Blair's £19bn challenge

In the run-up to the election, Tony Blair is promising the biggest investment in the national infrastructure since 1945. Spending on schools, hospitals and transport will double over the next three years to £19bn a year in 2003/4, as construction minister Nick Raynsford proudly announced at the start of Labour’s campaign.

But the promised spending spree has provoked fears within the construction industry that Blair has set a target that neither the government nor it can possibly meet.

“There are two problems,” says Sir Michael Latham. “The first is whether the clients can cope, the second whether the industry can handle it.” He points to the length of time it can take to push money through local authorities and to the poor performance of public sector clients, exemplified by projects such as the Scottish parliament and the Welsh assembly. “Releasing government money will require a big effort on the part of these clients,” he says.

Latham predicts that unless things change, the Labour government will have little more than building sites to show off by the time it asks the country for a third term.

Raynsford’s £19bn is not new money: the sum was unveiled in last July’s Comprehensive Spending Review. However, this headline figure is an understatement of the government’s real investment plans.

For one thing, spending on social housing is not included. DETR figures show that spending in this area will rise from £4.5bn this year to £7bn in 2003/4. The money will be used to tackle a £10bn renovation backlog and is intended to lead to the refurbishment of 500,000 homes. On top of this, the PFI is expected to secure an additional £760m of investment, which will be used to upgrade 60,000 homes over the three-year period.

Nor does the £19bn include all the private money raised by public–private partnerships and the PFI: the Treasury anticipates that PFI deals worth £12bn will be signed over that three-year period, as well as £9bn in PPP projects such as the part-privatisation of the Tube.

Industry economists are concerned by the figures. “Across the whole industry, it might mean a rise in output of between 3-5%. In transport we’re talking a double-digit growth rate,” says Jacquie Cannon of Construction Forecasting and Research. She says a slowdown in retail and leisure work could help, but adds: “There could be hold-ups on projects and fast-risers in wages.”

Can the industry do the work?
“I worry how we can pick up and support a higher level of output,” says Martin Donohue, chief executive of Westbury Homes. “If the government wants to up the stakes it will mean either inflation, delays, importing workers from abroad or possibly a combination of all three.”

Donohue’s concern about skills shortages is backed up by a survey published by the Association of Consulting Engineers, which found that 95% of companies face problems recruiting and retaining experienced staff, and 80% cannot recruit enough graduates. To meet the likely growth in demand, the Construction Industry Training Board estimates that the industry needs to find 74,000 workers a year.

I’m well aware of the issues of capacity and training. I’ve no doubt that the investment can be absorbed

Nick Raynsford

Latham fears that the South-east in particular will be unable to cope. “These are high-pressure areas that suffer a severe skills shortage. If all the money ends up there, it will have a potentially inflationary effect,” he says. This is especially true given that large-scale projects such as the £4bn CrossRail link are being pushed through in and around the capital, and that 30% of the government’s construction spend for 2000/1 is earmarked for London.

Many other voices in the industry echo the views of Latham and Donohue. “A shortage of fully trained engineers means we’ll start fighting each other for available resources, and the price of people as well as of construction will rocket,” says Doug Willis of consulting engineer PB Kennedy & Donkin. So far, the staff shortfall has meant the firm has had to put more work through its offices in Poland and the Middle East, and has had to bring in workers from India and Australia.

The potential failure of British companies to absorb the upsurge in public sector investment is also likely to open their markets to firms from abroad. The big American players that have snuck into the market over the past few years are being handed an opportunity to expand their bridgeheads. Companies such as Swanke Hayden, HOK, Fluor Daniel and PB Kennedy & Donkin are all hungrily eyeing the opportunities. Bechtel, the largest contractor in the USA, has won the Channel Tunnel Rail Link and wants to expand its portfolio. “There’s no limitation other than the will to get involved,” says Bechtel spokesperson Ian Morris: “We are a global organisation and we bring in global resources. At the moment we are always confident of resourcing out on a project, otherwise we wouldn’t get involved.”

