November 21 2012 A blueprint for British business Part five: infrastructure finance

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BLUEPRINT FOR BRITISH BUSINESS | INTRODUCTION BLUEPRINT FOR BRITISH BUSINESS | INTRODUCTION CONTENTS Big schemes need big money Investing in infrastructure could boost the economy but investors still need to be convinced, says Brian Groom

2 OVERVIEW S BRITAIN TRIES TO LIFT Some parts of infrastructure remain relatively this is only a third of the £2bn that the new Many economists put their faith in itself out of economic gloom, healthy – notably rail, where work is continuing group had been hoping to raise in its first year. infrastructure to give the economy a boost one area is attracting particu- on London’s Crossrail and Thameslink lines. Gershon Cohen, chief executive and fund prin- ‘The real issue is about taking Case study VolkerWessels 3 CASE STUDY lar attention: investment in There is a reasonable amount of work in other cipal of infrastructure funds at Lloyds Bank, How VolkerWessels UK is faring in the infrastructure. Not only do its regulated areas such as water, gas and telecom- believes money will be found for important steps to give confidence to y “luck and judgment”, the Dutch- construction industry effects percolate deep into the munications. But road construction, dependent projects. “If we can arrive at a point where the owned infrastructure contractor 4 ECONOMICS economy, say enthusiasts, but on government and local authority spending, has public sector can bring forward a visible pipeline private businesses’ VolkerWessels UK is doing better The need for projects that can be undertaken the UK also faces pressing been in freefall. The Construction Products Asso- of high-quality investment opportunities, I than many in the construction quickly without long drawn-out planning decisions on energy, roads, rail, water and air- ciation projects a 40 per cent decline in roads believe there would be few problems raising the Horizon Nuclear Power, a joint venture that has industry, says Alan Robertson, its 6 URBAN REGENERATION Aport expansion that will shape its productive investment this year and 5 per cent in 2013. finance,” he says. plans to build as many as six nuclear reactors, Bchief executive.The luck is that its business is The success of a number of national projects capacity for the 21st century. Against this backdrop, companies that adapt to Decisions also need to be made, he argues, on for £696m, has helped boost confidence in Brit- focused mainly on areas where there is still could set an example for regional companies The government has announced many initia- the structural changes reshaping the industry the procurement methodology to be used – ain’s nuclear plans. By 2023, the UK will have work, notably rail, ports and airports. The judg- 7 ENERGY tives, including a national infrastructure plan, can still succeed. Costain, the civil engineering whether it is traditional build and design, shut down all but one of its existing nuclear ment is that is concentrating on areas where it How to do more to exploit the UK’s natural planning reforms, a Green Investment Bank, an company, has focused on winning bigger projects financed through taxes; or done through utilities power plants and badly needs new generating sees a commitment to investment. advantages effort to unlock £20bn of institutional investment from blue-chip clients in areas such as transport, with a regulated asset base and charging of capacity. VolkerWessels UK saw its turnover grow by 8 INVESTMENT over a decade, a £40bn guarantee scheme to energy, water and waste – a strategy that is users; or through the private finance initiative. Alasdair Reisner, director of external affairs at 20 per cent last year to £666m and it made a Infrastructure requires both public and underwrite private sector projects, and an over- paying off. Its first-half operating profit was up Since the credit crisis, bank finance has the Civil Engineering Contractors Association, £12.2m pre-tax profit, after a £1.5m loss the pre- private funding haul of the private finance initiative to fund 16 per cent and its order book rose to £2.4bn. become concentrated at the shorter-term end of says attention needs to be paid not just to the vious year. That is still below the £17.5m it 10 FINANCING schools, hospitals and other schemes. “Big customers are looking to work with a the market. But institutional investors and insur- financing of infrastructure projects, but to who made in 2008. “It’s not where we want it to be Complicated schemes might initially look As yet, few of these ideas have resulted in smaller number of tier-one service providers, ance companies have been increasing the propor- ultimately will pay the bill. One solution is user and we have various plans to grow the profit simple on paper projects on the ground. Potentially, billions of but on a much longer-term basis, with a broader tion of investment allocated to infrastructure charging: ministers plan, for example, to intro- margin,” Mr Robertson says. 11 OPINION pounds could be available from new sources of range of services and bigger contracts,” says because it provides a good match for their long- duce road tolling on an expanded section of the The company has just finished a £32m con- Maria Eagle talks about co-ordinating road, finance such as pension funds, insurance compa- Andrew Wyllie, chief executive. “They are all term liabilities. A14 in Cambridgeshire, the first time tolling has tract to resurface the runway at Gatwick air- rail and air projects nies, asset managers, private wealth management looking to consolidate their supply chains.” One problem is that British pension funds tend been introduced on an existing stretch of road. port and it is starting a £35m scheme to build groups, private equity houses and sovereign Clients are looking to construction groups to be small compared, for example, with the Another is to ask other beneficiaries to contrib- a new quay at Southampton docks for ABP. wealth funds. About two-thirds of infrastructure that can provide a service starting from the large Canadian funds, and lack in-house expertise ute, as in Crossrail, where a special levy on It is also in the middle of a £334m project CONTRIBUTORS finance comes from the private sector. concept of a scheme, through planning and to make judgments on greenfield projects. There London businesses is funding a quarter of the to extend Manchester’s Metrolink tramway, PILITA CLARK is the FT’s environment