Infrastructure - The big picture

Cutting the deficit is the number one, two and three priority for the government. But it is also trying to do three other things. It wants to roll back the role of the state in the economy by reducing the percentage of public expenditure compared with private expenditure, and that’s important for all suppliers in the infrastructure market to understand. It’s also trying to delegate some of the tough decisions away from central government to local government, and it’s trying to move to a position where spending decisions are made on the basis of cash spend.

The story so far is a mixed picture - it’s not as bleak as is sometimes made out. You could say the government has done a fantastic job of frightening the market witless about what might happen, whereas the reality is a bit more subtle and complicated. The main question is, will this be a really radical government that changes the way infrastructure is delivered in this country, or is it just going to be a cost-cutting one?

To pick out some sectors and look at their prospects in more detail: transport includes some of our most expensive schemes, and the emphasis is on looking at the third-party contributions that can be made, focusing on the real beneficiaries of the schemes and prioritising them on their contribution to the economy. The message to those tracking schemes is to look for the ones that have the potential for third-party support in one form or another, not just those that are relying on handouts from the state.

Waste and energy

Waste offers an interesting prospect. There is still a significant pipeline of consumer waste projects that will happen because they have to, because we’re sitting under European directives with obligations to improve the percentage of waste being recycled and move to a world where we are generating much more energy from waste. So far the market has been focused on residential, but the big opportunities are going to be in commercial and industrial waste.

In the energy sector, the question for the government is, is it going to grasp the nuclear nettle? One of the least satisfactory outcomes of the coalition is the uncertainty over nuclear. We all know the lights are going to go out in 2015 if there isn’t a big investment in energy supply. And although the move toward supporting wind, solar and other renewables is all welcome, they aren’t going to provide a base load of energy that takes us through to 2020 or 2030. Sooner or later the government is going to have to address that.

The long view

What is going on in the longer term is divorced from the five-year cycles of party politics. If we were to go back 200 years, nearly all the infrastructure in the UK and for that matter anywhere in the developed world was provided privately. We went through a period from the late Victorian age to the privatisation programme in the eighties and nineties where a much larger portion of that infrastructure was publicly provided. And almost regardless of what sector you look at today, the trend is towards moving infrastructure into the private market. The only two sectors bucking that trend are power - where concern about security of supply means you can’t just leave the job to private provision - and rail, where longer-term franchises mean you would have less frequent competition.

So who are going to be the winners and losers in the supplier market if these are the trends? There are going to be fewer schemes, but they’re going to be better prioritised according to their impact on the economy. Those are the schemes everyone in the market should be tracking. There will be fewer opportunities, but those that are there will be for bigger contracts as the government is trying to drive efficiency, value for money and economies of scale. The fact there will be a smaller state is largely good news for the private side as there will be more outsourcing.

And finally, we will be left with a relatively thin policy core, so this means not only a bigger role for the private sector in running public services, but also that the scope of contracts will be much broader. The challenge for any supplier is to think about what it does today, not only in terms of building or providing services, but whether that company should put itself in the position of the government and take on its responsibilities?

As to how we respond as an industry, the question is: how do we drive better value? And that requires an industry-wide response. We’re not suggesting we relinquish good design. But we’re likely to see the perennial debate of form versus function coming back to the fore. The government’s buzz phrases like “more for less” are all about better functionality from spend. The reality is that we need to acknowledge that for the next period. The pendulum has definitely swung towards function, and we need to embrace that as an industry.

To achieve better value we need to focus on scope that drives real output. The size and scope of an infrastructure project should be determined by its contribution to business or economic growth. We should see more use of the cost:benefit ratio. Then we can compare what contribution each scheme makes to GDP, so this allows informed decisions on prioritisation.

For greater efficiency there are two key drivers. The first is that we need to eliminate waste, gaps and conflict in the team. Too often we set up teams to work independently. We need a move towards integrated teams and consortiums. We are also going to see an increasing requirement for entire teams to put equity into special-purpose vehicles, greater use of incentivisation and pain/gain shares in contracts.

We may also see more merger and acquisition activity, with firms seeking to create larger integrated supply chains. The second point is about re-evaluating processes to take away unnecessary tasks. The obvious one is the procurement process - we’ve all been in a position where we’ve been asked unnecessary questions, and we need to see if we can cut that down, as well as cut down on the costs of tendering.

We also need better alignment of “build” and “operational” requirements. We need to bring carbon, capital expenditure and operational expenditure budgets and priorities in line at an early stage so we we can really drive whole-life cost and value. Too often as consultants, we’re told just to focus on capex, and not worry about the rest, as it’s the responsibility of other departments and budgets. But to ignore opex and carbon is to ignore opportunities to improve value.

We should also look to invest in technologies that promote compatibility. Many organisations tend to use building information modelling for their own organisation’s benefit, but there are not many examples where the whole team use it for the benefit of the client or the project.

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Richard Threlfall is UK head of infrastructure and projects at KPMG and Steve Waltho is a head of infrastructure and industry at Davis Langdon