November 20, 2012 8:50 pm

Economics: Time to get to work

Britain’s glaring shortcomings in infrastructure – ageing nuclear facilities, Victorian sewage systems, and inadequate road and rail networks – are being eyed by UK businesses as the ideal target for government funding in an economy currently starved of investment. With business investment down sharply, household demand contracting in four of the past six quarters and further cuts to public spending ahead, it is not clear that government can do much to trigger the kind of spending that would lead to economic expansion.

And with government likely to miss at least one of its two key fiscal targets, it is not certain how much scope there is at all for any increase in spending, even on infrastructure projects that have long been on the drawing board and whose economic benefits are likely to contribute to economic growth for years ahead.

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Even by the estimates of the Office for Budget Responsibility – the Treasury’s independent forecasting arm – infrastructure is a good bet. For every pound spent on it, infrastructure generates £1 of GDP – about three times as much impact as, say, cutting VAT.

Even that analysis, some experts say, may be too modest. A report by consultants LEK on behalf of the Construction Products Association (CPA) – whose members are either engaged in or supply goods to the infrastructure sector – calculates that each £1 generates £2.84 in GDP to the economy as a whole. Among other factors, the “multiplier” effect is so high because unlike other industries, construction relies very little on imports and therefore each pound spent is much more likely to remain in the UK. In addition, LEK takes account not just of the immediate effects of the expenditure but the long run improvements that such investment makes to productivity.

Therefore, it came as little surprise that in unveiling its Autumn Statement in November 2011, the government announced plans for £20bn of infrastructure spending over the next few years in big schemes that are seen as vital to Britain’s future. Other initiatives include FirstBuy, launched last year, which involves builders and the government underwriting first-time buyers. There will also be guarantees for £10bn of housing association bonds, an extra £300m for social housing and a relaxation of the rules for developers on affordable housing.

But Noble Francis, an economist for the CPA, says that the government’s infrastructure strategy is deeply flawed. Not only has the amount earmarked for infrastructure fallen far short of £20bn, it now appears that pension funds – which were being tapped to provide the capital for infrastructure – are unlikely to be able to invest more than £700m by next year.

But the biggest flaw, he says, is that ambitious new projects that change the landscape require preparation. First, considerable time must be spent on gaining planning permission and then on procurement. “If you are focusing on stimulating economic activity, then you don’t want large infrastructure projects,” he says. “There is a minimum 12-18 months’ lag before you even see any return on your expenditure.”

Instead, infrastructure experts say, efforts should focus on more modest repair and maintenance projects that do not require extensive planning and can be undertaken very quickly. “There is no planning, no contracts needed. All you need to do is to bring forward planned projects,” Mr Francis says, citing a roads maintenance project around Sheffield, South Yorkshire, that would require investing £2bn over a 20-year period.

Data from the CPA show that the private sector is currently showing little appetite for picking up the slack as government puts repair and maintenance on hold. Private sector repair and maintenance contracted by 17.1 per cent in 2009, and by a further 9.2 per cent in 2010. The total level of output is not expected to top the 2008 level of £14.6bn before 2016 at the earliest.

Alasdair Reisner, director of external affairs at the Civil Engineering Contractors Association, says big headline infrastructure projects are ambitious and time-consuming. “We all love the big projects,” says Mr Reisner, whose trade association members include some of the UK’s largest civil engineering companies. “But to get growth going, you’ve got to go for repair and maintenance projects.”

One prime example, he said, is a long-delayed national highways maintenance programme for which there is a £9bn backlog of badly needed works. “It could address problems that cause delays all around the country by just getting rid of potholes and carrying out some minor repairs.” Such a project would have the added benefit of spreading economic stimulus across the UK, rather than concentrating it in a single geographic area.

Water infrastructure badly needs attention. Since local authority water assets were transferred to private companies last year, the new owners are required to undertake much-needed repairs and maintenance. And while that may require permission of Ofwat, the water industry regulator, to allow higher tariffs, these can be done fairly swiftly.

Housing has also benefited from construction spending. In April, government announced its NewBuy programme, aimed at helping first time buyers acquire newly built homes. It had only 250 sales in its first three months, according to the CPA, but it is still fairly new. Earlier this year the government announced a £280m extension to FirstBuy, which proved effective, accounting for 10,500 home sales since March 2011.

But Mr Reisner notes that even with that stimulus for homebuilders, relatively little advantage has been taken of it. In the private sector, developers want certainty of demand before they invest, he says.

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