But there are barriers to overcome, not least design to delivery, as Costain is doing with its is also only a small number of fund managers £16bn cost. Mr Reisner suggests insurers might jointly with Laing O’Rourke. correspondent the need for clear strategic priorities and cer- £400m contract to redevelop London Bridge sta- they can turn to with experience of investing in be persuaded to help fund flood defences if these Mr Robertson says there are pockets of pri- NORMA COHEN is the FT’s economics tainty about policies on energy and airports. tion for Network Rail. This approach has reper- the construction phase. would cut claims. vately funded investment, but the market needs correspondent Ways also need to be found to overcome the cussions down the chain. Where Costain five Mr Gershon says: “The more projects that need He does not, however, hold out much hope of “government commitment and certainty” if MARIA EAGLE is the shadow secretary of fears of investors who like the long-term income years ago had 18,000 suppliers on its database, funding, the more experienced fund management short-term improvement in the construction infrastructure is to be developed. “Periodically state for transport streams from infrastructure but are nervous of today it works with only 3,000 or 4,000. Mr Wyllie platforms like mine will emerge.” industry’s prospects. His organisation’s surveys we see government take steps forward and BRIAN GROOM is the FT’s business and construction risks such as cost overruns. still sees a role, though, for working with special- Aside from financial constraints, infrastructure suggest there is less work around sometimes things go backwards.” employment editor “The real issue is not about government spend- ist organisations such as the UK’s strong core of companies in some sectors, notably energy, face than before and the outlook is less As an example of the latter, he cites the DAVID OAKLEY is the FT’s investment ing more, it’s about taking the steps necessary engineering design consultants. frustrations over policy uncertainty and political than positive. slashing of subsidies for solar projects last year. correspondent to give confidence to private businesses,” says The industry’s overall prospects, however, conflict. Phil McVan, managing director of Myr- “The middle market, companies He also says deferring a decision on south-east GILL PLIMMER is an FT reporter Richard Threlfall, head of infrastructure at depend on finding the finance to get projects iad CEG Wind, a supplier of small wind turbines with £50m-£300m turnover, is a airport expansion until after the next election PAUL SOLMAN is a freelance journalist KPMG, the advisory firm. moving. George Osborne, the chancellor, faces a to farmers, says expansion has been held back fairly nasty place to be at the means “we are going to suffer a three or four- HESHAM ZAKAI is a freelance journalist All this comes at a time when, as Mr Threlfall challenge to attract tens of billions of pounds of this year by resistance from local councils. moment,” Mr Reisner says. year delay in terms of whether Heathrow gets puts it, the construction industry is “close to pension money into infrastructure – underlined Mr McVan says decisions are taken by people “You’ve probably got a expanded, or Stansted or Luton or Boris island”. ILLUSTRATIONS [being] on its knees”. Gross domestic product fig- by the fact that the industry has found commit- who do not understand the technology or the big overhead and But he praises the government for accelerat- Andrew Baker ures for the third quarter suggest that construc- ments of just £700m after a year of talks. commercial pressures they inflict on dairy farm- you’re being ing the release of 4G radio spectrum, which tion output fell 2.5 per cent in the three-month The National Association of Pension Funds ers, who are seeking to cut energy bills squeezed from will lead to high-speed mobile services becom- Special reports editor Michael Skapinker period and is down 10 per cent in a year. While believes that it has achieved a “critical mass” in the face of rising costs and fixed below and ing widespread, and for supporting the HS2 Editor Hugo Greenhalgh there are stirrings of activity in housebuilding, a of investors for its Pensions Infrastructure milk prices. He sees it as sympto- above.” high-speed rail link between London, Birming- Production editor George Kyriakos wider recovery of the construction industry Platform, which will channel money to big matic of a wider problem: “The ham and northern England. Picture editors Michael Crabtree, remains elusive. projects such as energy and transport. However, lack of central direction and lead- John Wellings ership and consistent policy is Art director Derek Westwood allowing people to use their Infrastructure investment pipeline data Intern Lulu Rumsey own personal prejudices.” (£bn, 2010-11 prices) Commercial director, Emea Dominic Good Industry view At the larger end of the Head of strategic sales Patrick Collins Paul Sheffield, chief executive, Kier energy market, the deci- Water0.2 Intellectual capital Head of project delivery Rachel Harris sion by the Japanese Flood 4.9 Integrated solutions manager “Infrastructure projects generate significant blue collar technology group Transport Alexis Jarman employment opportunities and life skills training for Hitachi to buy 20.9 Advertising Peter Cammidge people. The nation needs to replace much of its crumbling infrastructure such as schools, hospitals, housing and 89.3 All editorial in this special report is produced by power stations. Investing now while skills are available and Total the FT. Our advertisers have no influence over, or project pricing is as low as it has been for over a decade 257.4 prior sight of, the articles or online material. will help to solve our social needs.” 117.7 3.9 Waste Online Energy 20.4 Video: James Pickford, Communications the FT’s London and Airport capacity South-East correspond- Passengers per year (m) Heathrow ent reports from the 2010 66 redevelopment of 2030 (unconstrained*) 117 London’s King Cross. 2030 (constrained*) 85 Interactive: how the London total UK’s infrastructure 2010 127 compares with other 2030 (unconstrained*) 205 developed economies. 2030 (constrained*) 182 * Unconstrained: developing infrastructure increases airport www.ft.com/blueprint capacity. Constrained: maximum use of airports' existing capacity Source: HM Treasury/National Infrastructure Plan 2011 4 FINANCIAL TIMES WEDNESDAY NOVEMBER 21 2012 FINANCIAL TIMES WEDNESDAY NOVEMBER 21 2012 5

