Policy Update – July 2013
Comprehensive Spending Review - 2013
The Spending Round 2013 covering government spending for the period 2015-16
was published 26 June 2013. It was followed on 27 June by a document entitled
“Investing in Britain’s Future” which outlined Government plans in respect to
infrastructure over the longer term.
As expected the main features of this spending round were further cuts to those
Government departments which were not ring-fenced. For instance for the period
2015-16, the Department of Communities and Local Government (DCLG) capital
budget, the main source of financing for affordable housing fell by 35.6% in
comparison with the capital allocations for 2014-15. The stated intention in this
spending round is to reduce current spending by £11.5 bn in 2015 in order to allow
an increase in capital spending of £3 bn a year from 2015-16.
The headline figures for capital expenditure announced on June 27, were “a pipeline
of public investment in infrastructure worth over £100 billion to 2020”. It should be
noted that the definition of infrastructure is wide including “science and innovation”
and “digital communications”. Of this commitment to “publically fund a pipeline of
specific projects” the largest share is £70 billion on transport, over £20 bn on schools
and £10 bn on science, housing and flood defences.
Affordable Housing The specific allocation on housing is £3.3 billion. Between
2015-16 and 2017-18 is planned to support a delivery of 165,000 homes “over the
next three years” . It is not clear yet how the DCLG cuts will affect the Affordable
Housing Programme but some analysts have pointed out that the allocation of £3.3
bn over three years is actually less than the current affordable housing programme
of £4.5 bn over four years.
One interesting move in relation to affordable housing, has been the shift in the
social rent setting policy to the formula of Consumer Price Index (CPI) + 1% each
year for 10 years. Hitherto the formula has been the Retail Price Index (RPI) + 0.5%
+ up to £2 per week. The stated rationale behind this is that it might “give the private
sector confidence to invest” in social housing. Although the initial reaction from the
National Housing Federation was that this might help housing associations to start
planning new homes there is concern that the gap between the RPI and the CPI
might grow in the longer term hitting the income of housing associations. Some are
concerned within the housing association movement that the £540 million which is
the predicted saving from the new formula might in the end up coming from housing
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associations themselves. The other development also announced was the launch of
a new Affordable Rent to Buy Scheme, with £400m funding up to 2017. This allows
funding for new build homes at affordable rents, with a subsequent right to buy.
Energy infrastructure Bearing in mind the recent Ofgem report on energy security, it
was not surprising that some strategies for levering investment into low carbon
energy generation were launched. There is an allocation of £800m of additional
capital investment for the Green Investment Bank. The UK Guarantee Scheme is
also extended for two more years to December 2016, along with the decision that
the proposed new nuclear power station sited at Hinkley Point C should be eligible
under this scheme.
As private finance must be coaxed into the energy sector, given the huge costs
involved, the other leveraging mechanism encouraging investment in energy
generation is the “contract for difference” provision in the Energy Bill, going through
Parliament. Contracts for Differences (CFDS) are long-term contracts to provide
stable and predictable incentives for companies to invest in low-carbon generation.
Transport With a stated commitment for £70bn over the next parliament, the
transport sector was the major focus of the infrastructure plans, with major
announcements in respect to the rail sector and the road network. The coalition
expressed the intention to set “a funding envelope of £42.6 bn (in 2011 prices) for
construction costs”. They also expressed the intention to establish a HS2 growth
taskforce chaired by Lord Leighton to capitalise on the growth opportunities across
the country resulting from HS2. At present HS2 state that they have completed the
consultation on Phase 1 of the project to Birmingham. As announced in the 2013
Queen’s Speech, a hybrid Bill to facilitate the construction of the line between
London and the West Midlands will be launched in Parliament later this year. In the
meantime a “paving bill” which will provide the Secretary of State for Transport with
parliamentary approval to incur essential expenditure on preparatory works in
advance of the hybrid Bill, is currently going through Parliament.
In relation to roads there is a very welcome commitment of £10 bn towards
maintenance, with nearly £6 bn to help local authorities repair the local road network
and £4 bn to enable the Highways Agency to resurface the vast majority of the
national network by 2020-21. In line with the recommendations in the Cook report
the Highways Agency will be transformed into a publically-owned corporation.
