Infra survives UK spending review

UK Chancellor George Osborne's spending cuts sidestepped several road PFI projects, Nottingham Tram, Crossrail and a new high-speed rail network. A £1bn Green Investment Bank was also launched to help channel private sector investment into renewable projects.

UK Chancellor George Osborne has let the axe fall on about £81 billion (€91 billion, $127 million) of government spending over the next four years but infrastructure has emerged relatively unscathed from the announced cuts.

George Osborne

Of the different infrastructure sectors affected by the review, transport comes out in the best shape, with the government committed to spending close to £31 billion across the sector over the next four years.

Several projects that form part of the UK’s private finance initiative (PFI) – Britain’s standardised process of tendering public works to the private sector – will continue in procurement, including the Isle of Wight, Sheffield and Hounslow road maintenance PFIs. The £600 million Mersey Gateway bridge PFI was also green lighted yesterday, as well as new lines for Nottingham Tram.

The Chancellor also reinforced the government’s commitment to building High Speed 2, a multi-billion pound high-speed rail network linking Birmingham to Manchester and Leeds. Osborne promised to spend £750 million on the project by 2015, including the introduction of enabling legislation. While details have yet to emerge, the private sector should be called on to help fund the project.

An important change announced in the spending review concerns the devolution of power to local authorities as a way to help compensate for the stringent budget cuts implemented by the government. As such, local bodies will be allowed to use Tax Increment Financing (TFI) to help fund infrastructure, enabling them to borrow against expected increases in business from higher property values.

PriceWaterhouseCoopers’ Richard Abadie, a partner, believes these cuts will be determinant in introducing the debate on user charges as a way to fund UK infrastructure.

“Such a drastic fall in public revenues flowing into infrastructure will inevitably force the debate on user charging, which is common in several European countries but which the UK has traditionally not adopted. There is likely to be serious consideration of user charging, not only for roads, bridges and tunnels, but also for additional energy infrastructure. Supplementary charges may become a fact of life for many, to guarantee supply and quality,” Abadie said in a statement.

On the energy side, Chancellor Osborne said the government is committed to a low carbon future, establishing a previously announced Green Investment Bank with £1 billion of public funding. The bank intends to leverage private sector funds to help develop renewable energy projects and may receive further government funding from asset sales.

But infrastructure developer Halcrow expressed disappointment with the government’s initial commitment to the bank. “The £1 billion of public funding announced fell well short of the initial plans of £2 billion (and hopes for even more) for the bank,” Halcrow said in a statement. “The reduced public funding will require the private sector to contribute more if the bank’s objectives are to be met,” the developer added.

Social infrastructure was the “the biggest loser” in the spending review, commented KPMG’s UK head of infrastructure, Richard Threlfall. Still, Threlfall highlighted that it “is clear that the government wants to see continued investment in social infrastructure with £15.8 billion pledged to maintain and rebuild schools, albeit not via BSF”.

The £55 billion Building Schools for the Future (BSF) initiative, started by the previous Labour government in 2004, aimed to refurbish or rebuild every secondary school across England but was scrapped by the current government earlier this year after being deemed “wasteful”.

Seven waste-to-energy PFI schemes were axed by Osbourne yesterday, as the Department for Environment, Food and Rural Affairs (Defra) found that it is well on its way to meeting European Union targets on landfill diversion. It will still keep procurement going on 11 such schemes, Defra said.

Further details on the government’s infrastructure plans are set to be unveiled next week, when the authorities present the National Infrastructure Plan. In it, the government is expected to outline the UK’s medium to long-term infrastructure goals and detail how it intends to fund them.