November 20, 2012 8:50 pm

Investment: Shovel-ready projects needed

Last month, one of the largest cranes in Europe lowered a white-cylindrical tunnelling machine weighing as much as 280 London taxis into a 40m shaft near Canary Wharf. Elizabeth, as the machine is known, will begin burrowing under the River Lea towards Liverpool Street and Farringdon, taking three years to build a network of tunnels that will eventually provide a new east-to-west commuter railway for London, stretching from Royal Oak in the west to beyond Essex in the east.

Approved under the last Labour government, Crossrail is the biggest construction project in Europe, and one of 40 that were outlined in the government’s national infrastructure strategy last autumn. But despite the fanfare with which the announcement was made of a £250bn shopping list of much-needed road, rail and energy projects, it is also one of the few large-scale construction projects actually under way.

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IN Blueprint for British Business 2012

The Treasury says it is “making infrastructure a priority, investing public funds, guaranteeing private investment, sweeping away the accumulation of barriers that the state puts in the way of projects”.

But industry is feeling less optimistic. According to figures from the Construction Products Association, spending on infrastructure has declined markedly in the past year, and will have dropped by 13 per cent to year end despite the government’s hopes that a building boom will provide a platform for economic growth.

Despite the need for investment in new nuclear power stations, significant progress in power construction is not expected until 2014 due to ever-growing concerns over the government’s commitment to investment in nuclear and offshore renewables. A decision on airport expansion also remains caught in political crossfire.

The hiatus has caused a growing sense of impatience among the business community, which is urging the government to take action. But with cash flows tight the Treasury is struggling to find alternative means to shore up investment.

The CBI business lobby group has expressed frustration with the slow pace of progress on new infrastructure schemes, warning that the UK’s international competitiveness could suffer. According to the World Economic Forum, the UK currently ranks 28th for the quality of its infrastructure, trailing behind Malaysia and Bahrain.

The decline in 2012 comes despite the government announcing an additional £5bn capital spending and £40bn loan guarantees this year. With finance tight, it had hoped the private sector would provide £20bn of investment to boost infrastructure investment over the next decade.

From the outset, the plan to rely on the private sector has sparked criticism from business lobby groups and analysts.

“Knowledgeable people in the market questioned the £20bn raisable from pension funds the minute it was announced,” says Richard Abadie, global head of infrastructure at PwC, the professional services company. “If you want to move the dial on GDP growth, it’s government investment not the private sector you need to rely on.”

Although pension funds have signed up to the scheme – agreeing to pool money collectively into a pensions platform – they have come up with only £700m, well short of the initial £20bn the government said last November that it wanted to raise from them. It is also a fraction of the £2bn the new group, the Pensions Infrastructure Platform, hoped to raise in its first year.

The Treasury said the Pensions Infrastructure Platform was “making strong progress”.

“We’re supporting private sector investment, working with industry to reduce the cost of infrastructure delivery by £2bn-£3bn a year by 2015, and developing new ways for industry to invest,” a spokesperson says.

But infrastructure experts say the government will probably need to invest money in projects directly if it is to deliver the much-needed boost to the economy.

“There is no magical solution,” says Mr Abadie. “Either the taxpayer or the user pays. In most pieces of new-build infrastructure it’s impossible to expect the user to pay the full economic tariff, particularly in the early years; you almost always need taxpayer support through government in the early years.”

Gershon Cohen, chief executive and fund principal of infrastructure funds at Lloyds Bank, one of the biggest providers of capital to the construction industry, agrees. He does not blame the government for the shortage of new infrastructure projects, but believes the UK desperately needs a longer-term vision in which new-build projects should play a crucial role.

“The government is still wrestling with the problems left by the credit crisis,” he says. “There’s been a hole in the ship and they’ve had to use sandbags to steady the boat, but there still isn’t an overarching economic growth strategy of what to load on to the boat and then set it on to the right course.”

He says key issues must be better explained to the public, such as whether the government would be better to invest in local railway lines and signalling technology than promoting High Speed 2 – the fast railway line that will run from London to Birmingham and the Midlands.

“All the costs associated with infrastructure will ultimately feed through to the taxpayer,” he says. “Has High Speed 2 really been evaluated as a top-priority investment for stimulating economic growth, and the right thing to be spending money on right now? And what is the economic vision with which it fits?”

With construction slumping, the government has launched an infrastructure forum to look at fast-tracking schemes that could benefit the economy, underlining the importance that ministers have attached to such projects.

The National Infrastructure Plan Strategic Engagement Forum will bring together industry executives with ministers to seek ways to get projects moving.

The publication of the government’s review of its private finance initiatives, which have funded much of the investment in UK public infrastructure, such as schools and hospitals in recent years, could also help. The review is likely to be published with the autumn statement alongside a third infrastructure plan.

The Treasury also pointed to transport as a bright spot. “Transport spending is growing in real terms,” it says. “This July, the government supported a further £9.4bn for Network Rail to invest in the railways from 2014 to 2019.”

But, excluding rail, analysts say that even if the government does announce new funding mechanisms there is a dearth of so-called “shovel-ready” projects on which building can start almost immediately. “What the government hasn’t done well enough is to kick-start projects – additional airport capacity and power generation, for example,” says Mr Abadie.

“Crossrail is fantastic in terms of economic growth and jobs. But infrastructure investment doesn’t happen in the short term. If you want shovel-ready projects, it takes years to plan.”

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