BLUEPRINT FOR BRITISH BUSINESS | ECONOMICS Time to get to work Projects are needed that can start now, not ones that need time on the drawing board, says Norma Cohen

ritain’s glaring shortcomings in infrastructure – ageing nuclear ‘With infrastructure there is a facilities, Victorian sewage sys- tems and inadequate road and 12-18 months’ lag before you even rail networks – are being eyed by UK businesses as the ideal see a return on your expenditure’ target for government funding in an economy currently starved of investment. With business investment Bdown sharply, household demand contracting in four of the past six quarters and further cuts to public spending ahead, it is not clear that gov- ernment can do much to trigger the kind of spending that would lead to economic expansion. And with government likely to miss at least one of its two key fiscal targets, it is not certain how much scope there is at all for any increase in spending, even on infrastruc- ture projects that have long been on the drawing board and whose economic benefits are likely to contribute to economic growth for years ahead. Even by the estimates of the Office for Budget Responsibility – the Treasury’s independent forecasting arm – infrastructure is a good bet. For every pound spent on it, infrastructure gen- erates £1 of GDP – about three times as much impact as, say, cutting VAT. Even that analysis, some experts say, may be too mod- est. A report by consultants LEK on behalf of the Construc- tion Products Association (CPA) – whose members are either engaged in or supply goods to the infrastructure sec- tor – calculates that each £1 generates £2.84 in GDP to the economy as a whole. Among other factors, the “multiplier” effect is so high because unlike other industries, construction relies very little on imports and therefore each pound spent is much more likely to remain in the UK. In addition, LEK takes account not just of the immediate effects of the infrastructure – are unlikely to be able to invest civil engineering companies. “But to get growth expenditure but the long run improvements that more than £700m by next year. going, you’ve got to go for repair and mainte- such investment makes to productivity. But the biggest flaw, he says, is that ambitious nance projects.” Therefore, it came as little surprise that in new projects that change the landscape require One prime example, he said, is a long-delayed unveiling its Autumn Statement in November preparation. First, considerable time must be national highways maintenance programme for 2011, the government announced plans for £20bn spent on gaining planning permission and then which there is a £9bn backlog of badly needed of infrastructure spending over the next few years on procurement. “If you are focusing on stimulat- works. “It could address problems that cause in big schemes that are seen as vital to Britain’s ing economic activity, then you don’t want large delays all around the country by just getting rid future. Other initiatives include FirstBuy, infrastructure projects,” he says. “There is a min- of potholes and carrying out some minor launched last year, which involves builders and imum 12-18 months’ lag before you even see any repairs.” Such a project would have the added the government underwriting first-time buyers. return on your expenditure.” benefit of spreading economic stimulus across There will also be guarantees for £10bn of housing Instead, infrastructure experts say, efforts the UK, rather than concentrating it in a single association bonds, an extra £300m for social hous- should focus on more modest repair and geographic area. ing and a relaxation of the rules for developers on maintenance projects that do not require exten- Water infrastructure badly needs attention. affordable housing. sive planning and can be undertaken very Since local authority water assets were trans- But Noble Francis, an economist for the CPA, quickly. “There is no planning, no contracts ferred to private companies last year, the new says that the government’s infrastructure strat- needed. All you need to do is to bring forward owners are required to undertake much-needed egy is deeply flawed. Not only has the amount planned projects,” Mr Francis says, citing a roads repairs and maintenance. And while that may earmarked for infrastructure fallen far short of maintenance project around Sheffield, South require permission of Ofwat, the water industry £20bn, it now appears that pension funds – which Yorkshire, that would require investing £2bn regulator, to allow higher tariffs, these can be were being tapped to provide the capital for over a 20-year period. done fairly swiftly. Data from the CPA show that the private sec- Housing has also benefited from construction tor is currently showing little appetite for pick- spending. In April, government announced its ing up the slack as government puts repair and NewBuy programme, aimed at helping first time Industry view maintenance on hold. Private sector repair and buyers acquire newly built homes. It had only maintenance contracted by 17.1 per cent in 2009, 250 sales in itsfirst three months, according to David Hill, vice-president for Emea, Spirent Communications and by a further 9.2 per cent in 2010. The total the CPA, but it is still fairly new. Earlier this level of output is not expected to top the 2008 year the government announced a £280m exten- “The UK has been slow to change and embrace new level of £14.6bn before 2016 at the earliest. sion to FirstBuy, which proved effective, account- technologies, particularly virtualisation and cloud Alasdair Reisner, director of external affairs at ing for 10,500 home sales since March 2011. computing. Longer-term savings in efficiency and power the Civil Engineering Contractors Association, But Mr Reisner notes that even with that stim- are being overlooked due to concerns associated with says big headline infrastructure projects are ulus for homebuilders, relatively little advantage initial capital expenditure costs, security issues, and a lack ambitious and time-consuming. “We all love the has been taken of it. In the private sector, devel- of understanding. More avant-garde corporations reap the big projects,” says Mr Reisner, whose trade asso- opers want certainty of demand before they benefits of early change to next-generation technologies.” ciation members include some of the UK’s largest invest, he says. 6 FINANCIAL TIMES WEDNESDAY NOVEMBER 21 2012 FINANCIAL TIMES WEDNESDAY NOVEMBER 21 2012 7

