By CivilServiceWorld

01 Nov 2012

To ensure greater international competitiveness and help boost Britain’s economy in the long term, the Treasury is prioritising investment in infrastructure. Colin Marrs appraises the government’s efforts

The UK’s infrastructure is ranked 28th in the world, lagging behind countries including Oman and Barbados, according to the World Economic Forum’s Global Competiveness Report, released in August. Meanwhile, GDP is still low while the global economic forecast is gloomy, even with last week’s news that the economy has returned to growth.

To make Britain more internationally competitive, and put us on a steady footing for the long term, the government is seeking to increase investment in infrastructure. It’s doing so in a number of ways: loosening regulations, tapping into private sector investment – particularly from pension funds – and pumping public cash into some big schemes such as Crossrail (pictured). CSW has analysed these efforts, and looked at their likely implications.

The Treasury’s broad definition of infrastructure means that a large number of departments are involved, from culture and transport to energy and environment. And the government has prioritised departments’ capital investment in infrastructure, a Treasury spokesperson says, pointing out that the Spending Review increases spending by £2.3bn a year by 2014-15.

However, Dr Noble Francis, economics director at the Construction Products Association, says the Treasury’s figures are highly selective. Despite the £2.3bn “increase”, he says, expenditure will be decreasing in real terms before it rises after 2014. The Treasury admits that this is the case.

Francis says that the Department for Transport’s capital investment budget is rising slightly over the Parliament, but this simply recognises prior commitments outlined in the five-year Network Rail spending plan, which runs from 2009. And he points out that the increase comes at the expense of roads, where spending is falling due to allocation cuts to the Highways Agency and local authorities. “The total amount Network Rail has to spend over the next five year plan, beginning in 2014, will be around £27-29bn compared to the £35bn that [it] has to spend in this five-year spending plan,” he says.

In energy, waste and water, Francis says, investment lies in the hands of private firms – but the government can push businesses to put money into capital projects. Meanwhile the coalition’s much-trailed replacement for the private finance initiative, set for launch later this year, also offers a way to bring private cash into infrastructure spending.

To encourage private investment, in July the Treasury announced the £40bn UK Guarantees scheme. This will see the government underwriting infrastructure projects that have struggled to raise funds from investors. To qualify, schemes must be deemed “nationally significant”, ready to start construction within 12 months, and assessed as good value to the taxpayer. Richard Threlfall, UK head of infrastructure at KPMG, says: “It is a very neat way to use the strength of the government’s credit without driving up debt. Providing the structure is right, you leave risk in the private sector.”

The government has already managed to gain state aid clearance for the scheme from the European Union, which means that it will be able to underwrite private schemes without breaking EU subsidy rules. However, while 60 per cent of businesses think the scheme will help boost investment, according to a CBI poll, the organisation’s head John Cridland said the government must prove “it can deliver on the ground”.

The UK Guarantees scheme could help another government initiative, Threlfall says, by encouraging more infrastructure investment by pension funds. Such funds are traditionally conservative, he believes, and particularly unwilling to get involved in projects during the risk-laden construction phase, but “with guarantees, you are possibly solving that. The risk for the pension funds is stripped out by the government underwriting the schemes.”

Last month, it was announced that six pension funds have agreed to join a new group dedicated to raising £2bn towards infrastructure investment – a significant downward revision of chancellor George Osborne’s original aspiration that it could raise £20bn. In fact, the scheme has only raised £700m after a year. Meanwhile, a national commission has said that £10bn could be drawn from local authority pension funds.

Joanne Segars, chief executive of the National Association of Pension Funds – which is jointly administering the private sector scheme – calls on the government to do more to encourage such investment. In particular, she says, government should take on more of the risk in infrastructure schemes that combine private and public money, making them more attractive to pension funds.

To improve the strategic management of infrastructure schemes across Whitehall, Osborne announced the creation of Infrastructure UK, a new Treasury unit, in the 2010 Emergency Budget. A report released earlier this year found that the unit is on track to reduce the cost of delivering infrastructure in the UK by £2-3bn a year by 2015.

Meanwhile, the government last month announced a new Growth and Infrastructure Bill to speed up private sector schemes by giving more power to ministers over infrastructure planning applications. However, Angus Walker, partner and planning lawyer at law firm Bircham Dyson Bell, says: “The bill is good as far as it goes, but it only makes small changes and it could have done a lot more to speed up infrastructure delivery.”

After 2014, Francis expects “double figure” growth in infrastructure spending – particularly in energy, where the UK faces the prospect of power shortages as old coal and nuclear generators are closed down. “The debate is not whether there will be growth in energy infrastructure, but what types of energy will be subsidised in future,” he comments – a decision currently dividing the energy department and Treasury. The same applies to transport, where a shift is expected from rail to roads spending, although debates on road charging and air capacity remain unresolved.

In the meantime, Francis thinks a different approach to infrastructure spending by departments could achieve a more instant effect. “Departments could get more bang for their buck by focusing on repair and maintenance of existing infrastructure,” he says. “You don’t need to worry about contracts and planning, and the framework contracts are already in place.”

With capital spending budgets in real-terms decline for another year or two, this may be the only option available to some departments. It’s clear that, at least until 2014, it’s the private sector that will need to stump up the most cash if we’re to finally beat Barbados in the infrastructure rankings.

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