The construction sector still languishes in the depths of recession, but a need for as much as £400,000 million of new infrastructure projects to get started by 2020 suggests that this situation shouldn’t last too much longer.
How to pay for it is a decision that had been placed on the back burner since the Coalition government decided to focus on mending the UK’s battered finances with a policy of no economic growth, public spending cuts and austerity. Traditional procurement routes of government borrowing large sums to pay contractors and other suppliers from tax revenues no longer apply for sums of this magnitude.
News that a new version of the Private Finance Initiative, PF2, was to be used was a welcome highlight of the Chancellor of the Exchequer’s Autumn Statement in December last year. But cautionary noises have already been made by spending watchdog the National Audit Office (NAO), which has warned in a report on the government’s National Infrastructure Plan that offering guarantees on these contracts could result in large losses being funded by taxpayers.
Among the worries for the NAO is the demand forecasts that are used to underpin infrastructure plans, particularly transport schemes. Other risks like cost overruns might be more manageable by contractors as the success of the London Olympics construction programme suggests.
The NAO report says the government has identified the need for getting infrastructure projects worth £310,000 million under way by 2015; the hope is that private finance will fund and own some 64% of that. The UK’s infrastructure is already about 70% privately owned or funded – think of the huge private investments made in the water sector since privatisation – so there is nothing new in principle in this. Getting it right is crucial if investors are to be encouraged to invest on the scale the UK’s road, rail, energy and other infrastructure demands.
For the future, there looks like being a new focus on risk management and monitoring, as suggested by the NAO report. There will be more detailed assessment of risk at the outset of projects, with greater scrutiny than before of demand forecasts. Contracts will seek to closely align the interests of users of the infrastructure – who will pay for it as consumers rather than as taxpayers – and investors. Contracts will be structured to ensure that financiers can only call on any guarantees if totally justified.
Private investors however, from overseas as well as the UK, are going to need some assurances before putting their cash up; in particular assurances about government policies affecting infrastructure that the construction industry – always a political football – has never been able to secure despite many years of hard lobbying. If guarantees about implementing the National Infrastructure Plan within a set timescale are given to attract private investment, the construction industry will have a long hoped for clear sight of its future workload.
Nick Barrett
Editor