BLUEPRINT FOR BRITISH BUSINESS | URBAN REGENERATION BLUEPRINT FOR BRITISH BUSINESS | ENERGY Long-term solutions in a flattened economy Breath of fresh air The success of a number of national projects could set an example for many regional companies and provide a much-needed stimulus, says Paul Solman The UK must exploit natural advantages, says Pilita Clark

MID THE FANFARE FOR F THERE WAS A PRIZE FOR THE guaranteed enough turbine orders from offshore London 2012, the building of ‘I recognise that the government countries doing the most to wean them- wind developers, and it is not clear when this the Olympic Park was trum- selves off fossil fuels and on to cleaner, will happen. peted not only as a chance for is beginning to take action, but it greener energy, the UK would have to be In fact, there has only been one order for the UK capital to show its a contender – at least on paper. offshore turbines in the UK this year by the mettle on the world stage but needs to be bold in its plans’ IUnder the previous Labour government, Brit- three top offshore turbine companies: Ger- also as an opportunity to pro- ain introduced what it boasted was the world’s many’s Siemens; Denmark’s Vestas and vide funding for much-needed first long-term legally binding framework to REpower, a German subsidiary of India’s regeneration in a somewhat depressed part of tackle climate change – the 2008 Climate Suzlon. Aeast London. Dubbed the “Regeneration Games” Change Act. Some in the industry say this is to be by Sir John Armitt, who chaired the Olympic The act requires emissions to be reduced expected given the way the planning and con- Delivery Authority, the event was touted as a by at least 80 per cent by 2050, compared with sent system has been operating. catalyst to revive the whole area, and to provide 1990 levels. But some developers say there is an “invest- a boost to British businesses that would supply In line with EU targets, the UK has also ment freeze” because of uncertainties about the and work on the infrastructure. agreed to boost the amount of energy it pro- coalition government’s forthcoming energy mar- As it turned out, the country’s present duces from renewable sources such as wind ket reforms. economic circumstances have made the commer- power to 15 per cent by 2020, a figure that These reforms are designed to replace the cial prospects created by London 2012 even more implies about 30 per cent of electricity will have existing system of renewable energy subsidies welcome than could have been predicted back to be generated from green sources. with a new set of long-term contracts that will in 2005 when the city won the contract to host That is a big jump given renewables’ share of also be available to nuclear power generators. the games. electricity today is just under 10 per cent. But there is concern in the industry about With the economy struggling, projects such as Big strides are already being made towards how workable the contracts are going to be, the £1.45bn Westfield shopping centre in Strat- this goal in one particular area: offshore wind coupled with anxiety that George Osborne, ford, the £1.3bn development of the International power, one of the most powerful forms of chancellor, is trying to water down the govern- Quarter and the £200m investment in Stratford renewable energy so far invented. ment’s green commitments at a time of eco- station have proved a fillip for many companies. Thanks to its shallow coastal waters, strong nomic difficulty. Yet while such large urban regeneration initia- winds and – most importantly – relatively gen- Several of the world’s biggest wind turbine tives can offer opportunities for businesses, erous financial incentives, the UK has companies, including Vestas and Sie- there is still much work to be done to ensure 2.7GW of offshore wind power mens, recently wrote to Ed Davey, that companies take full advantage over the capacity, more than the rest of the energy secretary, warning longer term. the world combined. that confusion about the Mid-sized companies in particular are in need That is well below its government’s policies of growth stimuli. While they punch above their 5GW of onshore wind, “have caused us to reas- weight in terms of their contribution to the and the total pales sess the level of politi- economy – accounting for 20 per cent of private in regional towns and cities. Regional projects beside the 62GW of cal risk in the UK”, sector turnover and employment but representing are important to mid-sized companies. We need wind power China had which could cost just 0.2 per cent of British companies – mid-sized to reinvigorate regeneration in these areas.” at the end of last thousands of new companies have yet to realise their full potential One of the larger regeneration projects outside year, or the 47GW in jobs. when it comes to exports. London is in Birmingham, where the “Big City the US, or the 29GW Amid such ten- In London, the work around the 2012 Games Plan” aims to expand the size of the city centre in Germany. sion, it did not help has been the capital’s largest regeneration by 25 per cent, and includes the £600m redevelop- But it still amounts when a junior project since the Docklands development of ment of New Street train station. Legacy Communities Scheme for to a large amount of energy minister, the 1980s and 1990s, which gave the city Canary James Payne, design director of Nikal, which is Olympic site regeneration infrastructure invest- John Hayes, suddenly Wharf and the Docklands Light Railway. developing the Masshouse site in the east of the Affordable ment. Offshore wind declared late last Similarly transformative schemes elsewhere city centre, says: “Development has been stifled Timeframe Size housing alone led to £1.5bn of month he was going to in the UK include Manchester’s Salford Quays, in the past few years by the economy, but the ‘Regeneration projects have huge investment in the 12 try to tackle the on the site of the old Manchester Docks; and Big City Plan has delivered in terms of transport 20 64 35 months to June 2012, “extraordinary” number Liverpool One, the shopping centre close to and infrastructure, which is so important for the potential benefits for mid-sized Years Hectares per cent according to RenewableUK, of wind turbines “pep- the city’s waterfront. connectivity of the city. The strategic approach the wind industry trade body. pered” around the country. “Thousands, if not tens of thousands, of that Birmingham has taken is very welcome for companies in the UK