Investors

You cannot take the politics out of infrastructure

Sir John Armitt tells Infrastructure Investor what to expect from the National Infrastructure Commission and how the lessons learnt from the London Olympics can help with procurement.

-

We wrote about it just last December, but if there is a long-standing dream in the infrastructure community, the wish to top many a Christmas list, it is the dream that infrastructure procurement could, somehow, be depoliticised.

Of course, no one dares suggest that infrastructure procurement should be completely depoliticised – that would, after all, be thoroughly undemocratic. But if it could somehow be less affected by the electoral cycle, well, let's just say it wouldn't hurt.

That is why initiatives like the National Infrastructure Commission (NIC), dreamed up by Sir John Armitt, the man who successfully delivered the London Olympics, was so well received by industry. After all, what's not to like about a quango that is seen as taking the politics out of infrastructure while also looking at the UK's needs on a 30-year basis, producing a national infrastructure assessment in each Parliament

The idea was so well liked, in fact, that Chancellor George Osborne had no qualms about borrowing it wholesale, bringing the NIC to life with former Labour Cabinet Minister Lord Adonis as chair and founder Armitt as one of its commissioners. Which makes it especially refreshing when Armitt candidly replies, after being asked how successful he thinks the NIC can be in taking the politics out of infrastructure, that:

 
“I'm not sure it can. I was already saying this when the NIC was being discussed under the old Labour government, but you cannot take the politics out of infrastructure. The public, at the end of the day, will always look to government if there's a problem with the water, or the electricity, or if the trains aren't running on time. They don't really care about the private sector involvement in all of this.”
What the NIC can certainly attempt to do, though, is to take the bad politics out of infrastructure.

“The benefit of the NIC is to increase the openness and transparency of the [infrastructure procurement] debate and provide the opportunity to really have a proper understanding of the choices available, including the 'do nothing' option, which many people might like, and outline clearly what the consequences are if nothing is done,” Armitt argues.

“I think a lot of the NIC's work could potentially be about policy options as it could be about physical infrastructure,” he continues, “and getting the debate about policy options out in the open. So when it comes time for the final decision to be made, politicians have a large amount of independent advice and the public is hopefully better informed. It also hopefully creates some better chances for cross-party consensus. If you take politics from the process, what you are trying to take out is projects simply being used as weapons, in a tribal sense, and get politicians united around what needs to be built.”

Still, Armitt doesn't doubt how challenging the NIC's work will be, especially considering the large-scale nature of many of the projects it has been asked to advise on. “With the environmental constraints in a country like the UK, where no one wants anything built in their backyard, you are going to finish with these arguments, as we are clearly finishing at the moment after three years of the Howard Davies Commission [Airports Commission], where you get a recommendation that is somehow still very politically difficult for government to finally make up its mind on,” Armitt concedes.

FLEXIBILITY, FLEXIBILITY, FLEXIBILITY

Challenges aside, what are the main lessons Armitt draws from the Olympics that could benefit the procurement of big infrastructure projects?

“The fundamental need with all of these projects is to understand the governance, in the sense of understanding who's going to be sponsoring these projects. We saw that with Thames Tideway and the need for Thames Water to create a separate body [to procure the project] because of the way in which it was going to be financially structured. Who owns a project and who's going to be sponsoring it are the kinds of issues you want to sort out as soon as you can,” he begins.

Next on the agenda are three important questions. “You then clearly need to be asking some fundamental questions about the project. I've always described them as 'why', 'what' and 'how'? My argument is that we tend not to spend enough time on the 'why' and we love to rush into the 'what' and the 'how' without considering other options.” Once the scope of the work is firmly established, you need to get ready for a fairly long planning process for these mega-projects, Armitt points out.

“And then your procurement process is equally critical,” Armitt explains. “One of the lessons we learnt from the Olympics was that, where the final detail design was nowhere near ready when we were placing contracts, we went for an open book form of contract with maximum collaboration between ourselves and the tier 1 contractors and sub-contractors. It actually worked very well. It strongly incentivised contractors to build on time, which is the most important thing, get in below the target price and share the upside with us, rather than get bogged down in endless claims.”

Another tricky procurement question is, of course, who is going to foot the bill. And if the private sector is involved, there is the added discussion on whether the investment framework and the political climate are solid enough, so that investors feel secure in their ability to earn a decent return from these projects.

“The funding bit tends to be a sticking point because it requires government policy, since investors are looking at that stability before they finance,” Armitt admits. This tug of war is particularly evident in the energy sector.

“At the moment, it's not easy for investors to feel any sort of security around their infrastructure investments when governments continuously change their attitude towards subsidy and pricing levels. Governments want to give power to consumers as cheaply as they can, they want to cut carbon emissions and they want security of supply. But actually, those three things don't sit very easily together,” he argues

Maybe the solution lies in a running dialogue between governments and the private sector, a more flexible arrangement along the lines of the open contracts Armitt engineered for the Olympics? Armitt agrees and refers to Hinkley Point, the UK's much debated £18 billion ($26 billion; €24 billion) nuclear project, as an example.

“If you take the Hinkley Point negotiation and the desire to reach a strike price on the electricity generated – which is not going to be generated in some 12 years – and people seeking certainty on that, you can guarantee that whatever price they decide on [now] will be the wrong price in 10 or 12 years' time. Therefore, why make the negotiations so difficult by trying to agree on something which you know is not going to be the right answer?” he questions.

“Somehow, you could try and reach a slightly more open understanding between the two parties as to how they will address that strike price, taking into account that the price of oil will have a direct impact on it, such is the competitive nature of the sector. The only thing I suppose you could say is that the investor will have a floor price beneath which he just can't afford to build the project. But above that floor price, there should be a fair degree of flexibility which reflects the market at the time,” Armitt concludes.