BRIEFING PAPER
Number 06594, 23 December 2015
Infrastructure policy
By Chris Rhodes
Inside:
1. Definition of infrastructure
2. Government policy
3. Infrastructure Pipeline
4. Financing infrastructure
investment
5. Government policy to
encourage investment
6. Public Sector Net Investment
7. Appendix 2 – UK
Infrastructure strengths and
weaknesses
www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | papers@parliament.uk | @commonslibrary
Number 06594, 23 December 2015
Contents
Summary
3
1.
1.1
1.2
Definition of infrastructure
Economic benefits of infrastructure
Current state of UK infrastructure
4
4
4
2.
2.1
2.2
2.3
2.4
Government policy
Policies announced in October 2015
National Infrastructure Commission
Infrastructure and projects authority
Nationally Significant Infrastructure Projects
6
8
9
11
12
3.
Infrastructure Pipeline
13
4.
4.1
4.2
Financing infrastructure investment
Current and past infrastructure financing
Public funding for infrastructure
Private funding for infrastructure
Estimates of total infrastructure investment
How much investment is needed
15
16
16
17
17
19
5.
5.1
5.2
5.3
5.4
5.5
Government policy to encourage investment
UK Guarantees
Pensions Infrastructure Platform
British Wealth Funds
Green Investment Bank
Infrastructure premium
20
20
21
22
22
23
6.
Public Sector Net Investment
24
7.
Appendix 2 – UK Infrastructure strengths and weaknesses
25
Cover image copyright:
Sheringham Shoal Offshore Wind Farm by Statkraft.
Licensed by CC BY 2.0 / image cropped.
2
3
Infrastructure policy
Summary
This note examines the current state of infrastructure in the UK, current levels of
investment and recent Government policy.
According to the Infrastructure Pipeline, 64% of planned infrastructure investment will be
privately funded, 25% will be publicly funded and 11% will be financed by a mixture of
public and private investment.
Public Sector Net Investment (a measure of public investment in infrastructure) totalled
£33.6 billion in 2015/16, 1.8% of GDP. The Treasury estimates that total infrastructure
investment totalled £47 billion each year from 2010/11 to 2013/14.
The Government argues that a higher level of investment is needed if the UK is to have
the infrastructure that it needs. This note outlines some of the measures that the
Government has taken to increase infrastructure investment including:
•
The UK Guarantees Scheme
•
The Pensions Infrastructure Platform
•
The Green Investment Bank
In October 2015, the Government established the National Infrastructure Commission
which will provide “unbiased analysis of the UK’s long-term infrastructure needs.” The
Government intends to establish the Commission in law and will consult on the legislation
in late 2015.
Number 06594, 23 December 2015
1. Definition of infrastructure
The Economist calls infrastructure the “economic arteries and veins;
roads, ports, railways, airports, power lines, pipes and wires that enable
people, goods, commodities, water, energy and information to move
about efficiently.” 1
The Institute of Civil Engineers defines infrastructure as “the physical
assets underpinning the UK’s networks for transport, energy generation
and distribution, electronic communications, solid waste management,
water distribution and waste water treatment.” 2
1.1 Economic benefits of infrastructure
Infrastructure spending can have a positive effect on economic growth
by increasing productivity and attracting investment, as well as by
providing short-term boosts to employment in construction and related
industries.
This view is supported by empirical evidence which shows that investing
in infrastructure can increase long-term economic growth and that, for
example, building better transport links and energy generation capacity
can have a stronger positive effect on GDP per capita than other forms
of investment. 3 Evidence also suggests that failure to invest in the
maintenance of infrastructure can have a significant negative impact on
economic growth. 4
1.2 Current state of UK infrastructure
International infrastructure rankings provide a way of comparing the
performance of UK infrastructure with other countries. The UK was
ranked 10th the in the world in terms of the overall quality of its
infrastructure in 2014/15, behind France (8th), Germany (7th), but
ahead of the USA (12th), according to the World Economic Forum. 5
A recent OECD study of infrastructure in the UK found that
infrastructure in the UK has suffered from under-investment, compared
with some competitor countries, since the 1980s. 6 The OECD state that
this is partly attributable to insufficient long-term planning by successive
governments. One result of this is regional disparity in the quality of
infrastructure between the South East (including London) and the rest
of the country. However, the OECD also note that the UK has a “strong
network regulation framework” and a “strong institutional setting”
which should enable infrastructure improvements. 7
Matthew Bishop, Economics: An A-Z Guide, 2009, p167
ICE, A National Infrastructure Investment Bank, December 2009
3
Égert et al (2009), Infrastructure and Growth: Empirical Evidence, OECD (Cited in
National Infrastructure Plan)
4
Mattoon (2004), Infrastructure and state economic development: A survey of the
issues (Cited in BERR, The 2008 Productivity and Competitiveness Indicators, 2009)
5
World Economic Forum, Global Competitiveness Report 2014/15, September 2014,
Pillar 2
6
OECD, UK economic survey 2015: Improving Infrastructure, February 2015
7
Ibid, p 61
1
2
4
5
Infrastructure policy
According to some economic commentators, UK Infrastructure has
suffered from historic-under investment and has failed to keep up with
demand. 8 According to the National Audit Office, the UK’s roads are
already among the most heavily used in Europe and around a fifth of
the UK’s existing electricity generating capacity is scheduled to close
over the next decade. 9
A 2012 survey by the Confederation of British Industry (CBI), found that
over 60% of UK companies believe UK infrastructure will not improve
over the next five years. Particular concern was shown for the UK’s
transport system with 61% rating it below average by international
standards. On the other hand, 82% were pleased with communications
infrastructure, with 79% expecting it to improve further over the next
five years. 10
Further details of the strengths and weaknesses of UK infrastructure as
analysed in the National Infrastructure Plan are presented in Appendix 2
of this note.