because It says the UK’s total wind Mr Hayes, who was quickly UK-based mid-sized companies have been private developers like us.” Homes Nurseries industry has expanded by a quarter slapped down by his boss, Mr involved in the Olympic Park and the regenera- Part of Birmingham’s regeneration has supply chains tend to be local’ over the past two years, and now pro- Davey, was referring to onshore wind tion work that is going on in east London included establishing a hub for digital businesses vides direct full-time employment for 12,200 peo- farms. Offshore plants are much less politically around it,” says Adam Marshall, director of pol- in the Digbeth area of the city, much in the ple. The question is, however, how long will the sensitive because they block fewer views. But icy and external affairs at the British Chambers same way that Salford Quays gave rise to the old Alfred Bird and Son factory, once home to UK retain this position, and is it doing its best any hint of a reversal of government support of Commerce. “That extends far beyond compa- MediaCityUK development. the venerable Bird’s custard powder brand. to exploit its natural advantages? for the industry makes investors fret. nies in London, and the project has definitely Lucan Gray, who runs the Fazeley Studios Mace, the privately owned consultancy and One man with a big interest in the answer to “It does make you nervous,” said Andrew injected some confidence into business.” site in Digbeth, also lauds the advantages of construction company, has been involved in both 6,740 9 these questions is Ian Farquhar, offshore wind Norman, chief executive of JDR Cables, a Cam- But he stresses that businesses need to ensure working under the umbrella of the Big City Plan. Birmingham New Street and the east London development director at David Brown Gear bridgeshire-headquartered company that has that the momentum generated by such regenera- “[It] provides a clear vision for the area, which regeneration. Systems, the engineering company. made subsea cables for some of the UK’s big- Health centres Playgrounds tion initiatives is not lost. “Companies need to helps in marketing and attracting people and Mark Reynolds, deputy chief executive, says: The 152-year-old Huddersfield company started gest offshore wind farms, including the London use that success,” he says. “There is an opportu- businesses,” he says. “It’s easy to identify the sites for regeneration life building gears for northern textile mills and Array in the outer Thames Estuary. nity for them to export their experience and Fazeley Studios opened in 2008 and includes projects but much harder to come up with a via- ended up putting them into submarines, tanks “When you see these things offshore slowly products to other markets that are engaged in businesses specialising in video, web design ble proposition and make it work. There aren’t and nuclear power plants. churning out energy with no pollution, no emis- similar projects.” and digital marketing. However, Mr Gray also the subsidies available that made projects like Three years ago, it started building them for sions... in terms of providing clean and abun- Mr Marshall also highlights a divide between runs the nearby Custard Factory Arts Complex Canary Wharf a success.” the massive turbines that are used in offshore dant energy to the UK it’s clearly a no-brainer,” regeneration projects in the London area and project, home to a thriving community of artistic Mr Reynolds believes one of the government’s wind farms. he says. those in other parts of the country. and media businesses. The Custard Factory challenges is to develop a long-term strategic 329 “Wind is a small but very fast growing seg- “I understand not everyone wants one at the “We have definitely noticed a gap between opened in 1993, long before the Big City Plan plan for urban regeneration. “We need to be ment of the business,” says Mr Farquhar. “So end of the garden but that’s a different story.” projects inside and outside the M25,” he adds. was conceived, and has built a community of thinking about where we want to be in 2050 at a Source: LLDC, Westfield far, it’s been very successful.” Depending on how the industry grows, Mr “There has been a big slowdown in projects creative industry enterprises on the site of the minimum,” he says. “I recognise that the govern- One of David Brown’s major customers is the Norman thinks his wind business could double. ment is beginning to take action, but it needs to South Korean industrial giant Samsung Heavy At BGB Innovation in Lincolnshire, which be bold in its plans to move forward.” Industries, which has chosen the Huddersfield makes components for both onshore and off- A point echoed by Mr Marshall at the BCC, company’s gears for the enormous 7MW offshore shore turbines, the wind business is already Industry view who says: “Major regeneration projects have Industry view wind turbine it plans to start testing in Fife. helping to make business boom. Alan Hearne, chief executive, RPS Group huge potential benefits for mid-sized companies David Tonkin, UK chief executive, Atkins This could be the world’s largest turbine once “We have been expanding by up to 40 per in the UK because supply chains tend to be local, installed and there are hopes that Samsung will cent a year for the last five to eight years,” “To produce value-for-money schemes that help the UK so the projects mean UK jobs and UK sales. This “Quick, reliable connections within and between cities and eventually do what no turbine maker is doing at says David Holt, chairman. economy expand faster we must build incrementally huge benefit is often overlooked. regions are vital for the UK’s economic growth, the moment in the UK: build a turbine at a Brit- But Mr Holt is already noticing a big differ- around the infrastructure we have: junction improvements, “The problem is that they are often held back regeneration and future competitiveness. Investing in new ish manufacturing plant. ence in the industry. road widening and bypasses and a new runway at an by issues like financing, planning and empty and existing railway infrastructure is fundamental to this. That would be a big boon for David Brown, “Our best customers used to be in Europe, existing airport. But most important of all is the need to property rates. What we need to see from the Committing now to delivering a diverse mix of sustainable and many of the other 80-odd UK companies now business is going to Asia,” he says. “You define the policy necessary to bring forward the energy government is maximum effort to unlock projects power generation, combining nuclear, renewables and gas, scattered across the country. are getting the feeling the Chinese are going to supply infrastructure we desperately need.” that have stalled and get them going again.” is crucial to meeting the country’s future energy needs.” But for this to occur, Samsung will need to be pinch it all.” 8 FINANCIAL TIMES WEDNESDAY NOVEMBER 21 2012 FINANCIAL TIMES WEDNESDAY NOVEMBER 21 2012 9

