It's vital that the UK attract more private infrastructure spending

Given the extravagant post-Brexit spending promises being made by Messrs Hunt and Johnson, I’ve recently started to get a little nervous about how much money will be left to invest in national infrastructure.  

The timing was good for the Treasury’s recent consultation on the role of private finance in the delivery of infrastructure – providing the opportunity to highlight the range of options available and make sure the right tools are in place to finance future infrastructure needs.

Will UK contractors need to take on the risk transfer expected by private infrastructure investors or can they select safer opportunities elsewhere?

The main focus of the consultation is on the need to identify replacements for two important sources of investment: PFI, officially abandoned for future projects in the 2018 Budget; and the European Investment Bank (EIB). Both have been used extensively to attract private finance into the delivery of “greenfield projects”, where there is a much higher level of risk associated with construction and operation than an existing asset such as an airport or a water company with a known income stream. Unsurprisingly, most finance prefers lower-risk brownfield assets.  

One implicit challenge of the Treasury review is that new sources of risk-seeking finance need to be identified for greenfield projects. This is where construction businesses come into the picture as a vehicle for risk transfer. However, in the UK, this isn’t working as well as it should. You only need to look at the fate of Carillion and Interserve to recognise that UK construction firms don’t have strong enough balance sheets to carry the full construction risk and then retain the asset, to participate in its long-term operation. Currently it makes more sense for contractors to improve margins by self-developing commercial and residential projects.

Ironically, the barrier to attracting private investment into UK infrastructure is less likely to be access to finance, given that the world is awash with low-cost money, but a lack of access to construction firms with the financial strength to participate, and profit from their involvement. Vinci, for example, is a conglomerate with a turnover of around £40bn – not much less than the total turnover of the UK’s 15 largest construction businesses. Unfortunately, for the UK, lack of size really does matter, with overseas contractors taking an increasingly prominent role as JV partners in the delivery of major infrastructure.

As part of the Arcadis response to the Treasury consultation, we looked at the risk attitude of contractors in other markets that have a high reliance on private finance including Canada, France and Ireland. All have thriving privately-funded infrastructure sectors with contractors keen to participate and, in many cases, take on more delivery risk than is the norm in the UK. What’s more, many of these contractors retain ownership and a share of long-term profits. Just think of all the euros that Building readers will spend on toll roads operated by Vinci, Bouygues or Ferrovial on their holidays this summer.  Could the UK construction sector benefit from a similar concession model?

These are really tough times. However, while contractors are struggling to rebuild balance sheets and attract equity investors, they can still be selective over the work they take on. Will UK contractors need to take on the risk transfer expected by private infrastructure investors or can they select safer opportunities elsewhere?   

Not having access to large, diversified contractors with a deep balance sheet could be a problem for UK plc – just as we face the threat of crashing out of the EU. Not only could the muscle associated with European site labour be in short supply, but perhaps also the financial strength needed to deliver the UK’s much-vaunted £600bn infrastructure pipeline.

So, what should Treasury do about this? Is it their problem? I do hope that the government will recognise that solving the infrastructure finance problem goes deeper than attracting long-term money at the lowest cost. In the short term, the infrastructure pipeline needs to be slimmed down into a genuine shortlist of financeable opportunities. This must set out to attract enough interest from UK and overseas contractors and JVs to ensure that the immediate future investment programme delivers value. This means plenty of interest from bidders, although Silvertown Tunnel attracted only two bidding consortiums.  

In the medium term, the government will need to develop mechanisms that allow for a smarter risk transfer between user, financier and constructor so that the UK’s construction supply chain can participate fully in the programme.  

Both of these steps do feel like half measures, and in the longer-term, and in the spirit of international trade, shouldn’t these investment programmes be set up to attract globalised concession firms such as Ferrovial and Vinci? If they can own and manage UK airports, could they play a larger role in ensuring that the UK secures essential infrastructure investment?

UK supply chains will continue to benefit from much of the work on these investments – as they have on overseas-funded programmes such as Hinkley Point and Heathrow – but they won’t necessarily be exposed to all of the downside risk. Size does matter, and unfortunately, the risks and costs of working on some of these projects has made UK contractors smaller still. In order for UK plc to compete on a global stage, we may need to attract global capability as well as global capital to deliver our infrastructure.

Simon Rawlinson is head of strategic research and insight at Arcadis and member of the Construction Leadership Council