ICE, A National Infrastructure Investment Bank, December 2009
NAO, Planning for economic infrastructure, HC 595, January 2013
10
CBI, Infrastructure survey 2012: Focus on delivery, Sep 2012
8
9
Number 06594, 23 December 2015
2. Government policy
In the UK, the development and operation of infrastructure is largely the
responsibility of the private sector. The maintenance of operating and
safety standards is the responsibility of the various regulators, which
operate independently of government. But the government still plays a
role in infrastructure policy in several ways:
•
•
•
Providing funding – the amount of public funding varies widely
between sectors and projects. The extent of public infrastructure
investment is discussed in section 3.1 below.
Directing investment and support towards certain projects that
the Government considers valuable for the UK.
Ensuring the development of coherent infrastructure “systems”
– long-term frameworks in which individual projects play a role
but which require national-level strategic leadership and
decisions. 11
Since 2011, the government has set out its infrastructure priorities and
re-states its overall approach to infrastructure in the annual National
Infrastructure Plans. The OECD commented that this report and its
regular updates 12
…represent the first steps in the right direction towards providing
a comprehensive view of the country’s infrastructure needs and
how the government plans to meet them.
Intermediate Infrastructure Delivery Updates are published each spring,
normally around the time of the Budget. The government also publishes
an annually updated Infrastructure Pipeline which includes details of all
major projects (costing over £50 million) planned or underway in the
UK.
The three key criteria guiding the Government in deciding which
projects to invest in or support are:
•
•
•
Projects must have a high potential contribution to economic
growth, with particular emphasis on increasing productivity and
enabling innovation.
Investment must deliver, enhance or replace infrastructure of
national importance.
Projects must attract significant private sector investment. 13
With these criteria providing overall guidance on the direction of
infrastructure policy, the Government have outlined their approach in
seven key sectors: transport, energy, communications, water, flood,
intellectual capital and waste. The following table summarises the
Government’s approach in each of these sectors.
“British infrastructure policy and the gradual return of the state”, Oxford Review of
Economic Policy, Volume 29, Number 2, 2013, pp. 287–306
12
OECD, UK economic survey 2015: Improving Infrastructure, February 2015, p61
13
HM Treasury, National Infrastructure Plan 2013, December 2013, p77
11
6
7
Infrastructure policy
Government policy approach - key infrastructure sectors
Sector
Policy approach
Transport
Roads
Maintenance and development of strategic roads is funded directly by government through the Highways Agency. Local
Authorities are responsible for managing and maintaining local roads. Larger enhancements to local roads are supported by central
government.
Rail
Passenger train services are provided through franchises let by the Government (except in devolved cases). Private companies bid
for franchises to provide specific services. The physical infrastructure of the network is maintained and developed by Network Rail
which is funded partly through money from government grants and partly through money paid to it by freight and train operating
companies. The government also directly funds some schemes, such as High Speed 2 and Crossrail.
Aviation
In a largely privately owned market, the government sees its role as one of facilitating competition, ensuring a level playing field
and maintaining high standards of safety and security. The development of the aviation sector is seen as a priority for industrial
policy.
Energy
Government energy policy is to minimise energy costs for consumers over the long term and to meet renewables targets by 2020.
Investment is from the private sector, and the government believes that "the current market is unlikely to deliver further
investment...at the scale and pace required. The Government has set out several policies to tackle this problem, further information
on which can be found in the relevant House of Commons Library Notes: http://www.parliament.uk/topics/EnergyArchive.htm#SN
Communication/digital
Water
Government seeks to achieve increased coverage and affordability of broadband for consumers and businesses. In addition to
ensuring an effective regulatory framework, Government will provide public investment where there is limited commercial viability
to providing increased coverage.
In the privately owned water industry, the Government's role is to ensure, though the regulator, that water is of a safe and
acceptable standard, that prices are affordable and that companies are investing at levels which will meet long-term pressures.
Flood
The Government coordinates the work of Defra, the Environment Agency, private water companies and local authorities to ensure
that the risks from flooding and coastal erosion are properly mitigated. The Government funds the management of rivers and flood
defence system through the Environment Agency
Intellectual capital
The Government views science and innovation as key drivers of the economy. Public funds are invested in research through
funding agencies, particularly the higher education funding bodies, the research councils and the Technology Strategy Board. The
Government also seeks to leverage private finance for research projects.
Waste
The Government aims to ensure the current infrastructure is in place to deal with waste as efficiently and as safely as possible.
