Construction Whitepaper

Whitepaper: The future of infrastructure investment in the UK

2017 has been a year of record infrastructure investment in the UK. It is funding that is much needed, as a lack of vision and resources over the years has led to some serious infrastructure issues, from a shortage of affordable housing to an inefficient transport network. You don’t have to look far to see the problems this has caused, from overcrowded trains and poorly maintained roads, to potential electricity shortages and infrastructure failings that are alleged to have caused safety situations, such as those at Grenfell Tower. Positive investment in UK infrastructure could be life changing for many of the people who live and work across the country, as well as the economy as a whole.

In this whitepaper we will be looking at the future for UK infrastructure investment, current spending plans and the benefits of large infrastructure investment. We will also be looking at whether the plans on the table for infrastructure investment now are all good news right across the country – or whether spending discrepancies could create problems.

UK infrastructure investment

In 2016, the World Economic Forum ranked the quality of the UK’s infrastructure as 24th in the world, towards the lower end of the group of G7 nations and mid-ranking in terms of other industrialised nations. The last time the WEF carried out its rankings in 2006 the UK was ranked as 19th so a slip of 5 places has occurred since then. Government spending on infrastructure has plummeted since the 1970s when the UK was spending more as a percentage of GDP than many other countries including Japan and the US. Today, we sit down in the bottom three in terms of G7 infrastructure spending.

However, a widespread acknowledgement of the problems that this has caused, not just to the wider economy but to GDP and to the lives of ordinary British citizens, has means that new targets are being set for infrastructure investment. And so, as a result – in spite of the pressures and uncertainties of Brexit – a large investment programme is currently being implemented designed to improve the nation’s infrastructure. The goal behind this investment is to lift and maintain UK GDP, to pave the way for future change and productivity and to make life easier for those living life every day on the ground.

The impact on the economy

Experts have estimated that, for the UK to correct its infrastructure issues, an investment of £20 billion every year will be required over the years 2017 – 2022. GDP – which is commonly used as a measure of a country’s economic performance – can be heavily influenced by the level of infrastructure investment being made. Unimpressive GDP growth is often attributed to a lack of government investment. With GDP currently at 2.6 in the UK, the government is seeking to raise this before 2022 with substantial annual investment in infrastructure. The £20 billion being earmarked for this would represent 3% of total GDP, the highest percentage of investment since before the financial crisis. However, while these figures sound large, they still only put the UK at a level of spending that is equal to the OECD public investment average, as opposed to above it.

Inflation and infrastructure investment

In September 2017 the UK’s rate of inflation hit its highest levels for five years. This was followed in November by a rise in base interest rates to 0.5%. The rise in interest rates marked a historic moment as, prior to November 2017, the Bank of England had not put interest rates up for a decade. The decision to increase the Bank of England Base Rate provided the strongest indication that there is very limited non-inflationary slack left in the British economy. The message is clear: without the higher borrowing cost being introduced consumer prices could end up out of control.

However, not everyone agrees that the only way to stabilise the UK economy is to increase the cost of borrowing. Many experts have argued that an increase in investment into UK infrastructure could generate serious positive change and create tangible economic growth over time. It’s certainly true that infrastructure has a key role to play in economic productivity, as well as attracting outside investment. For example, in a 2014 Ernst & Young report it was identified that transport infrastructure is the second most important criterion for multinational firms when choosing where to invest, behind workforce availability and skills.

Looking to Europe

Germany is perhaps one of the most often highlighted examples of the way in which investment in infrastructure can drive positive economic change. The GDP value of Germany represents 5.59% of the world economy and it ranks above the UK for GDP. After the Second World War large scale investment was made into the country’s infrastructure after the devastation of that conflict. A publicly-owned National Investment Bank was established in order to manage and guide the rebuilding of German infrastructure and the success that this achieved is held up by many as a great example of the way that investment should be managed. In fact, it has been so successful that other countries have followed suit – and it’s thought that the Institute for Public Policy Research (IPPR) will recommend a similar method of managing national infrastructure investment for the UK.

Currently, in the UK the need for infrastructure investment is pressing, not just to improve economic potential but also to counter the potential impact of Brexit and leaving the EU. Levels of investment in 2017 have shown a marked increase and this is highly likely to continue into 2018 with a wide range of infrastructure projects that include everything, from the Thames Tideway Tunnel to the implementation of Smart Meters on a national level. So, there is certainly upward movement in terms of UK infrastructure investment but how far is it likely to go and will it be enough?

Where is the money going?

Positive investment in UK infrastructure is going to increase into 2018, as there is widespread acknowledgement that investing into transport links, housing and other improvement schemes has a very wide range of benefits, both on a local level and also for the entire country. Perhaps the most significant investment into building UK infrastructure comes via the National Infrastructure and Construction Pipeline.

The National Infrastructure and Construction Pipeline

There has been increasing pressure to reverse the trend of poor infrastructure spending in recent years. And so in December 2016, the government announced the creation of the National Infrastructure and Construction Pipeline (NICP). This will funnel more than £500 billion of investment into UK infrastructure via a combination of public and private investment – with around 40% of this delivered thanks to government investment.

The focus for the introduction of NICP is an improvement in productivity. Living standards and wages have both come under increasing scrutiny – particularly the lack of real wage growth in the UK. The government has identified that NICP is one way to improve productivity, which will have a positive knock on effect over the long term on wage growth and living standards. Many of the projects included in NICP should also deliver short-term improvements in living standards, from making it easier to reduce energy spend, to eliminating the delays and problems that many currently suffer when it comes to commuting.

