With the potential to significantly change the landscape for infrastructure, understanding how the new, and unexpected, Conservative majority government will operate – and the impact that its policy programme may have on infrastructure investors – is critical.
WHY WILL INFRASTRUCTURE BE A PRIORITY?
All governments like to declare that infrastructure will be a clear priority. The question is whether that is simply rhetoric or whether it will actually translate into action. It is perhaps too early to tell, but early indications are that the government's approach will be more than just simply paying lip-service to infrastructure.
It is no coincidence that the Chancellor of the Exchequer, George Osborne, gave his first speech since the election in Manchester setting out proposals for the so-called “Northern Powerhouse”. This will see significant devolution of powers to northern cities combined with major investment in transport infrastructure and science and technology across the north of England.
A personal cause of the Chancellor, it is intended both to challenge the dominance of London but also politically to respond to critics who argue that the Conservatives are a party of the south. The focus on infrastructure has been framed as part of dealing with the UK's productivity challenge and central to securing the economic recovery. The Chancellor has set out that he believes rebalancing the economy away from London and creating a network of northern cities that can act as a counterweight is dependent on renewing infrastructure.
With the Chancellor's personal reputation at an all-time high, it seems likely that infrastructure will get the political momentum behind it that it needs. The recent Cabinet reshuffle was one in which, once again, allies of the Chancellor were well rewarded. The appointment of Sajid Javid as Business Secretary, Amber Rudd as Energy Secretary, Greg Hands as Chief Secretary, and Greg Clark as Communities and Local Government Secretary reflects this. With his key lieutenants in roles critical to ensuring infrastructure delivery, the Chancellor will have much more control in ensuring success.
WHAT CHALLENGES LIE ON THE HORIZON?
Decisions will also need to be made on key projects in the next five years, many with potential political risks attached. The long-awaited decision on how to proceed with airport capacity expansion in the south-east will come one step closer with the publication of the Airport Commission's report, expected in June.
Although the Conservatives did not make a manifesto commitment to automatically accept Sir Howard Davies's recommendations, after delegating the decision to an independent body it would seem difficult for them to ignore its conclusion. How the government responds to Sir Howard's recommendation will be a big test of this new approach of outsourcing difficult decisions to independent bodies.
Any decision to build a new runway at Heathrow will have significant political implications for the Conservative Party. A number of high-profile Conservative MPs across south and west London are strongly opposed to expansion. They include the Mayor of London Boris Johnson, now part of the Cabinet but without collective responsibility; the International Development Secretary Justine Greening; and the backbench MP Zac Goldsmith. Goldsmith has already declared that he would resign and force a by-election, and Greening would be expected to resign from the Cabinet. With a very slim majority, there is a danger that opposition to specific projects could become significant for the government.
Nuclear new-build and high-speed rail will also be high-profile issues. Hinkley Point C is continuing to face delays with a final investment decision from EDF expected later this year. Any difficulty in completing the project will be politically embarrassing for the government which has made it the centrepiece of its efforts to invest in low-carbon energy.
Likewise, legislation will need to be passed during this Parliament to proceed with High-Speed Two (HS2). With strong opposition from some Parliamentarians and grassroots groups over potential damage to the natural environment, and concern from others that this is not the best use of public resources, opposition should be expected.
CONTINUED ECONOMIC CHALLENGES
We can be certain that this Parliament will see a continuation of public spending restraint. The Conservative Party manifesto commits to a further £30 billion (€42 billion; $46 billion) in fiscal consolidation over the next two years to balance the structural current deficit by 2017/18. As a result, some of the deepest public spending cuts are yet to come with tax increases ruled out and £13 billion to be found from departmental spending cuts.
Under a Labour government, capital expenditure was set to increase and so the government will be looking for new ways in which to ensure funding. As a result, the government will be keen to work with the private sector to look at financing and investment opportunities. This is likely to include renewing initiatives to encourage pension funds and insurers to invest in infrastructure, such as the Pensions Infrastructure Platform; and looking at how Private Finance 2 (PF2) – which is seen by many to be overly complex – can attract investor interest.
STREAMLINED DECISION MAKING
How will a Conservative government operating as a majority government rather than in coalition with the Liberal Democrats affect infrastructure investors? The absence of the Liberal Democrats from the new government will mean that the process of consulting the 'Quad' – the Prime Minister, Chancellor, Deputy Prime Minister, and Chief Secretary – on all major policy issues will no longer be required. As a result there will be stronger control from the centre and a more streamlined process of decision making.
POLICY DRIVEN BY EXPERTS
The trend of appointing outside experts to key ministerial roles has continued. The departure of Lord Deighton, whose experience with the Olympics was seen as crucial in demonstrating the government's commitment to infrastructure delivery, has coincided with the appointment of Jim O'Neill, a former Goldman Sachs chief economist who has contributed to the policy thinking around devolution and the importance of cities. His role chairing the Independent Cities Growth Commission will stand him in good stead to help translate the Chancellor's Northern Powerhouse vision into reality.
Since 2010, the government has sought to recruit the Commercial Secretary to the Treasury – the Treasury minister responsible for infrastructure – from the private sector rather than making it a political appointment. The appointment of James Sassoon, Paul Deighton and Jim O'Neill reflect a belief that this ministerial role should be semi-independent and filled by an individual who is respected by industry and investors and able to build relations with these organisations.
The benefit for investors is that they are given confidence and clarity over future government policy. Having an expert as minister ensures they have experience of the sector and an understanding of the needs of private investors, and perhaps most importantly, can sit above the political dynamics that occupy some ministers. At the same time, the focus on infrastructure will be given momentum by the political backing of the Chancellor.
While the government's enthusiasm for infrastructure investment and greater clarity on decision making will be positive for investors, there remain a number of macro political risks that will dominate the next couple of years. A referendum on Britain's membership of the European Union will see business challenged over their view on its impact; there will be further questions about the future of the UK and pressure for a second independence referendum in Scotland; and ongoing economic uncertainty will prove challenging.
While it is too early to tell for sure, it seems that renewed political support for infrastructure and a rationale based on improving productivity and rebalancing the economy will lead to progress. The test for infrastructure investors will be understanding this new political environment and finding ways to take advantage of it.