Infrastructure Plan Lacks Strategic Vision, But Prospects Are Good
BMI View: Despite concerns over whether GBP310bn can actually be invested in infrastructure projects in light of the constrained fiscal positions of both the government and private sector players (who it is hoped will com e up with 64% of that sum), we believe that the UK's National Infrastructure Plan represents one of the few attractive stories for the construction industry across Europe. We currently forecast that the UK construction industry will post average annual growth between 2013 and 2017 of 1% in real terms , al though we not e downside risks to this forecast . However, over the same period we forecast that the infrastructure sector will outperform, with an average annual real growth rate of 5.5% year-on-year , an outlook underpinned by the ongoing infrastructure projects under construction .
The ambitious GBP310bn National Infrastructure Plan (NIP) , which was last updated in December 2012 ( see our online service, March 22, 'No Change In Forecast After Budget' ) , has come under fire from the cross-party Public Accounts Committee (PAC) for failing to provide coherent direction or sufficient momentum for the UK's infrastructure spending. There were three main issues highlighted in the PAC report:
The likelihood that the sums of money talked about in the NIP can be raised are low, and even if finance was secured, it is likely that consumers would certainly have to foot part of tha t cost through increased bills . This is a particular cause for concern considering that most infrastructure projects will not commence construction until after the current administration 's term has ended , increasing the potential for a policy change to satisfy voter concerns on costs.
Many of the programmes identified are wide ranging and lack the strategic vision to be effectively implemented ; 40 projects the treasury has highlighted as priority , actually include 200 individual projects , making the processes of directing funds and actually beginning construction onerous.
The legislative and regulatory framework vital for attracting private investment needs to be improved, considering that competition for capital is increasing as more countries around the world look to the private sector to take on stakes in infrastructure assets.
|Infrastructure To Outperform|
|UK Construction Industry Value, GBPbn, Residential And Non-Residential Industry Real Growth,% y-o-y, Infrastructure Industry Real Growth, % y-o-y|
We have long been highlighting similar concerns as the Public Accounts Committee (especially in terms of the nexus between the regulatory environment and private funding); namely that the ambiguous nature of some of the projects raises the risk of them not coming to fruition, and we have thus not yet adjusted our forecasts to reflect the NIP's entire catalogue of projects. Even with those that are moving forward, the slow implementation of work is concerning for the construction industry, as elsewhere in Europe the prospects for massive infrastructure spending are bleak. Along the same lines, many of the projects that have so far progressed since the NIP was announced are actually long-standing projects that have been brought under the NIP umbrella. This raises questions of how effective the NIP actually is in stimulating new infrastructure activity. Such projects include Crossrail, London Gateway Container Port, Birmingham New Street Station upgrade and HS2.
|UK Has Greatest Opportunities In Europe|
|Number of Projects Planned and in Construction|
That said, a number of factors are aligning which signal that the NIP could begin to gain traction, underpinning our optimistic outlook for the infrastructure sector, especially when compared to other markets in Western Europe. As part of NIP itself, in April the UK Guarantees Scheme agreed a loan for GBP75mn to invest in Drax power station's conversion to biomass. Similarly positive financing news is that the Green Investment Bank was launched in October 2012, and that Allianz Global Investors has launched a GBP1bn debt fund for UK infrastructure projects, with reports of other institutional investors looking into similar moves to diversify their allocations. Pension funds are also increasingly looking to stable infrastructure projects for investment opportunities, considering their low risk and long-term returns. Whilst the worries highlighted by the PAC, surrounding a lack of strategic vision and coherence in the NIP, has kept some pension funds away, if projects begin to become more focused as is suggested in the PAC report, we envisage that pension funds will look even more to UK infrastructure projects, for both debt financing, but also equity stakes. As such, the UK remains one of our favourite developed markets for the infrastructure sector in Europe despite the concerns raised over the clarity of the NIP.