BLUEPRINT FOR BRITISH BUSINESS | INVESTMENT Shovel-ready projects needed The government’s infrastructure requires public as well as private sector money, says Gill Plimmer

AST MONTH, ONE OF THE largest cranes in Europe lowered a white-cylindrical tunnelling ‘If you want to move the dial machine weighing as much as 280 London taxis into a 40m on GDP growth, it’s government shaft near Canary Wharf. Elizabeth, as the machine is investment not the private known, will begin burrowing under the River Lea towards Liverpool Street sector you need to rely on’ Land Farringdon, taking three years to build a network of tunnels that will eventually provide a new east-to-west commuter railway for London, stretching from Royal Oak in the west to beyond Essex in the east. Approved under the last Labour government, Crossrail is the biggest construction project in Europe, and one of 40 that were outlined in the government’s national infrastructure strategy last autumn. But despite the fanfare with which the announcement was made of a £250bn shop- ping list of much-needed road, rail and energy projects, it is also one of the few large-scale con- struction projects actually under way. The Treasury says it is “making infrastructure a priority, investing public funds, guaranteeing private investment, sweeping away the accumula- tion of barriers that the state puts in the way of projects”. But industry is feeling less optimistic. Accord- ing to figures from the Construction Products Association, spending on infrastructure has declined markedly in the past year, and will have dropped by 13 per cent to year end despite the government’s hopes that a building boom will provide a platform for economic growth. Despite the need for investment in new nuclear power stations, significant progress in power construction is not expected until 2014 due to ever-growing concerns over the government’s commitment to investment in nuclear and off- shore renewables. A decision on airport expan- Although pension funds have signed up to the and signalling technology than promoting High sion also remains caught in political crossfire. scheme – agreeing to pool money collectively Speed 2 – the fast railway line that will run from The hiatus has caused a growing sense of impa- into a pensions platform – they have come up London to Birmingham and the Midlands. tience among the business community, which is with only £700m, well short of the initial £20bn “All the costs associated with infrastructure urging the government to take action. But with the government said last November that it will ultimately feed through to the taxpayer,” cash flows tight the Treasury is struggling to find wanted to raise from them. It is also a fraction of he says. “Has High Speed 2 really been evaluated alternative means to shore up investment. the £2bn the new group, the Pensions Infrastruc- as a top-priority investment for stimulating eco- The CBI business lobby group has expressed ture Platform, hoped to raise in its first year. nomic growth, and the right thing to be spending frustration with the slow pace of progress on The Treasury said the Pensions Infrastructure money on right now? And what is the economic new infrastructure schemes, warning that the Platform was “making strong progress”. vision with which it fits?” UK’s international competitiveness could suffer. “We’re supporting private sector investment, With construction slumping, the government According to the World Economic Forum, the UK working with industry to reduce the cost of has launched an infrastructure forum to look currently ranks 28th for the quality of its infra- infrastructure delivery by £2bn-£3bn a year by at fast-tracking schemes that could benefit the structure, trailing behind Malaysia and Bahrain. 2015, and developing new ways for industry to economy, underlining the importance that minis- The decline in 2012 comes despite the govern- invest,” a spokesperson says. ters have attached to such projects. ment announcing an additional £5bn capital But infrastructure experts say the government The National Infrastructure Plan Strategic spending and £40bn loan guarantees this year. will probably need to invest money in projects Engagement Forum will bring together industry With finance tight, it had hoped the private sec- directly if it is to deliver the much-needed boost executives with ministers to seek ways to get tor would provide £20bn of investment to boost to the economy. projects moving. infrastructure investment over the next decade. “There is no magical solution,” says Mr The publication of the government’s review of From the outset, the plan to rely on the pri- Abadie. “Either the taxpayer or the user pays. its private finance initiatives, which have funded vate sector has sparked criticism from business In most pieces of new-build infrastructure it’s much of the investment in UK public infrastruc- lobby groups and analysts. impossible to expect the user to pay the full ture, such as schools and hospitals in recent “Knowledgeable people in the market ques- economic tariff, particularly in the early years; years, could also help. The review is likely to tioned the £20bn raisable from pension funds the you almost always need taxpayer support be published with the autumn statement along- minute it was announced,” says Richard Abadie, through government in the early years.” side a third infrastructure plan. global head of infrastructure at PwC, the profes- Gershon Cohen, chief executive and fund prin- The Treasury also pointed to transport sional services company. “If you want to move cipal of infrastructure funds at Lloyds Bank, one as a bright spot. “Transport spending the dial on GDP growth, it’s government invest- of the biggest providers of capital to the con- is growing in real terms,” it says. “This July, ment not the private sector you need to rely on.” struction industry, agrees. He does not blame the the government supported a further £9.4bn for government for the shortage of new infrastruc- Network Rail to invest in the railways from 