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More cash, less spend

Construction inflation threatens to erode the value of the infrastructure payouts announced in last week's comprehensive spending review.

The mainstream media's frenzy over Chancellor Alistair Darling's "thieving" of Conservative tax policies last week left little room to debate the true implications of his decisions on government spending over the next three years.

At first glance, the Comprehensive Spending Review (CSR) settlement for infrastructure seems generous. In transport, current annual spending increases of 2.25% above inflation are maintained, and a further £15.3bn is promised for expanding the national rail network, and £5bn was pledged to Crossrail.

The waste management sector also did well with an extra £2bn in Private Finance Initiative credits available between now and 2011 to help fund new facilities. The Nuclear Decommissioning Authority was handed more money and the development of renewable energy technologies was backed to the tune of £370M during the three years between 2008/9 and 2010/11, is covered by last week's CSR.

But on closer examination public spending looks to be slowing to the point where it will decrease in real terms.

Yes, Darling has backed Crossrail, the largest engineering project in the Northern Hemisphere. Along with the High Speed 1 London to Paris line and the 2012 Olympics, the Crossrail confirmation ensures that this Labour government will go down in history as one that was unafraid to back large, ambitious engineering schemes.

But British construction's heavy workload and lack of resources are expected to combine and push tender prices up at a pace that the public purse will be unable to keep up with.

Cost consultant EC Harris' UK Economic Survey for autumn 2007 predicts that tender prices for building and infrastructure schemes will rise by between 4.5% and 5% a year for at least the next two years. In London, with its vast number of property developments, various Tube and rail upgrades and, of course, the Olympics, construction inflation is predicted to stay at 6.5% until 2011, when the vast majority of works associated with the 2012 Games are complete.

This means that when Darling talks about increasing spending on transport by 2.25% in real terms, he may as well admit to a funding cut in real terms.

Any "real term" increases claimed by the government are relative to the overall Consumer Price Index (CPI), which shows across-the-board prices rising at 1.8%.

"The government is not going to get much for its money by kidding itself that construction inflation is the same as the CPI," says EC Harris head of local government and education Paul Foster.

In the education sector, says Foster, the Building Schools for the Future initiative is feeling the full corrosive impact of construction inflation. The programme is lagging behind schedule and money is not going as far as it was initially meant to.

This problem is also likely to blight spending on flood defence and mitigation. Promised increases in flood infrastructure funding following the summer floods have been delayed and staggered.

This has prompted the Association of British Insurers (ABI) to warn that its members will withdraw cover for homes in flood plains unless more funds for flood defences are made available.The CSR revealed that the Department for Environment, Food & Rural Affairs budget for flooding would rise from the 2007/8 budget of £600M to £650M in 2008/9, £700M in 2009/10 and £800M in 2010/11.

But the ABI believes that £800M is needed in each of the years of the CSR period, not just the last one. An ABI spokesman also said more money was needed immediately so that work could begin on schemes that might avert the scenes of widespread flooding witnessed this summer.

It would also minimise the adverse impact of construction inflation on the scale and number of schemes procured.

There seems little chance of the causes of rising tender prices disappearing during the CSR period, according to EC Harris. In the past year, materials prices rose by 10.2% while skilled labour rates rose by 6.6%. As the rapid industrialisation of the developing world continues, competition for materials is set to continue, and it will take more than three years to improve the poor supply of skilled labour in the UK.

There are also only a handful of contractors capable of delivering major schemes, so competition at the top end of the market is weakening, with the likelihood that prices will increase as a result. The situation is unlikely to change as consolidation among contractors and consultants continues.

The government is trying to claw some of the inflationary cost increases back with an efficiency drive. The Department for Transport, for example, is expected to reform itself to deliver £1.8bn in savings by 2011.

But while such changes will deliver some improvements, they will not tackle construction inflation.

What would make a significant difference would be a boost in the number of engineers and skilled tradesman in the UK.

It is unsurprising then, that Association for Consultancy and Engineering (ACE) chief executive Nelson Ogunshakin last week criticised the CSR's settlement for higher education and skills, for reducing the rate of increase in spending.

At just 2% above the CPI each year, this might just maintain the status quo, but it will do little to bring about the much needed improvement in Britain's skill base.

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