Financial support is provided by government to private sector firms and local authorities in dealing with waste. The Government
also seeks to meet EU-wide targets for reducing landfill use and increasing recycling.
Source: National Infrastructure Plan, various years
The various sectors are diverse, with differing priorities, types of
investment, risks and levels of public sector involvement. However, there
are several themes which are common to them all and which inform
debate about infrastructure in the UK:
•
•
•
In all of the sectors, there is a tension between ensuring shortterm affordability (for consumers and businesses) and ensuring
that long-term investment is secured.
Since investment in these sectors is unlikely to produce short-term
returns, long-term involvement is required from potential investors
(whether public or private sector).
The involvement of both the public and private sectors, with the
influence of independent regulators, is common in all of the
sectors. This means that the competing priorities of these groups
must be managed to ensure results which are acceptable to all of
them.
Number 06594, 23 December 2015
2.1 Policies announced in October 2015
In his speech to the 2015 Conservative Party Conference, the
Chancellor, George Osborne, announced several policies to do with
infrastructure funding and planning. 14
A Government press release summarised these announcements: 15
National Infrastructure Commission
The Chancellor announced the formation of an independent National
Infrastructure Commission, which was created on 5 October 2015, with
Lord Adonis as its Chairman. Further information on the Commission is
presented below.
British Wealth Funds
Local authority pension funds are a large potential source of
infrastructure funding. In order to encourage them to invest more in
infrastructure, the Chancellor has stated that the 89 existing pension
funds are to be pooled into six British Wealth Funds. This proposal also
featured the 2015 Summer Budget. 16
The new funds will “follow international norms for investment, meaning
larger sums being invested in infrastructure.”
Further information on local authority pension fund investments can be
found in the Library briefing, Local Government Pension Scheme
investments
Infrastructure premium
As part of a wider reform of business rates, the Chancellor announced
that city regions with elected mayors will be able to levy up to an
additional 2p on business rates in order to fund infrastructure
investment.
City regions that wish to pursue this policy would have to secure the
support of the relevant Local Economic Partnership. This policy is similar
to the one that was used in London to raise money for Crossrail. 17
George Osborne, Speech to the 2015 Conservative Party Conference, 5 October 2015
National Infrastructure Commission, Chancellor announces major plan to get Britain
building, 5 October 2015
16
HM Treasury, Summer Budget 2015, 8 July 2015, p26
17
Financial Times, George Osborne hands local councils control of business rates, 5
October 2015
14
15
8
9
Infrastructure policy
2.2 National Infrastructure Commission
The National Infrastructure Commission was launched on the 30th
October 2015, having been announced on the 5th October 2015 in the
Chancellor’s speech to the Conservative Party Conference.
Purpose and operation
The aim of the Commission is to provide “unbiased analysis of the UK’s
long-term infrastructure needs.” 18
Close to the beginning of each Parliament, the Commission will provide
a comprehensive report on the UK’s infrastructure needs over the next
30 years. These reports will be updated on a rolling basis and the
government will be obliged to respond to all of the recommendations,
either by accepting them or suggesting alternatives.
The government of the day will set the broad terms of reference for the
Commission, including a limit on the potential cost of recommendations
and the parameters of the Commission’s research.
The Commission will have around 25 to 30 staff, will be based in the
Treasury building in Whitehall and will have statutory powers to draw
expertise from other government and arms-length bodies.
Lord Adonis will chair the Commission on a temporary basis, although
his appointment may be made permanent once the post has been
established in law. The Government intends to provide a statutory basis
for the Commission in legislation which will be consulted on in late
2015.
Terms of reference
On the 30th October, the Chancellor wrote to Lord Adonis setting out
the Commission’s terms of reference. 19
Broadly, the current terms of reference are that the Commission will
examine three infrastructure requirements identified by the government
and then report back by Budget 2016. The Commission may also
publish in early 2016, identifying issues which will be addressed in its
first five year report.
The three areas that the Chancellor has asked the Commission to
examine and report back on before Budget 2016 are:
•
Transport connections in the North of England, particularly
East/West, cross-Pennines connections
•
Future investment in London’s transport infrastructure. The
Commission will examine priorities concerning road, rail and
underground, including the North/South Crossrail 2
National Infrastructure Commission, Chancellor announces major plan to get Britain
building, 5 October 2015
19
National Infrastructure Commission, Terms of reference, 30 October 2015
18
Number 06594, 23 December 2015 10
•
Energy storage and interconnectivity. The focus of this strand is
the overall security of the UK’s supply and reducing bills for
consumers.
Commissioners
The Chair of the Commission will be Lord Adonis, Secretary of State
for Transport from 2009 to 2010. The other Commissioners are:
•
•
•
•
•
•
•
Lord Heseltine, Deputy Prime Minister from 1995 to 1997 and
author of No Stone Unturned a report commissioned by the
Coalition Government examining ways to boost economic
growth.
