At the risk of stating the obvious, the quality of the UK’s infrastructure lags behind other advanced global economies. The World Economic Forum’s global competitiveness report ranks the UK 11th out of 140 nations for its infrastructure – perhaps not too demoralising. But this falls to 26th for road quality, 29th for road connectivity and 22nd for rail efficiency. With congested, pothole-ridden roads, delayed, overcrowded trains and still no superfast rural broadband, the UK is in desperate need of an upgrade. In the face of regional inequality, a housing shortage and climate change, to name but a few issues, it is not just a question of remedying historic underinvestment, but also ensuring high-quality, cost-effective infrastructure readies us for the future.
This should provide opportunities aplenty for the construction industry. Indeed, the 2018 national infrastructure and construction pipeline (NICP) laid out more than £400bn of planned public and private investment with £190bn to be spent by 2020-21. This would be a welcome boost for the struggling sector – according to IHS Markit/CIPS data from June, construction output fell at its steepest rate since April 2009. But to be effective, infrastructure policy must be able to provide long-term certainty. Without any guarantee of when (or if) these proposals will manifest, the construction industry cannot plan or commit investment. The Infrastructure Forum contends that just 8 per cent of the NICP is sufficiently certain for contractors to prepare to deliver them.
This speaks to the UK’s chronic ‘stop-start-change’ approach to infrastructure projects. Plagued by politically driven short-termism, decisions are slow, inconsistent and subject to change. London’s Crossrail was originally proposed in 1974 and is not expected to be completed until at least 2020. Even when schemes are given the go-ahead, a prevailing culture of accepting the lowest (and ultimately unrealistic) price as best value has resulted in projects being delivered either late, over budget, or both.
Build at your own risk
Criticised by a parliamentary select committee for its “preoccupation with price”, the government bears some responsibility for irresponsible tendering, encouraging construction companies to bid at unsustainably low prices to secure work. Already low margins are being squeezed further to remain competitive. Under the strain of an “aggressive approach to risk transfer”, unforeseen obstacles can quickly turn small profits into mounting losses and failures can reverberate throughout the supply chain.
Risk levels in the government’s major projects portfolio are rising. Analysis from think tank the Institute for Government indicates that around 40 per cent of infrastructure projects are now at risk, up from 14 per cent in 2016. The largest project, High Speed 2 (HS2), is rated as ‘amber/red’ by the Infrastructure and Projects Authority (IPA), meaning “major risks or issues apparent in a number of key areas” place successful delivery of the project in doubt. Dubbed “the station nobody wants to build” by City AM, the £435m Birmingham Curzon Street station encapsulates the government attempting to shift excessive risk on to contractors. Recognising “increasing concern regarding risk transfer”, HS2 has abandoned its initial tender process and is revising its procurement strategy to attract more bidders.
HS2: going off the rails?
A “money-eating behemoth”, a “gravy train for consultants”, a “vanity project”. HS2 certainly inspires fervent opposition. Less certain, however, are its prospects of actually being built. Current frontrunner to become the next prime minister, Boris Johnson, and some of his allies have expressed scepticism over the project, meaning it could face a potential review, further delays or even cancellation.
As it stands, HS2 appears to be on track to follow Professor Bent Flyvbjerg’s “iron law of megaprojects” – “over budget, over time, over and over again”. The budget (so far) is £55.7bn. This is up from the original £32.7bn budgeted in 2012 and the revised £42.6bn from 2013. According to the former chairman of HS2, Sir Terry Morgan, “nobody knows yet” what the final cost will be. After extended delays, it is questionable whether the 2026 delivery date for phase 1 (London to Birmingham) is achievable. Cost overruns in the first phase could see subsequent stages of the project scaled back or sacrificed altogether.
“HS2 is a project that suffers from a lot of uncertainty,” says Professor Flyvbjerg. “[A] lot of the work has started before we are sure it is going to be built.” Some £4bn has already been spent, and as the tendering process continues, a total of £20bn of contracts are expected to be awarded by the end of next year. But construction work has yet to start in earnest. With the ‘notice to proceed’ reportedly delayed until December, it is far from assured that building will definitely commence.
With big names such as Balfour Beatty (BBY) and Kier (KIE) exposed, efforts to reduce the cost and scale of the project could place contracts in jeopardy. It has been suggested that the London end of the line could terminate at Old Oak Common rather than Euston to avoid expensive tunnelling. Aside from the theoretical aspects, companies are encountering setbacks right now. Delays in southern section main works contributed to the recent profit warning from Costain (COST), sending its shares plummeting by around 40 per cent.
| Notable players involved in HS2: | |
| Balfour Beatty (BBY)/Vinci/Systra joint venture | £1.0bn construction contract to build Old Oak Common station |
| £2.5bn worth of civil engineering works across two projects | |
| Costain (COST)/Skanska joint venture | £1.8bn of civil engineering works for Northolt tunnels, Euston station tunnels and approaches (worth £600m to Costain) |
| £300m of enabling works in the southern section (worth £150m to Costain) | |
| Kier (KIE)/Eiffage joint venture | £1.4bn of civil engineering works across two projects |
| Morgan Sindall (MGNS)/BAM Nuttall/Ferrovial joint venture | £300m of enabling works in the central section (worth up to £100m to Morgan Sindall) |
| Source: Company accounts/news releases and HS2 Ltd | |
The Brexit effect
Both the government and the construction sector have been suffering from Brexit paralysis. Political and economic uncertainty is creating a climate of indecision, dampening business confidence and encouraging a ‘wait and see’ approach to spending decisions. “Swift decision-making and a break in the political impasse hold the key to pulling the construction sector out of the quicksand,” says Duncan Brock, group director at the Chartered Institute of Procurement and Supply.
Brexit will also exacerbate the existing skills shortage as construction companies have relied on EU workers to fill significant gaps. With the end of free movement, upward pressure on wages would translate to higher project costs. Similarly, with more than 60 per cent of building materials imported from the EU, tariffs or quotas on imports could lead to higher costs and material shortage.
Providing almost €8.8bn (£7.9bn) of financing over the past decade, the European Investment Bank (EIB) has played an important role in supporting some of the UK’s most significant transport infrastructure projects. Losing access to the EIB post-Brexit could increase the cost of capital, which means that some future projects would be no longer commercially viable. To ensure comparable funding, it has been suggested that the government establish a UK infrastructure bank.
What about talk of a potential post-Brexit construction ‘boom’? Boris Johnson has floated the idea of “borrowing to finance great infrastructure projects”. But Professor Noble Francis, economics director at the Construction Products Association, maintains any windfall hinges on the government improving its track record of delivery and companies “having the confidence to invest in the skills and capacity. This will take years to develop”.
