Agenda 15: Spending priorities

The last few years have seen a retrenchment of government spending on construction. From a peak in 2009-10 of £56bn at the height of Gordon Brown’s fiscal stimulus, government capital spending fell by a third to a low of £36bn in 2012-13. And while it is now, slowly, on the rise again, with George Osborne having diverted more revenue spending to capital projects than originally planned at the start of the parliament, budgets remain severely constrained.

Osborne has pledged that capital spending will return to £50bn by 2015, and then rise in every year of the next parliament, with at least £300bn to be spent overall. Of this, £100bn will be on construction and infrastructure projects.

Building’s Agenda 15 campaign is asking the industry to give its views on the policies that it would like to see from the next government in a bid to influence political party manifestos ahead of the election. This week we’re asking what spending measures the industry would call for to stimulate both construction and the UK economy from 2015. So what is the case for extra spending in each of the six major construction spending departments?

Department: Health

• Main construction spend: Expanding and renewing the NHS Estate, worth over £31bn
• Current capital spending*: £4.16bn a year
• Change on previous spending period**: 18% cut
• Post-2015 promise: 2015-16 budget £4.74bn, no further promises on capital specifically, though the pledge to protect NHS spending as a whole remains

_{*Average annual spend 2011-15
**Difference from annual spend 2010-11}

What is the case for more funding?

It is very difficult to quantify the exact amount spent by government on the construction of health facilities, as much of the headline capital spend will actually be on health equipment, and procurement is dispersed around the multitude of NHS bodies. However, what is possible to quantify is the growing backlog of maintenance work, worth more than £4.5bn this year, up from £4.4bn in 2013. In particular, there is a growing volume - £1.54bn this year - of “critical” maintenance work that has not been done. This has the potential to have a serious impact on patients and staff and the delivery of services. Conor Ellis, health partner at consultant EC Harris, says: “This is the stuff that should be really worrying people and needs to be addressed.”

However, at the same time as this backlog of work is growing, the NHS has been passing back £650m of unspent capital funding to the Treasury for each of the last two years, with hospitals and the newly formed clinical commissioning groups seemingly unwilling or unable to commit to large capital projects. This is despite an overarching strategic priority for the NHS to move the delivery of care to smaller facilities closer to patients’ homes, while focusing specific complex and acute services in large specialist centres of excellence, both of which aims require new facilities.

Peter Wearmouth, health sector director at Capita Property and Infrastructure, says the spectre of funding cuts to services are making trusts unwilling to commit to building facilities that will require future revenue funding to run. “Trusts are seeing the need to reduce overall expenditure. Foundation Trusts are able to borrow to get capital, it’s not that that is stopping them - it’s whether they can afford the revenue implications of new buildings.”

What other options do the politicians have?

Foundation hospitals already have the ability to raise private capital for construction projects, but are likely to be concerned about their ability to fund new services. Likewise the updated PFI model, PF2, has been linked to new hospitals such as Papworth, but concerns remain over the long-term liabilities this can impose on cash-strapped trusts. Long-term planned changes to the NHS Estate may see the health service sell off up to a fifth of its landholdings via the recently established NHS PropCo, bringing in capital receipts.

In brief: The government needs to clarify the shape of the funding of services before capital can be spent.

Department: Communities and Local Government

• Main construction spend: Affordable housing, local infrastructure and supporting the private housing market
• Current capital spending: £4.15bn
• Change on previous spending period: 39% cut
• Post-2015 promise: The government will spend £3.3bn to fund construction of 165,000 homes between 2015 and 2018 with £5.2bn promised in total. Its scheme to support the private new build housing market - Help to Buy equity loan - is due to end in 2016

What is the case for more funding?

The supply of new housing increased significantly in 2013, with the NHBC reporting a 28% rise in housing starts last year, on the back of the undoubted success of Help to Buy. But it nevertheless remains significantly below the 240,000 homes that are thought to be required to meet demand in England. Historically England has only ever produced that volume of housing with the help of a major public sector building programme. The government’s proposed programme of affordable housing construction, equalling 55,000 homes a year, will not come close to the amount of public housing construction the last time England built 240,000 homes, in 1978. That year more than double the number of public homes were built, almost 115,000, than is planned post 2015. Richard Jones, housing partner at EC Harris, says: “We’re not going to get to 240k without more coming in from the public sector and housing associations. We can’t expect the private sector will deliver anything like that amount.”