Sir John Armitt, Chairman of the Olympic Delivery Authority,
2007 to 2014
Professor Tim Besley (London School of Economics), Chair of
the Council of Management of the National Institute of Economic
and Social Research
Daniel Hassabis, co-founder of DeepMind, an AI company
recently bought by Google
Sadie Morgan, Design Chair for High Speed Two (HS2)
Bridget Rosewell OBE, non-Executive director of Network Rail
and Ulster Bank
Sir Paul Ruddock, Chair of Oxford University Endowment
Management and Chair of the Oxford University Investment
Committee.
Legislation
In his letter to Lord Adonis on the 30th October, the Chancellor stated
that he would launch a consultation on plans to put the Commission on
“statutory footing and confirm its independence.” The legislation will
also ensure the departments cooperate and share information with the
Commission. 20
Background
The idea of an independent Infrastructure Commission has been floated
on serval occasions by a number of different organisations including the
London School of Economics and the Institution of Civil Engineers.
Perhaps the most high profile recent suggestion along these lines was
from the Armitt Review of Infrastructure, which was commissioned by
the Labour Party in 2012 and led by Sir John Armitt, one of the
Commissioners of the new National Infrastructure Commission.
The Armitt Review published a draft National Infrastructure Bill which
the 2015 Labour Party Manifesto promised to introduce if the Party had
won the 2015 General Election.
20
George Osborne, Letter to Lord Adonis, 30 December 2015
11 Infrastructure policy
Comment on the National Infrastructure
Commission
There has been some criticism of the National Infrastructure
Commission as it is currently designed. The Financial Times has noted
the following potential issues: 21
•
•
•
The Commission will have no role in the decision regarding airport
capacity in the South East of England
The Government will still take the final decision regarding large
infrastructure investments, meaning that the problem of the
short-term political cycle in infrastructure decisions will not be
resolved
The Commission will only have a role at the very earliest stages of
infrastructure projects.
2.3 Infrastructure and projects authority
On 11 November 2015 it was announced that the Major Projects
Authority and Infrastructure UK would merge to form a new body from
1 January 2016, called the Infrastructure and Projects Authority. 22
Major Projects Authority (MPA)
The MPA was part of the Cabinet Office and provided independent
assurance for major Government infrastructure projects. It also helped
Government departments by providing project management training
and assistance.
The projects supported by the MPA included IT projects, defence
equipment procurement exercises and “service delivery
transformations” such as the modernisation of the electoral registration
system. 23
The MPA provides Delivery Confidence Assessments for all projects in its
portfolio (in 2014/15 this included 188 projects). The MPA marks each
project using a traffic light system, with projects given a green mark
considered to be highly likely to be completed on time and budget;
those given an amber mark considered to require management
attention for significant but resolvable issues; and those given a red
mark considered to be unachievable and in need of re-scoping or
reassessment.
Infrastructure UK (IUK)
IUK was established in the June 2010 Budget with a remit to:
…enable greater private sector investment in infrastructure, and
improve the Government’s long-term planning and delivery. 24
Financial Times, Adonis infrastructure body to make plans for three big schemes, 5
October 2015
22
Cabinet Office, Government creates new body to help manage and deliver major
projects for UK economy, 11 November 2015
23
Major Projects Authority, Annual Report and Accounts 2014/15, 2015, p6
24
HM Treasury, June Budget 2010, June 2010, para 1.83, p29
21
Number 06594, 23 December 2015 12
IUK was closely involved with the compilation of the Infrastructure Plan,
which was produced in the autumn each year from 2011 to 2014. This
document included both a forward looking assessment of the long term
infrastructure needs of the UK, and also outlines how planned
infrastructure projects will be funded. IUK also worked on the
production of the Infrastructure Pipeline which, is discussed below.
The Infrastructure Projects Authority will report jointly to the Treasury
the Cabinet Office and will combine the functions of project assurance
and monitoring from the MPA and the focus on long-term financing
from IUK.
2.4 Nationally Significant Infrastructure
Projects
The Planning Act 2008 and the Localism Act 2011 set out a planning
permission framework for approvals relating to projects in energy,
transport, water, and waste. This framework is intended to speed up
the planning permission process for this sort of project.
The 2008 Act sets out a threshold over which projects are considered
‘nationally significant’. Once this status has been granted by the
Planning Inspectorate, the application will be examined by the
Inspectorate and a recommendation will be made to the relevant
Secretary of State, who will make a decision on whether to grant
consent or refuse planning permission for the project. The process is
timetabled to take approximately 15 months from start to finish. 25
By making the process more transparent and quicker, it is hoped that
fewer potential infrastructure investors will be put off by the planning
permission process.
Further information can be found in the House of Commons Library
Note, Planning reform proposals.
25
National Infrastructure Planning website, Planning Inspectorate role, 2012
13 Infrastructure policy
3. Infrastructure Pipeline
The Infrastructure Pipeline is updated annually, most recently in August
2015. The Pipeline brings together major projects (costing more than
£50 million) that are planned or underway in the UK. It includes both
public and private sector projects. It is not time-limited, so includes
some projects with estimated completion dates in the 2030s. Many of
these long-term projects are still in the scoping or design phases of
development.
The purpose of the Pipeline is to illustrate the level of investment
required by both public and private sectors and to provide a means of
forecasting future requirements from the construction and other
industries. It is not intended to be a comprehensive list of all required
infrastructure, but is indicative of the scale of requirements.
