Infrastructure: Talking heads

Two nations divided by a common language, is how George Bernard Shaw is alleged to have characterised the relationship between the US and the UK in the 1940s. I see a similar paradox in our infrastructure and construction industry. Only rather than two divided parties there are at least four: government, regulators, industry and investors.

In theory, we are all working together to solve the common challenges of our time, grow the economy, and deliver quality of life. Through myriad formal relationships, round tables, conferences and articles we bring these groups together and deliver projects, programmes and services to make the world a better place. It sort of works, but I think we habitually talk past each other and each group is largely engaged in a conversation with itself. Let me elaborate – through four dramatic monologues:

Act 1: The Minister

I know infrastructure investment is critical to the UK’s economic growth. Unfortunately Humphrey says we can’t afford even the current plans. That is why the Treasury came up with this idea that we should prioritise smaller, local schemes. I say government should invest in transformational schemes, but I need quick wins too to help ensure we stay in power. Recently we set up the National Infrastructure Commission to help decide where we should invest, but the Treasury has insisted on setting them a funding envelope constrained to 1% of GDP. I thought that would be okay because the value of that GDP envelope would grow over time as we invest wisely in our country’s capital. But apparently we use a GDP forecast that doesn’t take account of any return from our investments. I’ve asked Bernard to try to find out why.

Act 2: The Regulator

It’s all about incentives. We just need to sufficiently fine-tune our economic models, which drive the behaviour of the utilities we regulate. When we started out, in the 1990s, we thought the RAB based model with a CAPM return on capital, plus RPI-X efficiency incentive on operating costs would do the trick. But recently we have become concerned that this is incentivising companies to prioritise investment over proper maintenance of the existing asset base. So we have moved to a Totex model where we regulate the total spend. This is working much better. But customer service is still not what it should be. I was tearing my hair out last weekend when the broadband went down for the third time and the person on their helpdesk in Glasgow, after I had been on hold for 25 minutes, said I need to switch the router back on and off again. So we are working on an incentive adjustment for that.

Apparently we use a GDP forecast that doesn’t take account of any return from our investments. I’ve asked Bernard to try to find out why

Act 3: The Chair of an Industry Group

The government is offering us an industrial strategy – but only if we first explain how we might sort out most of the problems of this industry ourselves. So we need to put together a detailed plan. We know what the key issues are. We need to invest much more heavily in skills, stop whinging about the apprenticeship levy, and make the industry attractive to a diverse talent pool. We need clients to change their approach to procurement, stop buying on the basis of fixed price for a supposedly fixed output, and instead go into partnership with the supply chain to invest in long-term, value-for-money, whole-life programmes of investment and maintenance. And we need jointly to invest in all the technology which has the potential to transform our industry. So hands up who agrees with all that. Excellent! Pity you only represent 0.05% of the industry, but still it’s a start.

Act 4: The Chair of the Utility

We now move to Item 4, business case for adoption of a new asset management system. You will appreciate, gentlemen, that this offers significant savings to the business and ultimately an enhanced return to our shareholders. The consultancy report attached at appendix 5B explains that currently we have almost no visibility of the state of our assets and that our financial statements are entirely independent therefore of the actual underlying asset value. Asset failures also adversely affect our customer approval ratings and under the new regulatory proposals this is likely to lead to more substantial penalties. You will appreciate however that there are significant costs associated with the adoption of such a new system as set out in table 21 in appendix 7. The analysis suggests that only some of these costs will be recoverable from customers. If this board endorses the proposal we will therefore need to put it to the holding company board for the consideration of shareholders.

With credit to Julia Prescott, recently appointed as a National Infrastructure Commissioner, who prompted this stream of consciousness with the simple question “how do you see the UK infrastructure debate?” My answer. In silos.

Richard Threlfall is head of infrastructure, building and construction at KPMG