Jones adds that housing associations are also raising significant doubts about their ability even to build the 55,000 homes a year planned under the programme, because of the low levels of grant. Catherine Ryder, head of policy at the National Housing Federation, says that more upfront grant is needed to make the programme both sustainable in the long term and cheaper overall to the public purse, and that the doubling of funding to £2bn a year could see 65,000 homes a year built. “We’ve been making the case for a significant rebalancing of funding for affordable housing to see more capital put in,” she says.

What other options do the politicians have?

The coalition has successfully stimulated the private sale market through government funding of equity loans to home buyers under the £3.5bn Help to Buy scheme. This does not impact on the UK’s national debt and therefore isn’t classified as CLG departmental spending, but is due to be withdrawn anyway in 2016 at the latest, amid concerns the market is overheating. The government is also using its balance sheet strength to sit behind loans to housing associations, and is facing calls to allow councils to borrow more to build homes.

In brief: Amid private sector recovery, the injection of capital funding or removal of council borrowing restrictions could have an immediate impact on the number of affordable homes built.

Department: Defra

• Main construction spend: Flood defences via the Environment Agency
• Current capital spending: £289bn a year
• Change on previous spending period: 21% cut
• Post-2015 promise: The government has agreed with insurers to provide at least £370m a year in funding of flood defences for the next six years

What is the case for more funding?

Government funding for flood defences has suffered a small cut in recent years, despite growing public clamour over extreme weather causing flooding at increasing regularity. However, the last week has seen the government divert a further £130m to flood defence repairs this year and next in the wake of the ongoing flooding situation in the South of England. Nevertheless, the government’s committee on climate change has said that, with flooding the greatest threat to the UK from a warming world, the pledged funding will still fall £1.4bn behind the minimum amount thought necessary by the Environment Agency, and will result in at least 250,000 more households being put at serious risk of flooding by 2021.

These scenarios do not even take into account the impact of new development, with 40,000 properties being built in areas of significant flood risk between 2001 and 2011, and floodplain development continuing. The committee adds that the expected bill from flood damages in the period due to the projected underspend will run to over £3bn. Alasdair Reisner, chief executive of the Civil Engineering Contractors’ Association (CECA) says: “There is a both a strong economic and emotional case for increased investment in flood defences.”

What other options do the politicians have?

The government is already attempting to draw in additional funding for flood defence development, by making private developers and other public bodies contribute where necessary. This funding is expected to hit £131m by the end of the parliament, and if taken into account leaves the funding over 2011-15 4% higher than the previous spending period.

In brief: The experience of this winter, alongside regular flooding in recent years and the view of experts that planned spend will not be enough, is sure to make additional funding a high priority.

Department: Transport

• Main construction spend: Funding for the construction of roads through the Highways Agency and local authorities; and funding for railway construction, renewal and maintenance via Network Rail, Transport for London, Crossrail and HS2
• Current capital spending: £8.26bn a year
• Change on previous spending period: 7.3% growth
• Post-2015 promise: The government has said it will spend £16bn on HS2 before the end of 2021, and Network Rail looks set to invest an average of £5bn a year in its next five-year spending plan (2014-19). Osborne also announced last summer that the government will spend £28bn on roads, trebling the current rate of investment to a maximum of £3.8bn a year

What is the case for more funding?

Of all the areas of government spending, transport can probably argue to have the best outlook from the government’s current plans. George Osborne has been clear for a number of years that his priority for investment is economic infrastructure - roads, bridges airports, energy - and with last summer’s spending review he backed that up with promises of real government funding.

The government describes the trebling of funding for road-building as the “greatest investment in our roads since the seventies.” But CECA chief executive Alasdair Reisner says it is vital that this promised funding is sustained. “There is a £78bn cost to the economy of the substandard economic infrastructure in the UK. It would add five basis points to GDP if we invested in improving this now and heavily.”