The 2015 Pipeline includes 564 projects with a combined value of £411
billion (in 2013/14 prices). The chart below shows the value by sector of
projects planned for each year of this Parliament.
Infrastrucutre Pipeline 2015, planned investment by sector
£ billions, real terms, 13/14 prices
25
2015/16
2016/17
2017/18
2018/19
2019/20
20
15
10
5
0
Energy
Transport
Water
Digital
Waste
Research
Flood
The table below shows the value and number of planned projects by
sector in the 2015 Pipeline. The energy sector accounts for 60% of the
value all the planned projects included in the Pipeline.
Infrastructure Pipeline 2015 by sector
Sector
£ billions
No of projects
Energy
Transport
Water
Communications
Flood
Science and Research
Waste
245
127
26
7
4
1
1
158
302
29
6
27
26
16
Grand Total
411
564
Source: Infrastrucutre Pipleine 2015
Includes public and private investment, 13/14 prices
The Pipeline also contains information on projects by region,
summarised in the following table.
Number 06594, 23 December 2015 14
Infrastructure Pipeline 2015 by region of impact
UK
England
North West
London
South West
Wales
Offshore
England and Wales
South East
Scotland
West Midlands
Yorkshire & the Humber
East of England
North East
East Midlands
Northern Ireland
England, Wales & Scotland
£ billions
No of projects
149
39
32
31
23
21
17
16
12
10
7
7
6
5
4
1
1
45
30
76
61
34
16
18
7
63
44
39
33
31
27
35
4
1
Source: Infrastrucutre Pipleine 2015
Includes public and private investment, 13/14 prices
Analysis of the Pipeline by region of impact shows is that there are
fewer projects which impact on larger regions, but they tend to cost
more.
In the English regions, there are more projects since smaller localised
projects are easier to plan, and they are generally cheaper because of
their smaller scale. For example, in the East Midlands, there are 35
projects in the Pipeline, costing a total of £4 billion.
The Government has designated 40 of the projects which feature in the
Pipeline as the ‘Top 40 infrastructure investments’ and further details
about them are provided in the Infrastructure Plan. 26 The list of priority
projects includes High Speed 2, the nuclear power plant at Hinckley
Point and the development of Innovation Catapult Centres.
26
HM Treasury, National Infrastructure Plan 2014, December 2014, pp135-137
15 Infrastructure policy
4. Financing infrastructure
investment
The financing of infrastructure is complex and varied. In the UK there
are three broad ways in which infrastructure projects have been funded:
•
•
•
Public funding: projects are financed through government
spending. High Speed 2 will be financed publicly.
Private funding: projects are funded by private companies, with
customer bills or charges re-paying the initial investment over a
number of years. Heathrow Terminal 5 was entirely financed by
private investment.
Mixed public/private funding: finance is drawn from both the
public and private sector. Network Rail maintains and develops
the railway infrastructure using Government grants, governmentbacked borrowing and private sector funding drawn from charges
levied on train operators.
The Pipeline can be used to give an indication of the extent to which
each type of funding is used in the UK. The following chart shows the
projects in the Pipeline by financing type.
Planned investment by source of finance
2015 onwards
Private
Public
Mixed
Energy (£245 bn)
Transport (£127 bn)
Water (£26 bn)
Communications (£7 bn)
Flood (£4 bn)
Science and Research (£1 bn)
Waste (£1 bn)
Grand Total
0%
20%
40%
60%
80%
100%
Private finance dominates planned infrastructure investment. 69% of
financing is from the private sector (worth £260 billion), whilst 19% is
from the public sector (£73 billion) and 12% is from mixed financing
(£46 billion).
The chart shows the extent to which infrastructure financing differs
from sector to sector. Energy sector projects (which have the highest
combined value of any sector’s projects in Pipeline) are 92% private
funded, and planned water sector projects are 100% private financed.
Planned projects in the transport sector are funded by 62% public
funding, whilst planned research projects will rely on 73% public and
27% mixed funding.
Number 06594, 23 December 2015 16
4.1 Current and past infrastructure financing
Although the Pipeline provides a useful indication of the source of
funding for planned projects, it should not be used to indicate the
current level or source of infrastructure financing, and it cannot provide
any information on past infrastructure investment.
Public funding for infrastructure
Public Sector Net Investment (PSNI) includes public investment in
infrastructure, although PSNI also includes some public investment
which is not infrastructure, such as defence procurement. The chart
below shows PSNI as a percentage of GDP since the mid-1950s.
Public investment in infrastrucutre
Public Sector Net Investment as a % of GDP
8%
7%
6%
5%
4%
3%
2%
1%
0%
Public infrastructure investment declined sharply in the 1970s and
1980s, partly due to the privatisation of several key sectors such as the
water and energy industries, but also because of a “very large and
permanent reduction in public house-building.” 27
In the early 2000s, infrastructure spending as a proportion of GDP
increased, although it remained low by historic standards. Infrastructure
spending rose sharply in 2008-09 and 2009-10 as capital spending was
brought forward as part of the Labour Government’s ‘fiscal stimulus’.
