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Elevating Infrastructure | Making the case

Heathrow 1758168551405

“High quality infrastructure drives economic growth, boosts productivity and raises living standards.”

“That is why we placed infrastructure at the heart of the Autumn Statement.”

That is chief secretary to the Treasury David Gauke’s opening sentence in the introduction to an analysis published alongside the government’s National Infrastructure and Construction Pipeline in late November last year.

The pipeline sets out, for the first time, more than £500bn of total planned investment in the UK’s economic and social infrastructure, of which more than £300bn will be invested by 2020/21. It was universally welcomed by industry bodies who seem to agree that it will provide greater certainty for investors and the supply chain, as well as helping improve forecasts of future skills needs.

Intro illo 1

Intro illo 1

Gauke goes on to provide even greater commitment, explaining how ministers are now asking the Treasury body the National Infrastructure Commission (NIC) to plan on the basis that the government will spend 1% to 1.2% of GDP on economic infrastructure between 2020 and 2050.

It sounds marvellous. But, with the NHS creaking at the seams, schools at breaking point and the social care system staring into the abyss, any civil engineer with a conscience must surely ask what possible case can there be for elevating infrastructure investment above all that?

The NHS grabs the headlines, and it is easy to see why. It is already struggling to stay on top of the demands of serving a growing, ageing population and has to make £22bn in savings over the next few years.

Investment is growing

Set that alongside infrastructure, where government investment is growing, and it is difficult to avoid the obvious comparisons between the cost of building and staffing hospitals with, say, the cost of building and operating High Speed 2 (HS2).

And it is not as if these infrastructure projects are universally applauded. Whether it is HS2, Hinkley or Heathrow, plenty of high profile detractors can be found. Take HS2, where former Newsnight anchor Jeremy Paxman is the latest high profile figure to launch a last-ditch bid to get the project scrapped, arguing there are better infrastructure projects for the government to invest its cash in.

So just what are the facts?

The facts are that, as a percentage of GDP, government health spending in the UK stands at 7.7% – 10 times the 0.7% of GDP that goes on inland transport and the 0.8% the government says it will have spent on infrastructure overall in 2016/17. But equally, it is true that health spending is set to fall significantly as a percentage of GDP as the savings are made – possibly to as low as 6.6%. Meanwhile, the government’s Autumn Statement told the NIC to assume, for the purposes of planning and prioritisation, that government investment in infrastructure overall will rise from 0.8% of GDP to between 1% and 1.2% by 2020.

Why invest in infrastructure?

So the government is clearly seeing value in investing in infrastructure. But why? Why, when the NHS, and others, have far more emotive arguments in favour of spending?

“The allocation of the total public envelope is the job of the Treasury and those are the choices it faces. But what is really striking is the level of focus and investment in economic infrastructure as the main tool to improve productivity,” says the Infrastructure & Projects Authority (IPA) director of strategy and policy Hala Audi.

The IPA is the Treasury offshoot charged with monitoring and updating the infrastructure plan, working with government departments and industry to improve delivery and, crucially, to attract private finance.

“You can then make the wider case that improving productivity improves the economics of the country as a whole and that will provide for further investment down the line,” explains Audi.

Intro illo graph

Intro illo graph

In fact, the government believes that if the UK raises its productivity by one percentage point every year, within a decade it would add £240bn to the size of the economy.

“The government is incredibly serious about this and the numbers speak for themselves,” says Audi.

“There is a growing sophistication at political level as to what economic infrastructure does in enabling social infrastructure,” agrees Miles Ashley, director of infrastructure consultant Wessex Advisory. Ashley was previously at London Underground driving its Tube stations upgrade programme and is a passionate extoller of the broader role of infrastructure and the need to see its value in terms of long-term outcomes.

“There is a new vocabulary coming out about the value of infrastructure, the connectivity of infrastructure, and how that contributes to regional economic regeneration and national economic growth,” he explains.

Turning talk into action

So the government seems keen and committed and engineers might argue the case is made and their work is done. But life is never that simple, and it is clear that while the talk is positive, the reality of getting projects on the ground can be different. It would therefore be in everyone’s interest to find hard evidence backing the government’s view.

Trouble is, that is easier said than done.

Various studies support the government’s opinion that good infrastructure drives productivity, which in turn drives the economy, but all are light on hard facts. And plenty of others would dispute the view outright.

An example is the Oxford Review of Economic Policy. Following an in-depth study focusing in on China’s three-decade infrastructure boom, it concludes, somewhat damningly, that “the question of whether infrastructure investment leads to economic growth must be answered in the negative”.

