Infrastructure ‘deficit’ opens door for investors

This article is part of
Infrastructure Research Report - December 2014

Those living in London could be forgiven for believing that infrastructure investment is booming in the UK.

That’s because they have for a number of years lived amid the chaos of Crossrail, Europe’s largest infrastructure project at a projected cost of £15.9bn, which will see an entirely new railway traverse the capital.

But for those outside of London the picture is very different and in fact the nation’s infrastructure is severely in need of investment. The devastating consequences of the February 2014 floods on the Somerset Levels, for example, exposed the poor state of the UK’s water management systems.

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This state of affairs was hammered home by a landmark report issued in mid-November by Standard & Poor’s, the ratings agency, which indicated a £60bn ‘infrastructure investment deficit’ in the UK.

The report goes as far as to claim the UK’s investment levels have lagged behind several other OECD economies in recent decades.

“This has put the country’s infrastructure under severe strain and the World Economic Forum’s 2014-2015 Global Competitiveness Report said that inadequate supply of infrastructure stood out as an obstacle to doing business in the country,” says S&P.

While more infrastructure investment is sorely needed in the UK, the government is scarcely in a position to provide it. More than six years on from the sub-prime financial crisis, the nation’s public debt pile remains stubbornly high at £1.45trn, as of September 2014, and its annual deficit is still one of the largest of all advanced economies.

This is in spite of a swingeing programme of ‘austerity’ cuts by the current Conservative/Liberal Democrat coalition government that has seen almost all areas of spending reined in.

Filling the gap

According to S&P, the UK’s combination of a need for infrastructure investment and poor government finances presents an opportunity to investors.

“The government has implemented a deficit reduction program and this is likely to constrain its ability to finance new infrastructure projects. The government expects to publicly fund only one-quarter of its infrastructure pipeline. There will therefore be significant opportunities for the private sector,” the report says.

S&P says it expects the UK’s infrastructure investment to increase in the next decade, and each additional £1bn of money spent on infrastructure in one year will increase the UK’s real-terms economic output by £1.9bn in a three-year period thanks to a ‘multiplier effect’.

This will “create significant opportunities for private capital investment in the sector”, according to the agency. But where will the money come from?

“The government has supported significant private sector investment in the past by providing a stable and transparent legal system, developing public/private funding schemes, and fostering strong regulatory frameworks in industries such as airports, water, and energy,” the report says.

“In our view, macroeconomic factors support an increase in private investment in infrastructure: real interest rates remain at historical lows; employment in the U.K. construction sector remains well below peak levels; and, investing in infrastructure creates jobs, generates demand, and enhances productivity.”