Including HS2, the programme of rail investment is also strong comparative to recent years. However, local transport spending, where cash-strapped councils have been diverting money to deal with problems elsewhere, is likely to remain a major problem.

What other options do the politicians have?

Road charging has been floated by the government but then put on the back burner, with confirmation that the A14 improvement project will be built without private funding. It is thought that further funding will be needed to back Osborne’s roads promise given the predicted falls in the car tax and fuel duty revenues that are used to fund current road works.

In brief: Existing pledges are already more than the industry was expecting.

Department: Education

• Main construction spend: Building new schools and maintaining the existing school estate
• Current capital spending: £4.63bn a year
• Change on previous spending period: 39% cut
• Post-2015 promise: Chancellor George Osborne last summer pledged to spend at least £21bn on school building projects by 2021, and in doing so completely address the backlog of school repairs

What is the case for more funding?

Osborne’s pledge to put £21bn into school building after 2015 sounds impressive, but analysis shows it may still fall well short of what is required. The 2011 James Review found that the general maintenance backlog at the time was £22bn on its own. In addition the coalition estimates that there will be a need for 275,000 extra primary school places and 245,000 additional secondary school places by 2021. At the current average build cost, this will cost £4.6bn. Add in the £1bn or so spent each year on routine maintenance to 2021, and this takes you to over £30bn. So the funding required to meet Osborne’s pledges is likely to be much higher than that so far promised.

Stephen Beechey, education director at Wates, says: “At the moment education spending doesn’t even keep up with keeping buildings in the same condition. There does need to be a significant increase in spend.” In addition even these estimates may fall short of what is actually required: current average build costs of £9,000 per child place will be very hard to hold to as prices rise and more complex projects come on stream. Marcus Fagent, head of education at EC Harris, says prices could more than double: “The reality is many projects now will be expansions of existing schools which cost a lot more per place than simple new build. Our estimate is that costs will rise from £9,000 to more like £15,000-25,000.”

What other options do the politicians have?

The education sector is the only one to already have a significant programme using the updated PFI system, PF2. This is currently worth £700m to build 46 schools, but this has already been reduced from initial expectations by £1bn amidst nervousness about PFI liabilities. It could be an option for a government keen to expand social infrastructure without raising government borrowing.

In brief: The sheer scale of need with a growing population requires further funding.

Department: Energy and Climate Change

• Main construction spend: Nuclear decommissioning programme. However, the department also promotes private investment in energy infrastructure such as new build nuclear power through market levers such as price guarantees
• Current capital spending: £2.04bn a year
• Change on previous spending period: 20% growth
• Post-2015 promise: the only promise has been to set the capital budget for 2015-16, of £2.51bn

What is the case for more funding?

Nuclear decommissioning spend is one of the few areas of capital spend by government to have actually risen in recent years, with the Nuclear Decommissioning Agency having a budget of £3bn in 2013-14 for its site programme. There is little appetite from any of the political parties to radically increase this investment beyond what is essential, given the hopes that cheaper technical solutions to decommissioning may be developed in coming years.

Mark Stewart, UK sector leader for energy at EC Harris, says: “There is a case for spending more money now by taking some key decisions, but the political environment, the prospects for future technological change and limitations in the supply chain’s ability to step up all militate against it.”

What other options do the politicians have?

The DECC’s programme of energy market reform, designed to promote investment in new energy generation capacity, is effectively government subsidy, albeit working through guarantees of future revenue rather than capital outlay. Continued market and political uncertainty has seen investment in new nuclear and offshore wind stall, with creation of offshore wind capacity running at half the expected rate, and the Hinkley nuclear project on hold until an investment decision is made. Some, such as Olympic Delivery Authority chair John Armitt, have suggested direct public funding to get nuclear projects under way, but Stewart says: “It’s better to let the private organisations that have the capacity take this risk on.”

In brief: Decommissioning work will carry on as planned, and there is still hope private funding will be forthcoming for new build nuclear.