UK infra investment gap grows to £60bn

Each additional pound spent on infrastructure in one year would lift real GPD by £1.90 over a three-year period, says Standard & Poor’s.

Chronic underinvestment over the last decades has led the UK to accumulate an infrastructure investment deficit of more than £60 billion (€75 billion; $94 billion), according to Standard & Poor’s (S&P).

In a report released this week, the rating agency finds that the UK has spent an average 0.7 percent of its GDP on infrastructure between 1995 and 2011, compared to 0.9 percent for the whole of the OECD. It also notes a significant decline in spending since 1980, when investment on infrastructure stood at close to 1 percent of GDP. Both benchmarks allow the study to establish that the UK now suffers from an infrastructure investment deficit of between 3.4 percent and 3.7 percent of its 2013 GDP.

Yet the case for spending more on infrastructure is as strong now as it’s been since the start of the Financial Crisis, S&P says. Despite a seemingly robust recovery – with UK GDP expected to grow, in real terms, by up to 3 percent over the next few years – the agency reckons there is still significant slack in the economy: output per hour in the country last year still lagged behind the average for the rest of the world’s seven largest economies; employment in the construction sector remains below its pre-crisis level.

As a result, S&P thinks that the potential economic returns generated by fresh investments are bound to be significantly larger than the sums initially invested. The paper’s authors thus estimate that every marginal pound the UK spends on its infrastructure in one year would create, over a three-year period, an additional £1.90 of economic output.

“The benefits of infrastructure investment do not stop at the short-term boost to output and employment,” commented Jean-Michel Six, chief economist for the Europe, Middle-East and Africa region at S&P, during an event on Tuesday presenting the findings. “Over the longer term, improving infrastructure can enhance the private sector's productivity, for instance, by reducing transport and communication costs.”

Yet a crucial issue remained that of gathering the financing needed to help meet the country’s infrastructure needs, according to a panel discussion that followed.

“Fiscal pressure is likely to constrain the UK government's ability to finance new infrastructure projects,” said Aurelie Hariton-Fardad, director of infrastructure finance ratings at S&P. “We therefore believe that a significant portion of funding for infrastructure investment will come from the private sector.”

With growing institutional appetite for infrastructure assets, however, a major bottleneck limiting a surge in investments lied on the public sector side, argued Michael Wilkins, managing director and head of infrastructure at S&P, during an interview with Infrastructure Investor.

The ability to drive in a fresh wave of private capital, he said, remained so far constrained, due to the lack of certainty surrounding a number of Private Finance Initiative (PFI) and public-private partnership (PPP) projects in an increasingly politicised environment. Facilitating private investment would thus require more clarity from the government on the pipeline of future projects as well as on their risk profile, especially around the degree of demand or volume risk associated with them. 

“The issue therefore is the supply of projects – there is a strong pipeline, but projects are yet to be realised,” Wilkins said.

Angela Knight, chief executive of industry body Energy UK, added during a session dedicated to regulation that a firmer public commitment to maintain a stable investment climate was also crucially needed.

“Currently, there is uncertainty because the focus is not on investment; it’s on how much people have got to pay for their energy bill. This issue has not been properly addressed with policy makers – whether they are in the political arena or whether they are in the regulatory arena. Looking forward, we therefore need a resolution to the tensions between investment and affordability.”