Transport and infrastructure | Winter 2016/17
What do president Donald Trump, chancellor Philip Hammond and premier Li Keqiang all have in common? The answer does not relate to hairstyles but infrastructure – all have highlighted enhanced national infrastructure as key to bolstering their economies against the threat of slowing global growth. And they are not alone – the Word Economic Forum estimates the shortfall in global infrastructure investment to be at least $1trn per year.
The infrastructure challenges in each country are different. If we look at the UK, I see four main challenges to the government’s ability to deliver on its infrastructure agenda – what I call the 4Ps: pipeline, planning, private finance and procurement. So what are these challenges and what should the government do to meet them?
A consistent theme across UK industry is the need for a clear pipeline of deliverable infra projects. The National Infrastructure Pipeline looks great from a distance but examined closely does not contain the committed list of publicly-backed projects the UK enjoyed between the mid-1990s and the banking crisis.
Even with the latest plans from the chancellor, if they are delivered, we will still be spending less on infrastructure than we were under the previous Labour administration, and significantly less than the average G7 nations. Without a genuine pipeline of opportunities, global developers and investors will continue to focus on markets such as the US and Australia where there are more established programmes and greater perceived opportunities.
One way to address this would be to devolve greater power and responsibilities for formulating and promoting infrastructure projects to a wider group of bodies who can come up with more localised solutions rather than devoting disproportionate resources on large trophy projects. There is already within government a recognition of the need to devolve power and the creation of the National Infrastructure Commission and the move to create sub-national transport bodies are both helpful steps. But if the government is serious about effective devolution of powers and responsibilities, it also needs to devolve appropriate control over delivery decisions, fund-raising and spend to these bodies.
The shortfall in global infrastructure investment is at least $1trn per year.
Alongside public sector change, we need to encourage more private sector innovation. If we exit from Europe, we should consider providing the private sector with more capacity to put forward unsolicited proposals that, subject to sensible value and deliverability tests, can proceed going through a long and costly procurement process.
Even with the advent of the Development Consent Order process, planning hurdles are still seen as a major impediment to infrastructure development, creating significant uncertainties, costs and delays. There are no easy answers here, unless you are prepared to make a fundamental shift in the balance between individual rights and national or local strategic priorities. If we are not prepared to make that shift and give individuals and individual interest groups less ability to protect their interests, it is hard to see how we are ever going to extract ourselves from the nation’s infrastructure log jam. If we are prepared to change that balance, the time and the costs that could be saved by expediting planning processes would probably fund far greater compensation for those affected.
It is no secret that public purse strings are tight. On the other hand, there is significant private liquidity, and infrastructure is increasingly attractive to investors across the globe. The UK, despite the challenges of Brexit, is still a major destination of choice for many global investors and, as they look for better returns, these investors’ appetite for risk is increasing. So we need to be smart about attracting this money to the UK. In this context, it is good to see that the Treasury appears more receptive to alternative funding mechanisms under the current chancellor.
Importantly, we also need to accept that private finance is not just a balance sheet issue and that there is real value in bringing in private sector funding, in having real financial accountability, and in participants who are driven by profit and the potential to make money thus incentivising them to be more innovative and efficient and to take a whole-life view of assets. We also need to move away from the idea that private funding equals privatisation and from the stigma that private sector profit is bad and represents some kind of procurement failure. It is not – profit is good as long as it is reasonable and proportionate and the prospect of profit is the best way to motivate and incentivise efficient and cost-effective project delivery. Market competition and ultra-low debt funding rates have driven out the prospect of ‘super profits’ from new infrastructure.
We also need to accept that many infrastructure projects will not be self-funding. So where we need to mix public and private money or financial support, we need to be smart. In particular, this does not mean that public support must take the form of cash or guarantees. The Thames Tideway Tunnel project is a good example of the government being surgical in its support, in turn facilitating private sector funding for new infrastructure in a manner that delivers infrastructure at lower cost for consumers.
With some honourable exceptions, the public sector is often not cost-effective and efficient at delivering infra. We need the public sector generally to act as facilitator, to establish more clearly our priorities and to focus more on defining how we want infrastructure to perform and how we are going to pay for it. These are at the heart of any major project, but too often in the past they have not been given appropriate priority. One of the main reasons for this is that procurement is seen by many as principally an engineering exercise. Public sector delivery should be about defining what we want by way of outputs and how we best procure, fund and pay for these. It is not about how should we design and build the solution and, through over-prescription, stifle private sector innovation and efficiency.
Closing the gap?
There has rarely been such a consensus on the needs and benefits of developing new infrastructure. Fortuitously, there has also never been the same opportunity to access cheap private funding from across the globe to support the delivery of this infrastructure. Despite this, there remains a huge gap in the UK between the political rhetoric and spades in the ground. Addressing the 4Ps will not provide all the answers to the UK’s infrastructure challenge, but sensible and smart progress in each of these areas and a willingness to take some bold steps can help us close that gap.
Mark Elsey is a partner in Ashurst’s corporate practice.