Will the UK government prioritise infrastructure?

Infrastructure spending is a key component of the government’s plan to boost the economy, with a number of projects underway and in the planning stages. The latest update on the National Infrastructure Plan from HM Treasury reveals that the average annual infrastructure spend between 2010 and 2012 was £33bn, an increase from the average £29bn a year spent between 2005 and 2010.

It attributes this rise primarily to increased investment in energy and transport with projects such as the £32.7bn national High Speed Two rail project, and plans to reform the electricity market from 2014 that could see an estimated £110bn of investment in new energy infrastructure.

Figures from HM Treasury reveal the pipeline of infrastructure investment covers more than 550 projects valued at approximately £310bn from 2012 to 2015 onwards, which is an increase of more than £45bn compared with the infrastructure pipeline published in 2011.

Infrastructure, be it roads, rail, energy, or new technologies, is an important part of economic growth, with the Organisation for Economic Co-operation Development (OECD) noting in its latest economic survey of the UK that more investment in infrastructure could boost growth. It states: “Empirical evidence across the OECD area indicates that investment in infrastructure, and especially telecommunications and electricity, can raise growth. The effect seems non-linear, with a large positive impact at low initial levels of capital.”

The OECD report notes that, while the UK ranks sixth for infrastructure in the World Economic Forum Global Competitiveness Report 2012-2013, this is mainly driven by the strength of its air transport capacity, fixed telephone network, and the quality of electricity supply.

It warns: “The UK ranks poorly in terms of mobile phone subscriptions and subjective indicators of quality of overall infrastructure, roads, railroads, ports and air transport. [There is] a strong case for further investment in road and rail sectors. Public investment has been low relative to the OECD average for a long time and, as in many other countries, is expected to fall further due to fiscal consolidation. Finding additional sources for financing productive infrastructure would therefore be valuable, although the private finance initiative (PFI) and public private partnerships (PPP) in the UK and other OECD countries have generally not yielded hoped for savings.”

The need for new or improved infrastructure is clear but funding these projects at a time when the government is trying to reduce spending means more innovative ways of finance may be required.

The government has outlined details of a new approach to public private partnerships, PF2, which is meant to address the weaknesses of the previous system.

Meanwhile, the UK Guarantees scheme will provide up to £40bn in guarantees to attract private sector investment and ensure priority projects can raise the necessary finance.

An example of this scheme is the government providing a UK Guarantee to allow the Mayor of London to borrow £1bn at a new preferential rate to support the Northern Line tube extension to Battersea, subject to due diligence and agreement later this year.

Another unique investment option encouraged by the government is the creation of the Pension Investment Platform (PIP), which was created through a memorandum of understanding between the government, the Pension Protection Fund and the National Association of Pension Funds in 2011. In February it was confirmed the platform, which is a not-for-profit fund and independent of government, now has 10 pension funds as founding investors each making a soft commitment of £100m to provide a potential £1bn source of funding. The platform, however, has a target size of £2bn and is expected to be operational in the second half of 2013.

The government in the past has prioritised public spending in infrastructure on key projects, including investing £1.5bn to enhance and improve the road network. In its December update HM Treasury notes: “The government is assessing the feasibility of new ownership and financing models for the strategic road network, and will report on progress by Budget 2013.”

But with the recent blow to the UK’s credit rating threatening to undermine the government’s austerity strategy investors will be keenly looking at whether the chancellor intends to stand by its current infrastructure commitments or whether the macroeconomic situation will see infrastructure become more of a private investment than public investment issue.