LEPS It is also recognised that transport is central to local economic development.
Transport expenditure is a major component in the £2billion of funding under the
Single Local Growth Fund (SGLF). Funding from the SGLF is allocated to Local
Enterprise Partnerships (LEPS) on the basis of “growth deals” negotiated between
LEPS and central government. It is not clear how these new arrangements will tie in
with the operations of the revamped Highways Agency.
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Some £50bn of the £100 bn mentioned in relation to the modernisation of the UK
infrastructure is committed to projects starting in 2015-16. It will be interesting to see
how these plans develop in the next edition of the National Infrastructure Plan and in
the Autumn Statement later this year.
Construction Industry Strategy
On 2 July, the Government published Construction 2025 which is the latest in a
series of industrial strategies setting out vision strategies for key sectors in the
economy.Construction is seen as an enabling sector which has a massive impact on
the performance of the wider economy, forming a key element in the growth agenda.
As it is predicted that the global construction market is forecast to grow by over 70%
by 2025, improving productivity and innovation within UK construction is seen as a
significant export opportunity in relation to contracting, design activity and also for
construction products.
While themes of lowering costs and achieving faster delivery are also echoed in
other construction policies, it is interesting that the new report also endorses the low
carbon agenda. This is noteworthy, particularly given the debate on the relaxation of
standards in the housing sector. Construction 2025 did not outline any new funding.
The publication of the report took place after extensive consultation within the wider
construction industry. This collaborative approach is now taken forward with the
formation of a Construction Leadership Council which brings together a range of
organisations across the spectrum of the industry.
The housing gap
ACE has just published a paper entitled “The Housing Gap” which is the first in a
series of proposed reports to explore in detail conditions within the UK housing
market. The central conclusion in this report, is that there is a serious looming
housing gap, where the number of households formed outstrips houses built, in the
UK. The paper argues that unless the growing disconnect between supply and
demand is tackled through a major upturn in house building, the housing gap may
prove potentially irrevocable. Such a failure to tackle this housing gap, would have
serious social and economic consequences throughout the country.
The analysis in this report reveals that by 2021 the UK will have developed a
housing gap of £185bn, the equivalent of 886,000 households, requiring housing to
be built on the scale of a city twice the size of Birmingham. This additional gap, on
top of the already tight conditions in the housing market will, if unchanged, lead to a
future where millions of people in the UK will be unable to afford to own a home.
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This analysis highlights an urgent need for the “housing gap” to receive greater
priority from all political parties, as well as the need for a new housing model to allow
such increased house building to occur.
Transport – the state of the nation
Perhaps as a preclude to the Comprehensive Spending Review, the ICE published
their State of the Nation Transport 2013 report. Noting that the prosperity and wellbeing of the UK is inextricably linked to state of the transport infrastructure, three
key recommendations are set out.
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Immediate action to improve road conditions, planning and funding.
Ensure clear national transport strategies for all parts of the UK.
Extend devolution to fully integrated transport bodies.
The report contains five case studies and background information based on
extensive primary research. The politically sensitive issue of road charging is also
examined.
Risk waiver
The think tank, ResPublica, has produced a paper Risk Waiver: closing the
protection gap and opening the credit flow, which explores the potential for credit
protection products to act as a form of stimulus and get lending moving again.
Specifically this paper assesses debt waiver, a mechanism not currently utilised in
the UK market. Many firms in the US offer a waiver facility to their customers that is
written into the loan agreement. In this way, the lender takes out the insurance on
the loan rather than the borrower, thereby avoiding the mistakes that led to the misselling and mis-marketing PPI scandal.
Mandatory CE marking
From 1st July 2013, the Construction Products Regulation (CPR) came fully into
force. This means that it will be mandatory for products covered by a harmonised
European standard (hEN) to have CE marking. CE marking is only a consistent way
of expressing a product's properties. It is effectively a 'passport' allowing a product to
be placed on the market in any Member State. Rarely, if ever, is CE marking
evidence that the product is fit for a particular purpose. Further information is
available on the BBA website.
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