On the brink
Balfour Beatty recently hailed the progress under its Build to Last transformation programme, announcing a key milestone on margins – but the very fact it has been aiming for just 2-3% margins underscores a deeply troubling problem facing the UK infrastructure market.
Since the company has implemented its transformation programme, one of the key aims was to reach “industry standard margins” on all earnings. However, that means margins of just 2-3%, which leaves little room for error when it comes to pricing and delivering projects.
Indeed, there are enough stories of companies running into trouble over the past few years to demonstrate that the UK market is in a rather difficult place. Whether it is the big collapse of Carillion in January, or the recent serious wobbles faced by the likes of Interserve and Kier.
As one industry source told me recently, the government cannot bear the thought of another major supplier going under. As Interserve apparently teeters on the brink, there will be plenty of concerns that 2019 could start in a similar fashion to 2018.
There are, of course, a few things that the government could do to help out. While some cynics will be quick to moan that killing off PF2, instead of wholeheartedly backing it, is not exactly helpful, the truth is the model was never going to garner sufficient public support to become a major lifeline for the infrastructure industry.
So starting afresh with a new review of infrastructure finance across the board may be a good way to bring about the change that is needed. The only danger is that, after seven years of inactivity, any resulting pipeline could be too late for many firms.
And more than that, it is not just the organisations that may have disappeared. There has long been concern over a ‘brain drain’ in the UK, as projects have dried up and experts have moved overseas to find new opportunities. That continues to be an issue and with a whole host of countries taking advantage of the PPP model to deliver new infrastructure, there has been a clamour for UK experts for several years now.
So what will the New Year hold? The ideal would be for a strong political commitment to a new approach to investing in infrastructure, so that the summer’s Comprehensive Spending Review can deliver a clear sight of projects that are not only an ambition, but have a clear route through to being financed and delivered.
That, though, currently looks rather more of a pipe dream than a pipeline. After all, the government in the UK still has something far more pressing taking up its attention as we head into the New Year: Brexit.
We still are nowhere near knowing what the fallout from our (presumed) exit from the EU at the end of March will be, still less whether there will be a functioning government in place to develop and back a new programme of infrastructure investment come the summer.
Balfour Beatty may be in a far stronger position than it was a few years back, but like all those involved in the UK construction industry, it will be wondering where its next line of projects will be coming from in 2019 and beyond.
With so much still up in the air, the phrase “wait and see” is the one that comes back to mind – although it is one we have heard now for over two years on Brexit (and longer when it comes to wider infrastructure programmes) and is wearing more than a little thin.
Finally, there has been a lot of talk from some quarters about the potential of the regulated asset base (RAB) model to help fill the space left by PF2. That is fine, for the water industry, the UK’s railways and potentially even its roads. But a RAB model will have little to say on schools or hospitals.
On schools in particular, something needs to happen. The Conservative-led coalition inherited and then scrapped a major programme to refresh and rebuild every school in the country way back in 2010. Many schools have been left in limbo since then, making do with a ‘patch and mend’ approach that is neither financially sustainable or conducive to good education. The Priority School Building Programme has barely scratched the surface of this need, so finding a way of delivering (and, of course, financing) new schools must surely be a priority in 2019.
I would like to finish by thanking all our readers for your continued support over 2018 and look forward to providing you with the latest updates, news and analysis in 2019, in what is likely to prove yet another momentous year for the infrastructure market.