Minority Report

1 July 2017 If only Theresa May had had some foreknowledge of the election outcome, things would have been quite different. What now for infrastructure under minority rule?

“The worst possible result for the infrastructure industry.”

“A complete mess.”

“Disastrous for infrastructure.”

Those are just some of the responses that came from the industry in the immediate aftermath of the UK’s General Election result.

Ahead of the poll, many had seen the event as a frustration, given that it had meant a delay to announcements at a time when the industry was expecting some positive movement around both a PF2 pipeline and Community Health Partnerships’ Project Phoenix.

However, that was when everyone assumed Prime Minister Theresa May would simply increase her majority and be able to push forward with her plans safe in the knowledge she was untouchable for the next five years. Instead, election night brought a hung parliament – something that had been unthinkable only a few weeks earlier – leading many in the market to wonder what impact this might have.

While May’s mantra during the election was ‘strong and stable government’, she did her best to keep true to that word, quickly forming a minority government and looking to organise a deal with Northern Ireland’s Democratic Unionist Party (DUP) that would give her the numbers – just – to get measures through parliament.

And whatever the feelings of doing a deal with the DUP may arouse, the swift action has at least seemed to settle the jittery markets for the time being. As dawn broke on the morning after the election, there were fears that a drawn-out process of dealmaking, or uncertainty over who exactly would form a government, would be played out to the sound of markets crashing.

This scenario may, for the time being, have been avoided, but there can be no doubt that the result is far from ideal. So what now for the infrastructure industry?

“If anything, given increased political uncertainty, it means there will be more difficulty in getting things done,” suggests Nick Prior, partner at Deloitte. “The bigger issue is that the substantive focus of government officials and ministers’ time is going to be Brexit. And the fact they have less political leverage than before means they are going to be exposed to events as we have seen in recent days that will continue to divert.”

One potential benefit for the market of May’s weakened hand is the fact that Philip Hammond has remained in the Treasury. Strong rumours – that May herself did little to dispel on the campaign trail – suggested Hammond would be ousted if the prime minister had gained a large majority, which would have been detrimental to infrastructure investors, given his pro-business and pro-investment stance, and his apparent willingness to allow a pipeline of PF2 deals get off the ground.

“The chancellor is directing infrastructure investments with a view to tackling bottlenecks (such as on highway networks), aiming to improve efficiency and to maximise value for money,” says Manish Gupta, partner at financial advisory EY. “He has a tough task of prioritising allocation of funding to various infrastructure projects – and there is a likelihood that his approach will be for a greater focus on small to mid-sized schemes which might create greater value for money and efficiency, rather than the grand schemes.”

Charles Ford, partner at law firm Hogan Lovells, is also optimistic on this front. “If Hammond remains in place, I expect there will be a more ‘business as usual’ agenda, rather than if there had been a big majority, which might have seen people bringing more dynamic projects through.”

He also looks beyond the Treasury. “A lot of secretaries of state have remained in place. It would be hard for them to remain if there was going to be a big change in direction.”

However, how long the current status quo will last is hard to predict. There is no guarantee that May will remain in place for any considerable length of time. While she appears to have held off initial calls for her to go, it is thought in many circles that this is only because the Conservatives fear another leadership battle would culminate in another election – one that they now fear they would lose to Jeremy Corbyn’s resurgent Labour party.

As a result, May could yet be forced out in the autumn – either by the Tories seeking an orderly transfer of power, or by a major defeat for the government such as being unable to get its Autumn Budget through parliament.

Even if she and her current team do manage to cling onto power, that doesn’t mean the industry is expecting a sudden rash of PF2 deals. Despite the pre-election talk of a pipeline “early in 2017”, as well as some continued confidence within the Infrastructure and Projects Authority (IPA), there is a growing scepticism within the industry.

“I’m not confident that the government will announce a big PF2 pipeline,” says Gupta, while others suggest the model has little enthusiasm within departments and even the wider Treasury outside the IPA.

“I think the government is interested in being more creative around fund formation,” argues Ford.

That is not to say there will be nothing for the industry to get excited about. “Some projects are due to be announced by departments,” points out Ford.

At the forefront of this queue appears to be Project Phoenix. The business case went to ministers for sign-off just before Easter, and while the election prevented any opportunity for it to get the go-ahead, a lot of effort is now being put into getting it through as soon as possible.

Should those plans get ministerial approval and go into procurement, it will be a major boost for the social infrastructure market in the UK, which has been starved of opportunities in recent years.

Transport, too, looks to offer some fertile ground for the industry in the months ahead.

“There continues to be a discussion on exploring private financing for the key infrastructure projects in the pipeline, including on the Lower Thames Crossing and the A303 schemes,” says Gupta.

The chances of those emerging as PF2 deals, however, appear to have taken a severe blow with the appointment of arch-PFI critic Jesse Norman as a minister in the transport department. While he has previously declared himself happy with the revamped PFI model, sources suggest his appointment is a clear indication that the approach at the transport department will be different.

There remain, of course, the ongoing projects such as Crossrail and HS2. “The chances of HS2 falling over now are pretty slim,” says Ford, pointing to the cross-party support for the new rail line. As that progresses, it will create new opportunities that are already being developed around the line and particularly its stations.

However, the biggest question mark for these larger schemes is Crossrail 2. As was highlighted at the time, it was not included in the Conservative manifesto – unlike the Labour and Liberal Democrats’ documents. Since the election, the chair of the National Infrastructure Commission, Lord Adonis, has also suggested that its future has been called into question by the Tories’ manifesto decision.

Experts are nonetheless hopeful. “A lot of work has been done on Crossrail 2 and the economic case stacks up,” argues Ford. When any of this might happen, though, is another question.

In the wake of the election, there were less than two months for the government to get its wheels back in motion before the summer recess. Add to that the delays caused by negotiations with the DUP – something that caused the Queen’s Speech to be pushed back – and the timings for getting anything done before the summer start to look rather slim.

Ford suggests that while the Queen’s Speech provides the basic structure of what the government will look to do, any more detailed programme that would include infrastructure is unlikely to emerge now until the autumn.

“They can spend the recess working out their plans in more detail, and that will likely include infrastructure,” he suggests. “The Queen’s Speech is generally the things that the government survives or falls on. So infrastructure will form part of the non-Queen’s Speech agenda.”

“Infrastructure might have cross-party support,” concludes Prior, “but sadly it does not seem to be a big priority – perhaps as evidenced both by the Budget earlier this year and the narrative of the election.”

Some say it’s the hope that kills you. With the waiting game still not over after seven years of hoping for a new pipeline, the industry faces a few months more before knowing whether the PF2 model is alive or dead.

This page was last updated on:
2 October 2017.


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