Delivering a return

“Owing to uncertainty surrounding costs, time, and benefits parameters, a typical infrastructure project fails to deliver a positive, risk-adjusted return,” it concludes. “There is a common tendency for the benefit-to-cost ratio of major infrastructure investments to fall below 1.0. Such unproductive projects detract from economic prosperity. We thus reject the orthodox theory that heavy investment in infrastructure causes growth.”

Real data is hard to find. But a simpler argument may be to learn from others’ mistakes.

“Look at the flipside. Look at the United States where under-investment in infrastructure has led to economic downturn. That is a case in point,” says Ernst & Young head of infrastructure Amanda Clack.

On a chart of investment in infrastructure as a percentage of GDP, the US ranks pretty near the bottom. Perhaps disturbingly, the UK is currently pretty low too.

Shanghai example

“Then look at Shanghai and Singapore where infrastructure investment has been used to create cities that play on the world stage,” adds Clack. “Here in the UK we have got to be doing that; particularly in a post-Brexit scenario,” she stresses.

Clack is a staunch advocate of the world-class city concept, and urges civil engineers to get their heads around the simple premise that, in the UK, the power, and the creative thinking, is moving to the devolved regions.

Screen shot 2017 02 06 at 16.15.15

Screen shot 2017 02 06 at 16.15.15

“Collaboration across cities through initiatives like the Northern Powerhouse and Midlands Engine will be key,” she says. She also cites Scotland, with its programme of seven cities focused on developing their “smart” capabilities. Each one is interlinked, with the “Eighth City” being an amalgamation of the other seven.

“They all have a clear focus on a particular technology or development and the knowledge is then shared across all of the cities,” she says. But she stresses that physical infrastructure remains a crucial enabler.

“Infrastructure investment makes doing business easier and more attractive to foreign investment,” she says, noting that Ernst & Young’s 2016 UK Attractiveness survey found that digital skills, roads and London’s airports were most crucial to economic competitiveness.

UK priorities

In the summer, the NIC will report on what it considers the UK’s top infrastructure priorities to be. Its assessment is expected to filter into an update of the pipeline.

The NIC report will also have heavy bearing on planning within individual government departments, particularly transport where much work in 2017 will be focused on preparing for the next five-year investment programmes in roads, rail and aviation (see feature p24).

This work will, at the very least, allow the case to be made at micro level. But even that is hard to do: even staunch infrastructure champions like KPMG admit as much.

“Our experience suggests that very few governments are able to properly assess the actual economic value that their investments deliver,” says KPMG Australia director, advisory Said Hirsh.

Narrow view

“In part, this is because current infrastructure appraisal and prioritisation methodologies tend to take a narrow view of value,” he says.

“Those – like the UK – that do include more sophisticated business case requirements into their investment process often focus narrowly on calculating what expected revenues can be generated from users and the welfare benefits to these users for an improvement,” he adds.

In January the influential Organisation for Economic Cooperation & Development-backed International Transport Forum (ITF) published new thinking about how to better assess the value of infrastructure projects to society.

Its report, Quantifying the Socio-economic Benefits of Transport addresses head-on the issues with cost-benefit analysis, the commonly used quantitative measure of the extent to which a project, over its lifetime, will bring benefits that exceed its costs.

The ITF also argues that wider economic impacts should be examined where they are expected to be significant. But interestingly it also makes the case that cost-benefit analysis need not dominate decision making; that cost-benefit analysis is valuable, yet imperfect.

Using alternative evidence

It argues that “alternative evidence” should also be useful to communicate possible project impacts – for instance post-analysis of past projects, or even a “qualitative explanation of non-quantifiable impacts”.

Make the emotional argument, in other words. And maybe it has merits.

The IPA is hoping to contribute to this debate, through a review of what a well-delivered project looks like. It will examine the Treasury’s emphasis  on traditional success factors such as cost, time and quality. It will report in summer 2017, and while the work is to be done the anticipated outcome is clear.

“We have got to look at the benefits that go beyond capital efficiency,” says IPA senior advisor Keith Waller, “to look at customer experience, whole life carbon and wider economic benefits”.

Clearly focus also remains on good delivery – as nothing inspires confidence and investment more.

And that is crucial – because, while government has made its 1% to 1.2% long-term commitment, it recognises that building the infrastructure the UK needs will require more than just committing to increased public spending.

A significant announcement in the Autumn Statement was that the IPA will develop a new pipeline of projects that are suitable for delivery as public private partnerships. A list of projects to make up the initial pipeline, covering economic and social infrastructure, will be set out later this spring.

 

 

 

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