Plans to get government to set capital budgets for major infrastructure projects for at least five years could be a game changer for the UK infrastructure market and help increase certainty for private sector investors, it has been claimed.
The proposals, contained in the second National Infrastructure Assessment (NIA), would also see government move away from annual controls for major capital projects and instead giving major projects a fixed budget with the ability to move money forward and backward across years within that budget.
Julia Prescot, Deputy Chair of the National Infrastructure Commission, told Partnerships Bulletin that if the government was to adopt such changes, it would “remove the illusion that delaying projects saves money”.
She added: “It would be game-changing for major projects.” Prescot explained that ring-fencing budgets in this way would also require a “robust cost appraisal up front” by the government, and points to the experience of the London 2012 Olympic and Paralympic Games, where there was an acceptance of an initial uplift in costs, which once agreed in 2007 remained in that position until the completion of the project.
“This approach is more in parallel with how the private sector works,” she explained. Prescot pointed to her own experience as partner and chief strategy officer at Meridiam, which last year reached financial close on the £2.4bn NeuConnect energy interconnector project: “We have the financing for that £2.4bn and we have no recourse to go back to get more.”
Prescot also said that the National Infrastructure Commission (NIC) is eager to see projects being delivered at greater pace than they have been to date. “The potential is significant and the willingness to go ahead is there, but we need to press on and see projects being delivered.”
Part of the problem here is the continued questions around budgets and price increases - particularly in an environment where high inflation is constantly pushing up costs. That is one reason why the NIC is keen to see major infrastructure projects given their own ring-fenced budgets, so that longer term certainty can be given to projects.
Prescot also pointed out that support for private finance “needs to be maintained” by the government so that schemes can be delivered in increasingly complex sectors - particularly in relation to the energy transition.
Developing a stable regime in which private finance can confidently invest will be a key part of the UK’s ability to deliver on its infrastructure goals over the coming decades, and the NIC’s assessment has pointed out a number of ways in which that can be achieved.
Prescot highlighted the assessment’s call to provide updates to the National Policy Statements (NPSs) here as an example of where improvements can be made. “[The NPSs] should be renewed on a five-year basis, or a modular basis where legislation has changed things,” she said. “The assessment is trying to isolate a number of areas that are critical to getting planning through quickly.”
She is hopeful that the message is getting through, too, with murmurings from both the government and opposition Labour Party that changes need to be made to update and improve the planning regime.
Prescot pointed out that developing strong policy statements on infrastructure development can have a dramatic impact: Ofcom’s support for gigabit broadband, for example, has helped the technology penetrate around 75% of the country, up from around 5% in 2018.
Using regulators to help drive competition is something that the NIC, and Prescot, are keen to see developed. “For major new undertakings, it is important to have the market providing the best it can,” she explained.
The NIC is therefore keen to see the progress of direct procurement for customer (DPC) contracts in the water sector, which are being overseen by water regulator, Ofwat. “We would like to see these speeded up,” said Prescot. “It is disappointing that they have not yet been coming forward at pace, but they are going to be bringing in new investment and ideas, and they will allow the water companies to do what they were first established to do.”
There is also more that could be done to incentivise local communities to host new infrastructure, with the NIC referring to giving local people lower energy prices if a new wind farm or other renewable energy source is situated near their community, for example.
All these things backed by the NIC are designed to ensure an environment for investment that the private sector can believe in. Prescot went back to the NeuConnect project as an example of what the private sector is looking for. “Meridiam and the other investors were willing to put in a significant amount of money up front at the development phase, because we knew there was a cap and floor regime where we could make our money back down the line. So a very clear business model is important.”
The hope from the NIC is that if the government will take on board its recommendations, the UK will benefit from a public sector that approaches its infrastructure needs in a more businesslike manner, which will help to encourage more private investors to work with it on the delivery of those plans.