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Will lack of confidence dash £200bn infrastructure spend?

As civil engineering consultants and contractors keenly await the first annual update of the government’s National Infrastructure Plan, big questions about where the £200bn investment is going to come from remain.

Treasury body Infrastructure UK’s update is much anticipated after a dire 2011 for the economy and civil firms in particular.

Only last week official statistics showed the total volume of new construction orders at their lowest level since the third quarter of 1980.

Cost consultant EC Harris then offered a small glimmer of hope to the recession-weary market with the news that it thinks tender prices have finally hit the bottom and are now set to begin a slow but steady increase.

“We are at the point where we see the US [credit rating] has been downgraded, and Osborne is doing the right thing in saying that the priority now is to preserve our AAA rating”

Liam O’Keefe, Crédit Agricole

Its latest quarterly report, which tracks tender prices in the UK property and infrastructure sectors, predicted that prices for infrastructure work are expected to show positive movement in the third quarter of 2011. A bigger increase of 3.2% is expected in the year to the second quarter of 2012, with further rises of 3.8% over each of the following two years.

Different expectations

The different sub-sectors within infrastructure show different expectations with spending on water/sewage and roads falling dramatically over the next four years, says the analysis.

Workload in water/sewage in 2015 is forecast to fall by 33% compared to the 2010 figure, while roads output is forecast to fall by 45%.

Rail on the other hand is expected to more than offset these falls with 2015 output some 90% higher than in 2010 following five solid years of growth.

The forecast for the electricity sector is even more dynamic with output in 2015 almost triple that of 2010.

Growth of 35% per annum is forecast in both 2014 and 2015 as the nuclear power station building programme is timetabled to get under way.

Against this expectation, EdF, Eon and RWE are all reviewing their requirements and there could be a slowdown in the nuclear new build programme, although this should be compensated for by an increase in gas fired stations.

Cautious optimism

It’s clear that EC Harris’s cautiously optimistic analysis of the economic situation is the result of careful consideration of the likely downturns in the roads and water and wastewater markets against the likely upturns in rail and energy.

But the rail and energy sectors need big investment in big schemes - whether it’s government cash for High Speed 2 (HS2) or private finance for new nuclear and offshore wind projects.

Indeed, this week ICE Director General Tom Foulkes said ministers had failed to anticipate the extent to which private money will be needed (see ICE News, p29)

Much is needed but is it going to come?

Private and public investors need confidence before they will invest, and the signs are bleak.

Slow growth

Last week, chancellor George Osborne admitted he had revised down his hopes for the economy in light of new data that showed growth of just 0.2% in the three months to June.

The Office for Budget Responsibility’s (OBR’s) latest economic forecasts will be released in November and will show these new downgraded growth figures.

Halcrow chief economist Andrew Price says he worries for civils firms in the UK, predicting that some major infrastructure projects, such as HS2, could be delayed or reviewed.

But he says investment in infrastructure at this juncture would be the wisest possible choice.

“What the theories tell us is that spending on infrastructure is a significant contributor to GDP growth,” he says.

Davis Langdon associate for banking, tax and finance Neal Kalita says infrastructure investment was one of the measurements of a country’s competitiveness as decided by the World Economic Forum. “Infrastructure is a key determinant of growth, without it you can’t do anything,” he says.

However, Crédit Agricole global head of project finance Liam O’Keefe says the UK’s priorities have significantly changed in this latest batch of market turmoil.

“We should be having investment in infrastructure and increasing government borrowing. But we are at the point where we see the US [credit rating] has been downgraded, and Osborne is doing the right thing in saying that the priority now is to preserve our AAA rating.

Too much borrowing

“Britain is highly in debt, there has been a lot of government borrowing and my bank has huge exposure to Britain. Borrowing will be significantly curtailed.”

He says that projects such as HS2 could be a financial casualty. Kalita says Davis Langdon parent Aecom and many other civil engineering firms are instead looking abroad for work.

“In terms of new projects you’ve got to go where growth is strongest,” he says.

“We have to look at countries accelerating industrialisation. We had it for the best part of a century… Now the West has chronic underinvestment involving only refurbishment and major projects that are associated with major events such as the Olympics and World Cups.”

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