2014 ture projects, but believes the UK desperately to 2019.” needs a longer-term vision in which new-build But, excluding rail, analysts say that even Industry view projects should play a crucial role. if the government does announce new funding “The government is still wrestling with the mechanisms there is a dearth of so-called Ian Tyler, chief executive, Balfour Beatty problems left by the credit crisis,” he says. “shovel-ready” projects on which building can “There’s been a hole in the ship and they’ve had start almost immediately. “What the government “The government must start to provide clarity in to use sandbags to steady the boat, but there hasn’t done well enough is to kick-start projects infrastructure. This will help create a compelling reason still isn’t an overarching economic growth strat- – additional airport capacity and power genera- for investors to recognise the value in infrastructure and egy of what to load on to the boat and then set tion, for example,” says Mr Abadie. provide funding. Although the government is aware it it on to the right course.” “Crossrail is fantastic in terms of economic needs to take action, we must not become complacent. He says key issues must be better explained to growth and jobs. But infrastructure investment We must ensure investors recognise infrastructure is an the public, such as whether the government doesn’t happen in the short term. If you want increasingly attractive investment.” would be better to invest in local railway lines shovel-ready projects, it takes years to plan.” 10 FINANCIAL TIMES WEDNESDAY NOVEMBER 21 2012 FINANCIAL TIMES WEDNESDAY NOVEMBER 21 2012 11

BLUEPRINT FOR BRITISH BUSINESS | FINANCING BLUEPRINT FOR BRITISH BUSINESS | OPINION Cementing the road to recovery Projects that look simple on paper are much more complicated in reality, says David Oakley

N PAPER, IT LOOKS Still, the potential for improving the economy “super-sewer” under London, a multibillion-pound simple. Interest rates are at through infrastructure initiatives and project project that ministers say will end the dumping Maria Eagle More co-ordination needed in road, rail and air record lows and the country’s finance is enormous, say some fund managers. of untreated effluent in the river Thames while at infrastructure badly needs Not only do the companies involved in the pro- the same time providing jobs and boosting the upgrading, whether it is the grammes gain, but so does everybody in terms of economy. railways, the road networks better schools, hospitals, road networks and rail- Yet, there are now doubts over the £3.6bn or the congested airports. ways. Companies such as Balfour Beatty, the project because of complaints from householders The government could, in engineering and construction company, Carillion, and some politicians that the building of the theory, fund these building projects with cheap the support services and construction group, sewer will cause pollution and blight for resi- debt,O creating jobs and improving the country’s Serco, the international services company, and dents in the capital. infrastructure, which would, in turn, help revive Costain, the engineering group, have all benefited Even the more successful road building plans the economy and lead the nation to the sunny from winning contracts under the government’s have drawn complaints from some local councils HE ROLE OF GOVERNMENT SHOULD uplands of recovery. national infrastructure plan. and residents because of the inconvenience and be to work with the private sector to ‘Failure to maintain Indeed, the need to deal with ailing and ageing Some of the leading power companies, such as disruption they can cause in terms of noise. plan and deliver the fast and reliable infrastructure in the capital and across the coun- Centrica and Scottish and Southern Energy have “In theory, it should be simple,” Swordfish’s Mr transport networks around Britain on roads will cost more try and inject life into Britain’s lacklustre econ- also benefited from energy and utility projects. Jenkins says. “In practice it isn’t. Infrastructure which business depends. It should also omy is one of the biggest problems facing the The government came up with a plan in July projects play their part in helping the wider econ- Ttake the decisions, however difficult, that ensure in the longer term’ coalition government. that some industry figures and top investors omy and providing some investors with assets we have the international connectivity that is Gary Jenkins, head of Swordfish, the consul- have described as potentially game-changing as it they like in terms of solid income streams. But vital for trade and tourism. system and get projects under way”. Yet, a year tancy firm, says: “This government needs a is aimed at encouraging companies to step into they are not the complete answer to the problems Over the past two years, the government has on, not a single road scheme announced in the healthy economy, as we all do. If at the same the lending void left by the banks. in the economy. There probably isn’t a complete failed on both counts. More than a billion pounds chancellor’s autumn statement has seen a spade time they can improve the roads, railways and The plan involves the government guarantee- answer to the problems of the economy.” has been cut from investment in rail and a fur- in the ground. None of the £9bn investment in airports, then that is an extra bonus.” ing loans of up to £40bn for infrastructure ther billion axed from investment in maintaining rail announced before the summer will be spent Alan Wilde, head of fixed income and currency projects. This will enable companies to borrow the road network. There has been a complete before 2014. Nowhere is this lack of urgency at Baring Asset Management, adds: “I want to be rather than relying on the banks to do it for absence of urgency over major projects such as more evident than HS2, where ministers have able to get from A to B without congestion and them. The companies will be able to borrow the High Speed 2 (HS2) rail line. A major train rejected Labour’s offer of cross-party support to of course I would like to see a recovery. It makes more cheaply, at government rates, while procurement contract has been awarded to a legislate for the entire scheme between London, absolute sense to try and marry the two by it is likely to encourage more investors to company that will use the investment from Brit- Manchester and Leeds in this parliament. improving infrastructure and rebooting the econ- lend