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UK infrastructure after the Brexit vote

mark williams | partnerships bulletin | 16 december 2016

The Autumn Statement was a welcome demonstration of the government’s recognition of the economic benefits of spending on infrastructure and its role in addressing the UK’s productivity challenge.

As is well documented, since 2006 UK productivity has fallen significantly behind other G7 economies and part of the reason for this is our ageing infrastructure. This means the creation of the £23bn National Productivity Investment Fund (NIPF) for 2017/18 to 2021/22 to invest in housing, local roads, digital communications and R&D is good news.

This investment can also play a part in tackling the view that communities in northern England feel economically disadvantaged when compared with their southern counterparts. When it comes to infrastructure, there is some evidence to support the validity of this view, with the Institute of Public Policy Research saying spending on infrastructure in London to 2021 will be £1,870 per person, while in the North it will be £280.

In addition, it is important to recognise that the productivity gap is not consistent across the UK. Productivity in London is around 50% higher than the North and we need an infrastructure policy that positively addresses this gap.

Whatever the details of the business case methodology, it is clear that there is a real need to move rapidly on a series of infrastructure projects across the country. Brexit makes this more urgent as infrastructure can deliver a more inclusive growth strategy. There is a strong case for moving forward with HS3, Northern Powerhouse, Midlands Engine, energy efficiency schemes like RE: FIT, investment in the defence, schools and health estates and rationalisation.

A programme of accelerated infrastructure delivery is likely however to expose skills shortages in the sector. The further education sector, including specialist project specific colleges, will have a key role in addressing these construction and technical skills shortages. Other organisations will need to continue to build advisory capacity through training on the Treasury’s better business case accreditation, helping to run the Infrastructure and Projects Authority’s project leadership programme and the World Bank’s PPP accreditation.

The government now needs to move quickly to provide further details of its plans. Financing for projects is not currently a problem; the issue is instead around the lack of de-risked projects to repay the available financing. To address this, a specific pipeline of projects should be announced as soon as possible so financing and resourcing can be put in place. The five-year Roads Investment Strategy, which brings together smaller projects under a broad strategy, is a model that gives certainty and is a good way to stimulate local spending.

In a few areas, detailed pipelines do appear to be being developed. The Autumn Statement outlines that a list of initial PF2 projects to make up a pipeline would be set out in early 2017 and that these would cover both economic and social infrastructure. The renewed focus on social infrastructure is very welcome as, in some sectors, the existing infrastructure is looking beyond its economic life.

However, there is still a great deal of confusion in the UK around the operation and merits of PPP/PFI/PF2 and other alternative infrastructure funding projects. It needs to be recognised that the private sector is always going to be involved in the design, build and maintenance of property and infrastructure and, in some cases, operations. Given the government is running a £1.7trn debt, the private sector will also be involved in financing. PPP models offer a procurement route to integrate these components in a whole assets life fashion and can be a very efficient way of developing projects. The fact that 800 PFI/PF2 projects have been signed to date, all of which have provided Treasury compliant business cases, underlines that they do provide evidence of value for money.

In addition to the PF2 planned pipeline, the government has made recent specific statements around defence estate investment. The Ministry of Defence has stated it will explore alternative funding sources, such as PF2, to meet a £2bn estates investment requirement. It is worth noting the recently announced expansion of the garrisons around Salisbury Plain, which are held under a PFI contract to enable troops to return from Germany. This expansion unlocks a significant efficiency, in terms of costs avoided.

A programme of projects will also support another Autumn Statement announcement of a review of infrastructure performance. The government plans to work with industry to identify ways to improve quality, cost and performance of infrastructure spending. One area this review might consider is the decision-making process within public services. The Treasury states that following the better business case approach should save 40% in terms of time and cost of developing a business case and result in better outcomes. However, infrastructure project performance issues and UK productivity issues arise when the decision-making process within public sectors (the business case) does not follow best practice.

Finally, there are significant public service efficiency opportunities. Existing PFI arrangements could offer significant savings with a bit of central coordination from departments, applying Treasury operational efficiencies programme. Also, based on the Whole of Government Accounts (WGA) as at 31 March 2015, public bodies held £850bn of property, plant and equipment (infrastructure). Despite all the discussions around estate rationalisation, this has continued to build in value since the first WGA in 2009-10 (£700bn).

And anecdotal evidence suggests there have been relatively few site disposals, with again defence estates potentially being the most active with almost 100 sites announced for disposal this year. While there is good work ongoing that is thinking about asset consolidation, significant efficiencies can be achieved by rationalising the public estate at pace.

All of this suggests that there are considerable economic and social gains to be made by rapid action to put a clear programme of investment in infrastructure in place across the country.

Mark Williams is property and infrastructure lead at PA Consulting Group

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