Since then PSNI has fallen from 3.2% of GDP in 2009/10 to 1.7% of
GDP in 2014/15. It is forecast to fall to 1.4% of GDP by 2019/20 before
rising to 1.8% in 2020/21.
Public Sector Net Investment
£ bn (current)
2010-11
39.8
2011-12
30.0
2012-13*
34.8
2013-14
26.2
2014-15
30.4
2015-16
33.6
2016-17
35.8
2017-18
33.4
2018-19
30.6
2019-20
32.2
2020-21
41.3
Source: OBR, Databank, December 2015
27
£ bn (2014/15 prices)
42.6
31.7
36.1
26.6
30.4
33.1
34.7
31.8
28.6
29.5
37.0
“Trends in British public investment”, IFS, 2002, vol. 23, no.3, pp 305-342
% GDP
2.5
1.8
2.1
1.5
1.7
1.8
1.8
1.6
1.4
1.4
1.8
17 Infrastructure policy
Private funding for infrastructure
Private companies are under no obligation to publish details of the
amount they spend on infrastructure, so producing a robust estimate of
private sector investment is difficult.
The National Audit Office (NAO) has produced figures which show the
value of capital provided by banks to private sector companies for
infrastructure investment in the recent report, UK Guarantees scheme
for infrastructure: 28 These data do not include private sector investment
which funded from reserves or similar sources not requiring capital from
banks.
These data show that private capital raised from banks and used to
finance infrastructure investment totalled £6 billion in 2014, down
slightly on the 2013 level. This is double the 2010 and 2011 level of
around £3 billion.
Estimates of total infrastructure investment
Since the NAO estimates above and the data on PSNI are from different
data sources and do not present a complete picture of all infrastructure
investment from the private sector (for example, the NAO estimates
exclude spending from reserves), these two sources cannot be
combined to produce estimates of the total amount of infrastructure
investment in the UK.
The Treasury have produced estimates that average annual
infrastructure investment, from both the public and private sectors:
•
Between 2010/11 and 2013/14 total infrastructure
investment was £47 billion. 29
A separate Treasury document explains how this estimate was
calculated and the sources used. 30
New orders to the construction sector
An alternative source (which is not comparable with the data above) is
data on the value of new infrastructure orders to the construction sector
broken down into public and private sector. This is an incomplete
indicator of infrastructure investment since it excludes some
infrastructure spending, for example on project preparation, scoping
and any research and development investment. It also excludes
spending on housing, which is included in some other definitions of
infrastructure. 31
NAO, UK Guarantees scheme for infrastructure, January 2015, p15
HM Treasury, Infrastructure Plan 2014, 2014 p103
30
HM Treasury, Methodology and sources for National Infrastructure Plan 2014,
December 2014
31
ONS, Output in the construction sector, Q2 2013
28
29
Number 06594, 23 December 2015 18
% of new infrastrucutre orders to the construction industry
Great Britain, quarterly data
100%
80%
Private sector
60%
40%
20%
Public sector
0%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
In 2014, infrastructure orders to the construction industry from the
private sector totalled £9.6 billion, 63% of all infrastructure orders.
Private sector orders accounted for 59% of orders in 1997 and 4% of
orders in 1980.
The proportion of orders from the private sector has grown so markedly
mainly due to the fact that most infrastructure providers were privatised
in the 1980s and 1990s, transferring many orders from the public to the
private sector.
International comparisons
The following chart shows how the level of total investment in selected
G7 economies has changed since 1980. The data below are Gross Fixed
Capital Formation, a measure of investment which is broader than
infrastructre investment and includes all investment in assets, including
the purchase of buildings, land, software and intangible assets such as
intelectual property. These data include both public and private
investment.
Total investment as a % of GDP
Gross fixed capital formation, IMF data
30
25
France
G7 average
20
USA
Germany
15
UK
W
10
1980
1985
1990
1995
2000
2005
2010
19 Infrastructure policy
The G7 average is for investment of 20.1% in 2014, compared with
17.6% in the UK. Of the countries selected above, French investment
represented the highest proportion of GDP: 21.9%. In Germany,
investment was 18.9% of GDP and in the US it was 19.8%.
4.2 How much investment is needed
The OECD estimates that annual infrastructure investment of 3.5% of
GDP is necessary in developed economies. Without this, the OECD
states that there would be detrimental “implications for living standards
and quality of life” and competitiveness would be “blunted”. 32
Government spending on infrastrucutre and ideal spending
£ billions, PSNI and OECD ideal infrastrucuture spending
80
OECD target = 3.5% of GDP
70
A funding gap of
up to £40 billion
by 2019/20
60
50
40
UK government investment:
1.4% of GDP in 2019/20
30
20
10
0
The chart above shows government infrastructure spending (PSNI) and
3.5% of GDP in £ billions. The bars do not include private sector
infrastructure investment.
Currently, public sector infrastructure investment totals around 1.5% of
GDP, and forecast suggest that this will fall to 1.8% of GDP by
2020/21. This implies that if the OECD target is to be met, around £40
billion per year will have to be found, either from additional government
investment, or from the private sector, or a combination of both.
