April 5, 2016 By FTI Consulting
Ambition has underpinned the government’s rhetoric on infrastructure since George Osborne became Chancellor six years ago. In this FTI Consulting Snapshot we consider if this ambitious rhetoric has translated to meaningful policy able to foster the confidence of private sector investors.
In past decades, the UK has seen significant underinvestment in infrastructure from transport and housing to energy. Indeed, the lack of progress on critical infrastructure projects had previously been named among the major concerns of business leaders surveyed by the Confederation of British Industry (CBI). The Conservatives’ desire to change that, notably under the leadership of the Chancellor George Osborne, has seen infrastructure policy become a core focus of this government. No government has talked more about infrastructure – or with such apparent zeal. No government, or indeed political party, in recent times has looked to be known as “the builders” as Osborne told Conservative party conference last year.
This rhetoric on infrastructure has gone some way to reassuring businesses and investors alike, be they domestic actors or Far Eastern sovereign wealth funds that the government is taking this seriously, but perhaps it has not gone far enough. This government has committed £100bn of public money in this parliament alone to support its ambitious infrastructure policy. The government also claims that there is “significant ongoing private sector investment in our infrastructure” – but is that true? Is the government really doing enough to create and maintain confidence in its plans with private investors?
Over the Easter break, the government quietly published its National Infrastructure Delivery Plan (2016-2021), bringing together all of its infrastructure priorities over the next five years for the first time. Added to the first of several reports published by the Chancellor’s flagship National Infrastructure Commission, the government has attempted to stimulate forward-thinking ambitious policy. Trade groups like the Institution for Civil Engineers (ICE) and EEF the manufacturer’s organization all welcomed the new plan, backed up by money from the public purse. However, the Chancellor wants (and needs) further private investment to make these plans a reality.
This government’s ambition to overhaul the nation’s infrastructure is of course welcome and encouraged. There have been several successes, for example the Northern Powerhouse, and in particular plans for boosting east-west connectivity in northern England, or the national roll-out of superfast broadband, cross-country high speed rail (HS2/3), and Crossrail. However, this success rate is beginning to flounder. Several of the most vital pieces of infrastructure have been left in limbo and commitments to them have been undermined often just several Budget’s later – leaving investors scalded and cautious.
Despite a round of much-heralded Chinese investment in Manchester Airport, airport expansion challenges in the South East are yet to be resolved; ten years after the discussion entered the public domain. Successive governments have been unable to decide on a plan and stick to it. At the start of his premiership David Cameron bought time by establishing yet another Commission to provide an impartial recommendation. Yet, even after having the Airport Commission’s recommendation – build a third runway at Heathrow – the government has yet to back expansion plans at either Gatwick or Heathrow. First, a decision was to be made in the Autumn 2015, then by Christmas 2015. Now, in 2016, it is unlikely that a decision on this most vital piece of national infrastructure will be made until after the London Mayoral election and European Referendum in June – if at all. Politically-speaking, airport expansion is a toxic and difficult issue for government. It is more complicated than just whether to proceed or not. Who would build it, how will different parts of the project be funded, what are the timescales for gaining planning consent? These all remain clouded in uncertainty. A desire to play this carefully has inevitably meant making no decision at all leaving would be investors in limbo.
In the meantime, policy changes in the energy sector have been some of the most controversial taken by this Conservative government. A recent report by the Energy and Climate Change Committee on investor confidence concluded that; “sudden and numerous policy announcements have marred the UK’s reputation for stable and predictable policy development in the energy sector.”
The government decision to slash renewable subsidies while committing to closing down the UK’s coal-powered generation capacity leaves a significant question mark as to what new-build generation will ensure the country’s security of supply. While much has been said about the future role of gas, the pace of construction of new large-scale generation is simply failing to pick up. Meanwhile, the strong endorsement of electricity interconnectors which have been allowed to take part in the Capacity Market has left investors wondering whether domestic generation is the right ‘horse to back’. Simultaneously, flagship nuclear plans at Hinkley Point C are subject to further uncertainty and delays.
Hinkley Point represents an infrastructure project where despite all the right government rhetoric, government underwriting and numerous commitments, the development timeline of this project continues to wane, putting into question future investment in other UK nuclear projects. Despite French governmental (an 85% shareholder in EDF) support, the company’s employee shareholders association has warned the deal “could put EDF’s very survival at risk” and commercially, some are questioning the project’s viability. So why continue with the plan as is? Because, the British government, the Chancellor especially, would face huge embarrassment if Hinkley Point were to be abandoned or postponed, but more importantly, Hinckley is a project which would provide roughly 7% the UK needs, will minimize carbon output and is first in pipeline of similar projects.
It is well known that the UK faces significant challenges in respect of housing provision. Having recognized this, the government has sought to stimulate new affordable housing projects. In the Chancellor’s Spending Review and Autumn Statement last year, he prioritised housing by doubling the housing budget from 2018/19. Alongside this, he set out the “most ambitious [housing] plan since the 1970s” – to start building 400,000 new affordable homes by 2020/21 and support working people in their aim to buy their own home.
Fast forward on several months, and one of the many policies aimed at getting investors such as sovereign wealth funds to pour money into this new supply of housing – “Build to Rent” – was dealt a huge blow in the Budget, with a new 3% stamp duty surcharge on ‘additional residential property’ investments. This surcharge is aimed at tilting the playing field in favour of owner-occupiers, but is likely stifle the UK’s emerging build-to-rent sector which had started to show real commercial promise.
The British Property Federation (BPF) has estimated that the tax will equate to the loss of a year’s income on a typical 10-15 year investment in a build-to-rent property. Most damaging is that the new charge would apply to institutional purchases, after earlier indications that these would be exempt. The BPF said the tax would “undoubtedly” cause investors in build-to-rent properties to reconsider their commitment to the sector.
Since entering office, the government has instituted rapid and unwavering policy changes in the name of cutting government spending and tightening the public purse. The result: a perception among many economic commentators that short sighted policy- making is detrimentally impacting upon private sector investment.
As the Chancellor grapples with a slow-down in Britain’s economy, this is hardly the most prudent situation for the government to be in. The government must look to commit to matching its ambitious rhetoric with solid commitments for investors in the next three years if it wishes to keep its title of being the “builders.”
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