Future of Infrastructure special report 2018

Issue link: https://raconteur.uberflip.com/i/941988

Contents of this Issue


Page 2 of 19

RACONTEUR.NET 03 /future-infrastructure-2018 S ixty metres below London, engineers are building a £4.2-billion, 15-mile super sewer, designed to prevent overf lows of sewage from spilling into the River Thames. The pro- ject is one of hundreds of schemes, from broadband to high-speed rail and power stations, aimed at renewing the UK's creaking infrastructure. The Thames Tideway Tunnel is controversial, not least because it is a test case for how private finance is used. The company is owned by a consortium of infra - structure funds, using money from pension schemes and other long- term investments, to keep it off the balance sheets of both Thames Water and the government, even though it is being paid for through higher consumer bills. The government plans more than £460 billion of infrastruc - ture investments over the next few years, with almost half financed by the private sector. That is ambi- tious, especially as the political climate has led to greater ques- tioning of the value of private sec- tor involvement in public services. The UK pioneered privatisation and outsourcing 30 years ago. Now, how- ever, the Labour opposition wants to renationalise energy, rail and water companies, halt the use of private finance initiative (PFI) contracts and bring some existing schemes back in-house. The collapse of Carillion, the construction company undone in part by overruns on PFI projects, has added an extra twist. Even the Conservative govern - ment, which supports private finance, is sensitive to concern about excessive profits. It pro- poses, for example, a cap to end "rip-off " energy prices. So far, political risk appears not to have significantly harmed infra- structure investors' willingness to invest if projects are structured attractively. The UK has prided itself on being open to the world. Foreign direct investment has brought benefits including capi- tal, jobs, ideas, talent and leader- ship. But on top of Brexit, this adds another element of uncertainty. Few doubt the UK needs to upgrade infrastructure. It has spent less on this than other devel- oped countries over the past three decades, according to the Organi- sation for Economic Co-operation and Development. The result is overcrowded trains, congested roads and choked airports. "We're on a positive trend, but we have got a long way to go," says Richard Threlfall, global head of infrastructure at KPMG, the pro- fessional services firm. "We have an inheritance of roads and sewage systems and power systems, many of which date back to the middle of the last century and require signif- icant amounts of investment." The UK spent 2.2 per cent of gross domestic product (GDP) annually on infrastructure between 2008 and 2013, according to McKinsey Global Institute, below Japan, Can- ada, Italy and the United States, but slightly ahead of France and Ger- many. McKinsey reckons the UK needs to spend an extra 0.4 per cent of GDP a year between 2016 and 2030 to meet its needs. The government is raising its capital spending, but also needs private finance. Alongside state projects such as London's Crossrail and the High Speed 2 (HS2) north- south rail link, the private sector is expected to finance schemes such as fibre broadband, wind farms and subsea power cables. Much of the planned invest - ment is by companies in regulated industries including energy and telecoms. Also, more than half of water assets, all the major airports, most ports and all passenger rail rolling stock sit within specialist infrastructure investor vehicles, according to PwC. The government's PFI scheme, once used extensively to build schools and hospitals, now accounts for only a small number of new projects. "Personally, I think the govern - ment will struggle to raise the capi- tal, either public or private, to meet its objective," says Gershon Cohen, global head of infrastructure funds at Aberdeen Standard Investments, one of the largest managers of pen- sion fund capital invested in pub- lic-private partnerships. He cites consumer resistance to higher user charges and taxes. Investors need political and fis- cal stability and the rule of law, Mr Cohen adds. "Right now, I don't think the UK is in a very good place, the main barriers being a lack of political and economic confidence." Nick Davies, associate director of the Institute for Government, says the UK needs a more integrated approach. "To realise the full, transformational potential of HS2, you have got to think about the new stations, the housing to be built around those, and hospitals and schools. We have never had that." He is optimistic, however, about the National Infrastructure Com - mission, created by the government to recommend long-term priorities that can command cross-party sup- port. It is due to publish its assess- ment of what the UK needs for the next 30 years in the summer. Infrastructure investors are mostly pension funds, life insur- ers, sovereign wealth funds and other funds acting on behalf of them, looking for long-term investments that provide a steady income stream. "Private sector investment adds capacity because the government's balance sheet is constrained, but it also brings private sector skills," says Andy Rose, chief executive of the Global Infrastructure Inves - tor Association. "You tend to have more consistent investment throughout the cycle." What investors need from gov- ernment, Mr Rose says, is clar- ity on priorities and the models of procurement it will support. He adds that the private sector needs to show evidence of how well assets have performed. KPMG's Mr Threlfall says the main benefit of private capi- tal is "the multiplier effect" on our ability to invest in this coun- try's future. "We know that public finances are tight," he says. "If we remain constrained, the country will be much the poorer for it 30, 40 or 50 years out." Investing in the fabric of the UK's future FUTURE OF INFRASTRUCTURE @raconteur /raconteur.net @raconteur_london Political division over how to finance badly needed new infrastructure in the UK should not get in the way of progress TIM COOPER Award-winning freelance financial journalist, he writes regularly for publications including The Spectator, London Evening Standard, Guardian Weekly and Weekly Telegraph. NICK EASEN Award-winning freelance journalist and broadcaster, he produces for BBC World News and writes on business, economics, science, technolog y and travel. OLIVIA GAGAN Senior reporter at IJGlobal, she writes for Euromoney Institutional Investor, and was formerly with Drapers and Infrastructure Journal. FELICIA JACKSON Editor at large of Cleantech magazine and author of Conquering Carbon, she specialises in the low-carbon economy. JIM McCLELLAND Sustainable futurist, his specialisms include built environment, corporate social responsibility and ecosystem services. CHARLES ORTON-JONES Award-winning journalist, he was editor-at-large of LondonlovesBusiness.com and editor of EuroBusiness. BURHAN WAZIR Award-winning journalist and editor, he has worked at The Observer, The Times and Al Jazeera. BRIAN GROOM Freelance journalist, he has held senior positions at the Financial Times, including UK business and employment editor, political editor and Europe edition editor, and was Scotland on Sunday editor. Distributed in BRIAN GROOM Publishing manager Flavia Brown Digital content executive Elise Ngobi Head of production Justyna O'Connell Design Samuele Motta Grant Chapman Kellie Jerrard Head of design Tim Whitlock Production editor Benjamin Chiou Managing editor Peter Archer Published in association with CONTRIBUTORS Ken Jack - Corbis/Getty Images POLICY £460 billion 0.4% 2.2% of GDP spent annually on infrastructure in the UK between 2008 and 2013 of planned UK infrastructure investment in the pipeline extra GDP needs to be spent between 2016 and 2030 to meet the UK's infrastructure needs Infrastructure and Projects Authority/McKinsey Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 3877 3800 or email info@raconteur.net Raconteur is a leading publisher of special-interest content and research. Its publications and articles cover a wide range of topics, including business, finance, sustainability, healthcare, lifestyle and technology. Raconteur special reports are published exclusively in The Times and The Sunday Times as well as online at raconteur.net The information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher. © Raconteur Media

Articles in this issue

Links on this page

Archives of this issue

view archives of Raconteur - Future of Infrastructure special report 2018