32
OECD, Infrastructure to 2030, volume two, mapping policy, 2007, p13
Number 06594, 23 December 2015 20
5. Government policy to
encourage investment
The Treasury has stated that of those projects included in the 2013
Pipeline only 58% of planned projects have secured funding. 33 They
drew particular attention to the energy sector, stating that “the current
market is unlikely to deliver the further investment in electricity
infrastructure at the scale and pace required.” 34
The 2014 Infrastructure Plan includes analysis of the ‘investment
opportunities’ available for private sector investors in UK infrastructure
projects. £79 billion worth of ‘investment opportunities’ are available in
the period to 2021. 35
The Government has therefore taken a number of measures to increase
infrastructure investment or to make this type of investment more
attractive to the private sector.
5.1 UK Guarantees
The UK Guarantees scheme (UKGS) was announced in July 2012 and
was given statutory backing by the Infrastructure (Financial Assistance)
Act 2012. The scheme is due to close in December 2016.
The UKGS provides financial guarantees from the government for
money lent to fund infrastructure projects. The following diagram from
the NAO outlines how the scheme works: 36
HM Treasury, Infrastructure Plan 2013, 2013, p85
HM Treasury, Infrastructure Plan 2013, 2013, p49
35
HM Treasury, Infrastructure Plan 2014, 2014, pp108, 109
36
NAO, UK Guarantees scheme for infrastructure, 2015, p6
33
34
21 Infrastructure policy
The key aspects of the scheme:
•
•
•
•
•
•
The scheme is intended to “avoid delays to investment in UK
infrastructure because of adverse credit conditions making it
difficult to secure private finance.”37
HM Treasury provides guarantees to lenders so that if the
recipients of loans are unable to keep up re-payments or if the
projects fail, the banks will still be reimbursed. This is intended to
transfer the risk of investing in infrastructure from the banks to
the government and therefore encourage more bank lending for
this sort of project.
In return for the guarantee, HM Treasury charge an annual fee to
each infrastructure project company. The fee is based on the risk
associated with the scheme. It is intended that the fee income
paid to the Treasury exceeds any losses.
39 projects are prequalified at present, worth up to £34 billion
(the guarantees will not necessarily be the same amount)
The 2014 National Infrastructure Plan states a figure of £466bn of
identified infrastructure. The prequalified projects account for only
7% of this. 38
To date there have been no calls on government to pay out on
the guarantees issued.
5.2 Pensions Infrastructure Platform
The Pensions Infrastructure Platform (PIP) was the result of a
Memorandum of Understanding between the Government and UK
pension funds signed in November 2011 in which the parties agreed to
develop a facility to help UK pension funds invest more in UK
infrastructure assets. 39 40
UK pension funds have historically invested relatively small amounts in
infrastructure assets. This is because most UK pension funds lack the
capacity and in-house expertise to invest directly and assess risks.
Pension funds in other countries such as Canada and Australia have
been investing in infrastructure for over 20 years.
UK pension funds invest an estimated 1% of their total assets in
infrastructure. This is low compared with overseas pension funds in
Australia and Canada where an estimated 8-15% of assets are invested
in infrastructure. 41
The PIP is intended to help UK pension funds overcome these traditional
difficulties by providing a platform for UK pension funds to invest in
infrastructure. As of March 2013, the platform had secured ten
founding investors and reached £1 billion of investment capital.
The PIP has a target of raising an additional £2 billion of infrastructure
investment.
Ibid, p12
HM Treasury, Infrastructure Plan 2014, 2014, p116
39
Memorandum of Understanding between HM Treasury, (NAPF) and (PPF), November
2011
40
Memorandum of Understanding between HM Treasury and the pensions fund group,
November 2011
41
Fund managers back infrastructure plan, Financial Times, 25 November 2011
37
38
Number 06594, 23 December 2015 22
Although the PIP is the result of an agreement with the Government,
the scheme is entirely independent. The PIP is the first of its kind in the
UK.
Signatories to the Memorandum include, the National Association of
Pension Funds (NAPF), which represents around £800 billion of assets,
the Pension Protection Fund (PPF), with over £6 billion, and a group of
smaller funds holding a combined £50 billion.
PIP has attracted some criticism, particularly surrounding the extent to
which Government intervention was necessary to encourage pension
funds to invest in infrastructure projects. Deiter Helm, an academic of
infrastructure policy commented “…quite what the market failure was
to which PIP was supposed to be the answer remains opaque.” 42
5.3 British Wealth Funds
Related to the PIP scheme is the British Wealth Funds Policy. This was
announced in George Osborne’s speech to the 2015 Conservative Party
Conference, along with several other policies to do with infrastructure
funding and planning. 43 A Government press release summarises these
announcements.
Local authority pension funds are a large potential source of
infrastructure funding. In order to encourage them to invest more in
infrastructure, the Chancellor has stated that the 89 existing pension
funds are to be pooled into six British Wealth Funds. This proposal also
featured the 2015 Summer Budget. 44
The new funds will “follow international norms for investment, meaning
larger sums being invested in infrastructure.”
Further information on local authority pension fund investments can be
found in the Library briefing, Local Government Pension Scheme
investments.