Raynsford maintains that the industry can absorb the £19bn. “The investment profile has been building up over the last two years and will continue expansion next year. It’s not a sudden turning on the tap to full blast. I’m well aware of the issues of capacity and training. There’s considerable planning including the CITB’s work to attract more people and extend current training programs. I’ve no doubt that the additional investment can be absorbed by industry.”

Can the government spend the money?
There are two factors that may ameliorate the inflationary effect of the increase in public spending. One is the much-talked-about recession, and the other is the point touched on by Latham: the state’s inability to organise the investment.

The fact is, there are serious question marks over whether the government itself can keep up with Labour’s spending promises.

The first reason for doubt is the Labour government’s performance during its first term. Research by the Institute for Fiscal Studies shows that, over the past four years, investment in schools, hospitals and transport sank to their lowest levels since the Second World War. Real investment declined by an average of 4.4% per year – a steeper decline than during Margaret Thatcher’s premiership.

This has raised fears that attempting to double spending after a period of such low investment will put the government’s creaking procurement mechanisms under even greater strain. Even during this period of low spending, government departments have failed to get through the money allocated to them.

In March, chancellor Gordon Brown had to answer to the Treasury select committee for failing to reach spending targets in 2000/1, when actual investment undershot promised investment by £5bn. Brown expressed frustration at the spending departments’ inability to get through the resources allocated to them: “We’ve asked them to produce investment plans,” he told the committee. “We now look to them to implement these strategies effectively so that the country can benefit from the substantial increases.”

There are two problems. The first is whether the clients can cope, the second whether the industry can handle it

Sir Michael Latham

The second problem is the sheer length of time it takes to procure large-scale public projects.

Industry figures point to a range of hurdles. The notoriously slow and bureaucratic PFI/PPP process is one – witness the two-year delay in getting the London Underground PPP up and running.

“There is obviously an ideological commitment to the PFI at the top,” says Andy Walker, president of the Association of Consulting Engineers, “but this has borne a relatively small amount of fruit. At the moment, it is quite difficult for companies to get involved in the PFI and it depends if the government has ideas on making this route easier work or not. At the moment the jury is out.”

Other factors applying the brakes are the tortoise-like planning system, the tortuous inquiries faced by every major project and the glacial pace at which departments process their spending pledges.

Ambitious plans to improve the country’s road network seem especially likely to experience delay. For example new bypasses – and there are over 100 planned by the government – can take as long as 13 years to get built. The Botley Bypass in Hampshire, for one, has been a designated project for 25 years but has still not gone ahead. The road network is also carrying a backlog of £5bn in basic repairs and maintenance so the DETR will have a struggle to demonstrate to car owners that it has upgraded the road network.

Spending on rail infrastructure also faces huge obstacles, as witnessed by Railtrack’s inability to meet last week’s deadline to remove post-Hatfield speed restrictions on the network.

Rail and Tube investment is also dependent on vast amounts of private cash, which is proving notoriously hard to secure. Over the next three years, private finance could make or break the scheme for transport investment. State funding will total just over £31bn, which the government is hoping will be supplemented by £15.9bn in private cash. But the chances of bringing private and public money together is problematic to say the least, given Railtrack’s £534m loss last year.

In public housing, the government says it will allocate enough money to bring 500,000 homes, one-third of the social housing units in poor condition, “to a decent standard by 2004”. It also plans to build 10,000 new homes. This equates to a spending commitment of £3-4bn a year. A mix of inefficient bureaucracy and market forces will make this tough going. Housing associations seem to be permanently suffering from delayed money transfer. And in the South-east, where internal migrants and asylum seekers are currently suffering from a lack of provision, the high cost of land and construction are likely to reduce the number of units the government gets for its money.

Economic consultancy Construction Forecasting Research argues that “analysts should not expect a speedy implementation of the building programme”. Again, a lack of labour exacerbates the issue. In Glasgow, when the council wanted to transfer its stock of council houses, labour shortages meant they had to rush in a recruitment initiative to find enough workers to work on a £1.6bn backlog of repairs.

For school and hospital building projects, the main problem is a sloppiness in the procurement process that has in the past led to bloated budgets and delays. In January, the National Audit Office reported that up to £2bn of public money could be wasted if Whitehall departments did not ensure good practice in the procurement and management of new construction, repair and maintenance.