to them. ish taxpayers to create jobs in Germany. The Finally, we need to do better at seeking politi- omy at the same time.” Richard Threlfall, KPMG’s UK head of infra- Department for Transport has been plunged into cal consensus on decisions for the long term, However, what looks simple on paper is much structure, building and construction, says this crisis, with rail franchising on hold and private such as delivering additional aviation capacity. more complicated in reality. could make the difference to pension funds, companies left counting the cost. The divide The Tories in opposition saw political advan- First, there is only a finite amount of money to which would happily lend to a company that between investment in London and the rest of tage in switching their position to oppose the fund these infrastructure projects, even in the has the backing of a “gilt-edged” government the country has grown wider. And we third runway, to demonstrate Mr Cam- good times, and these are far from good times. guarantee. have seen delay over aviation eron’s detoxification of the party, With public debt levels around historic highs, the But still, problems persist. One of the most capacity, and a final decision and to shore up vital support in government has arguably already overstretched imaginative initiatives was a plan for a new kicked into the long grass. west London. Yet that left itself. Second, at a stroke the financial crisis cut A new deal on transport the country without an off one of the key sources of cash and loans infrastructure requires aviation policy. A year of behind these projects. three outcomes: a long- delay followed Labour’s The banks that stood behind and underwrote ‘It makes absolute sense to try to term strategy that no proposal of an inde- many of the loans to the companies that built or longer deals with pendent commission maintained the road improvements or the reno- improve infrastructure and reboot modes of transport on aviation before vating of hospitals have, to a large degree, separately; invest- the government took stopped lending as their balance sheets have the economy at the same time’ ment to be main- up the suggestion. shrunk and they have been restrained by regula- tained as part of a Boris Johnson tory rules. plan for jobs and is right to back A senior infrastructure investor says: “In growth and a real Labour’s call for theory, this could be the ideal time to start drive to turn invest- the independent pumping more money into infrastructure projects ment pledges into commission led by to boost the economy, but just because rates are schemes delivered; Sir Howard Davies to low doesn’t mean the government can keep on and cross-party sup- be allowed to report borrowing to fund it.” port to make long-term by the end of next He adds: “There is too much uncertainty out projects a reality. year. A faster timetable there. Companies are reluctant to borrow and The government will say would enable the final put their balance sheets at risk, even though that it has published the decisions on HS2 to be they have done well out of many of the infra- National Infrastructure Plan, taken in step with decisions structure projects that the government has yet this is simply a wish list of on aviation capacity. launched.” projects with no overarching eco- We know Britain can do better at It is also sometimes forgotten that the taxpayer nomic or social aims. Only a coherent planning, funding and delivering the vital has to pay for these projects. They might be plan can break down the barriers between each transport infrastructure on which business and called private finance initiatives or public-private area of transport. Investors find it extraordinary the economy depends. With the pressures on the partnerships, but in the end the taxpayer will that we are taking decisions over high-speed rail public finances, we have to think innovatively foot the bill through taxation or extra costs in and aviation in isolation. One of the clear conse- about how we can draw on the private sector their utility bills, rail fares or airport charges. quences is the lack of a serious national strategy and long-term pension savings to finance the For example, a £22bn upgrade of the UK’s age- for logistics, and specifically for getting more vital projects the country needs. ing gas and electricity networks that will allow freight off the roads. To help achieve this, Ed Miliband, the leader the connection of more renewable energy projects Second, it is vital to maintain investment in of the Labour party, and Ed Balls, the shadow will add £11 a year to the average £1,310 annual transport as part of a wider plan for jobs and chancellor, have asked Sir John Armitt to look household energy bill over eight years. growth. The government’s decision to cut at how long-term infrastructure decision making, planned investment in rail and road maintenance planning, delivery and finance can be radically too far and too fast is economically illiterate. It improved. He will draw on his experience as has cost jobs and contributed to sluggish growth. the chairman of the Olympic Delivery Authority, Industry view The deficit has increased and the government and make proposals for a commission or process, Chris Price, public sector director, Computacenter has had to borrow an extra £158bn to cover soar- independent of government, that does not just ing benefits and lost tax. The National Audit look at our infrastructure needs for the decades “It is critical that the government continually invests in Office has warned that the failure to maintain ahead but at how to build a consensus to ensure innovative technology to ensure that it enables ‘new ways Britain’s roads will cost more in the longer term. they become a reality. It is time the country had of working’, and continues to drive improved efficiency Even where ministers have kept inherited a comprehensive long-term plan to rebuild Brit- and cost reduction. In addition, the increased adoption of investment plans, little progress has been made ain’s transport infrastructure for the 21st small and medium-sized enterprises in the supply chain is in translating commitments into jobs. Prime min- century, and the cross-party support to deliver it. helping generate valuable growth in organisations critical ister David Cameron said that his government Maria Eagle MP is shadow secretary of to the growth of the UK economy.” would go on “an all-out mission to unblock the state for transport 12 FINANCIAL TIMES WEDNESDAY NOVEMBER 21 2012