5.4 Green Investment Bank
The Green Investment Bank (GIB) was created in 2012 with the purpose
of “accelerating the UK’s transition to a greener, stronger economy.” 45
The UK government is the sole shareholder in the GIB, having
committed £3.8 billion of funding. The GIB backs green infrastructure
projects on commercial terms. It also attracts joint investment from the
private sector for specific projects. The GIB is particularly focused on the
energy and waste sectors.
The 2014 Infrastructure Plan announced that the GIB had invested £1.4
billion in 35 projects, including investment from 70 private sector
“British infrastructure policy and the gradual return of the state”, Oxford Review of
Economic Policy, Volume 29, Number 2, 2013, pp. 287–306
43
George Osborne, Speech to the 2015 Conservative Party Conference, 5 October 2015
44
HM Treasury, Summer Budget 2015, 8 July 2015, p26
45
GIB, Annual report and accounts 2013/14,
42
23 Infrastructure policy
investors. The GIB is “seeking a group of strategic, long-term coinvestors to participate in capital raising exercises. 46
The European Investment Bank is another source of lending for UK
infrastructure projects. In 2013, the Bank lent £5 billion to infrastructure
projects. A record £1.5 billion was lent for investment in a National Grid
project. The Investment Plan for Europe will facilitate €315 billion of
infrastructure investment across the EU, and the UK’s approach of using
the Pipeline to highlight potential projects has helped attract investment
from this fund. 47
In his speech to the 2015 Conservative Party Conference, the
Chancellor, George Osborne, announced several policies to do with
infrastructure funding and planning. 48
A Government press release summarises these announcements. 49
5.5 Infrastructure premium
As part of a wider reform of business rates, the Chancellor announced
that city regions with elected mayors will be able to levy up to an
additional 2p on business rates in order to fund infrastructure
investment.
City regions that wish to pursue this policy would have to secure the
support of the relevant Local Economic Partnership. This policy is similar
to the one that was used in London to raise money for Crossrail. 50
HM Treasury, Infrastructure Plan 2014, 2014, p117
Ibid, p118
48
George Osborne, Speech to the 2015 Conservative Party Conference, 5 October 2015
49
National Infrastructure Commission, Chancellor announces major plan to get Britain
building, 5 October 2015
50
Financial Times, George Osborne hands local councils control of business rates, 5
October 2015
46
47
Number 06594, 23 December 2015 24
6. Public Sector Net Investment
2007-08
£ bn (current)
0.7
0.7
0.7
0.8
0.9
0.9
1.1
1.1
1.6
1.9
2.1
2.5
3.2
3.1
3.1
3.5
3.4
3.5
4.3
5.5
6.8
6.4
5.2
5.2
5.8
5.8
4.1
6.1
7.6
7.3
6.3
4.8
4.7
3.8
9.0
10.3
13.5
14.0
11.9
12.3
12.6
8.3
4.3
5.5
6.2
6.4
12.8
14.9
14.6
21.8
26.0
28.0
31.1
£ bn (2014/15 prices)
15.7
15.6
14.7
15.5
16.7
17.4
21.3
20.6
27.9
32.1
33.1
38.9
47.7
44.2
41.1
43.6
38.7
37.7
41.8
44.9
44.7
37.6
26.9
24.1
22.9
19.4
12.6
17.5
20.7
18.9
15.5
11.3
10.5
7.9
17.4
18.4
22.8
23.2
19.2
19.5
19.4
12.4
6.3
7.9
8.8
8.9
17.6
20.0
19.0
27.6
32.0
33.4
36.0
% GDP
3.6
3.5
3.3
3.4
3.4
3.4
4.1
3.9
5.0
5.5
5.5
6.4
7.6
6.7
6.2
6.3
5.4
5.0
5.4
5.8
5.9
4.8
3.3
2.9
2.6
2.3
1.5
2.0
2.3
2.1
1.6
1.2
1.0
0.7
1.5
1.6
2.0
2.1
1.7
1.6
1.6
1.0
0.5
0.6
0.6
0.6
1.2
1.3
1.2
1.7
1.9
2.0
2.1
2008-09
47.5
53.6
3.2
2009-10
48.8
53.8
3.2
2010-11
39.8
42.6
2.5
2011-12
30.0
31.7
1.8
2012-13*
34.8
36.1
2.1
2013-14
26.2
26.6
1.5
2014-15
30.4
30.4
1.7
2015-16
33.6
33.1
1.8
2016-17
35.8
34.7
1.8
2017-18
33.4
31.8
1.6
2018-19
30.6
28.6
1.4
2019-20
32.2
29.5
1.4
1955-56
1956-57
1957-58
1958-59
1959-60
1960-61
1961-62
1962-63
1963-64
1964-65
1965-66
1966-67
1967-68
1968-69
1969-70
1970-71
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2020-21
41.3
37.0
1.8
Source: OBR, Databank, December 2015
Note: (*) data exclude effect of Royal Mail transfer which was accounted as £28bn negative PSNI in 2012
Data exclude proceeds of 3G specrum auction which raised £22.5bn in 2000-01
25 Infrastructure policy
7. Appendix 2 – UK Infrastructure
strengths and weaknesses
Source: National Infrastructure Plan 2011, p17
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