Infrastructure investment and the construction sector

Construction demand, across both the private and retail sectors, is high up on the list of needs that infrastructure investment is designed to meet in the UK. Some of the UK’s most high profile existing infrastructure issues can be attributed to a lack of housing, for example. Building a fresh supply of homes to keep up with increasing demand is a key part of being able to raise living standards over time. That’s why there is now much more focus on enabling the construction sector to deliver more. So, in addition to the NICP, in the autumn statement this year, the government also announced a new £23 billion National Productivity Investment Fund. £7.2 billion of this investment fund has been allocated to support the construction of new homes. For those within the construction sector this means an ongoing uptick in demand for housing to accommodate an ever-increasing population. This should deliver not just stimulation to the sector in terms of projects but also an increase in employment opportunities and options for improving worker skills and resources.

Long-term productivity

The combination of the National Productivity Investment Fund and the NICP is designed to deliver significant change to UK infrastructure – with the long-term goal of stimulating economy-changing productivity. This vision for the future is being supported by the creation of the IPA (Infrastructure and Projects Authority), which was formed in 2016 by the merger of Infrastructure UK and the Major Projects Authority. The IPA overseas and provides advice and support with respect to infrastructure and Public-Private Partnerships from a government perspective. Ultimately, its role is to deliver infrastructure projects successfully. IPA Chief Executive Tony Meggs has said that “Creating the IPA has enabled us to produce a more comprehensive pipeline. Having the visibility and certainty of a pipeline of construction and infrastructure investment allows industry to invest strategically for the market, not just tactically for the project.”

There may be trouble ahead

There’s little doubt that investment into the UK to improve key elements such as housing, transport and energy infrastructure will have a very positive impact. However, the question is whether this impact will be felt broadly right across the country or whether there is likely to be a discrepancy in terms of benefits.

The focus on London

Particularly with respect to transport investment, there is considerable discrepancy between the funds being poured into the Capital and those made available to the rest of the country. For example, more than 50% of transport investment is being made into London. While the Capital may have the most complex transport network in the country, as well as the largest number of people who rely on it, this has still raised a lot of questions. In fact, the think-tank IPPR North – which looks at the value of investment per person within different areas – has identified that, in comparison to London, Northern cities may be chronically underinvested.

The North-South divide

It’s not just with respect to transport that London is likely to receive the lion’s share of investment capital. Analysis of the amount of spend per head shows that around £1,943 per person is being poured into infrastructure investment in the UK Capital. This is a much higher figure than many northern locations – for example, investment in areas such as Yorkshire and the Humber is as low as £190 per head. Figures vary right across the country – some areas of the North-West region, for example, come in at £680 and Northern cities have an average of £427 per person – but nowhere in the country are figures as high as for those in London.

The Northern Powerhouse

The Northern Powerhouse is a project designed to boost economic growth in the North of England. It has already begun to demonstrate how effective planning can generate greater investment with increased investment figures in the North-West region. The initiative could provide some counterbalance to the fact that investment figures seem heavily weighted in favour of the south of the country.

Why does the South demand more?

Although the disparity in investment between North and South provides plenty of fodder for political posturing, the reality is that there may well be a greater need for investment in areas in the South. Properties in the North of England, for example, are currently far easier to sell whereas southern markets have stagnated significantly. House prices in London are the highest in the country and mostly disproportionate to average wages. The reality is that areas across the country need varying levels of investment into the road developments, transport links and housing projects that could improve standards of living overall.

Where do the real benefits lie?

Investment in UK infrastructure could cover any number of projects, from delivering better transport connections, to providing improved education options and social facilities, and increasing the efficiency of utility supplies. From hospitals to housing, there are many opportunities for improving the infrastructure that currently supports the country and the benefits of doing so could be significant.

A national housing shortage

Housing is perhaps one of the most often-discussed issues that the UK has when it comes to infrastructure. From cutting Stamp Duty for first time buyers looking at properties under £500,000, through to help-to-buy schemes, the government has already begun to take steps towards making it easier for more Brits to get onto the housing ladder. However, there is really only one long-term solution to the housing crisis and that is to build more homes. Investment in housing infrastructure in the UK is a top priority – the £7.2 billion set aside in the National Productivity Investment Fund is proof of that. An infrastructure that actually delivers enough homes to meet demand would significantly improve the living standards of many, in particular when it comes to reducing the enormously high cost of housing that many currently have to pay.

Social needs are a necessity

Living standards in the UK are currently suffering under the weight of a range of issues that could be significantly reduced by better infrastructure. The housing crisis is just one example of the way in which infrastructure problems make life more expensive, tougher and less productive for many people. In fact, it goes much wider than this, with better transport links, better health facilities and improved educational services all having the potential to improve the overall health and wellbeing of the British population. Housing, retail and commercial developments could provide better ways to live and work, driving standards up and generating that all important boost to productivity in the UK as a result.

Construction industry involvement

The planned investment into UK infrastructure clearly requires significant commitment from the construction industry. This presents a great opportunity for the sector, which has suffered in recent years with a decline in jobs and opportunities and problems recruiting the right people into the right roles. As large investment into infrastructure projects is rolled out over the next couple of years there will be a lot of opportunity for those looking to work in the sector to find new roles. This is particularly important with respect to attracting young people into the industry – an increase in projects could be an attractive prospect, particularly given the training and learning opportunities that could provide people with a skilled trade and a long-term career in a time when job prospects are quite difficult to find.

The uptick in investment in infrastructure in the UK is likely to have a positive impact across the country – and has some very specific potential for the construction sector too. From better productivity leading to a rise in living standards, to stimulating a declining industry, an increase in UK infrastructure investment could deliver some impressive benefits all round

Although the future of UK infrastructure investment is not certain, there is no doubt that continued investment is required in order for Britain to keep up with other major economies across Europe. The RG Group works with the retail, commercial and living space sectors to help fulfill this demand. Give us a call today 01732 526 850 to discuss your requirements.

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