However predictable the election result might seem, life can be full of surprises. One thing that will surprise no one, however, will be the push on infrastructure from whichever party forms the next government. Sir John Armitt, Chairman of the National Infrastructure Commission (NIC), in the foreword to its May 2024 Infrastructure Progress Review recently noted that "we face a make or break time for the long-term prospects of UK infrastructure", and it is clear that infrastructure will be at the heart of many of the policy programmes for departments across the next government.

Indeed, Labour is pledging to begin a dialogue on the important strategic investments the country will need going forward and aims to set up a new body to break the "inertia"¹ of UK infrastructure delivery – and it wants to involve senior figures from business in advising on how better to deliver and fund national infrastructure projects to accelerate development. 

Because of the challenges facing public finances, both Labour and the current government are necessarily encouraging private investment to deliver these projects, including the development of innovative financing and funding models to achieve this. The question is whether this is going to help incentivise building and fix the problems, or whether it will store up greater problems in the future. 

The infrastructure challenge

There is a vast array of incentives to develop and deliver major projects, but in the last few years in the UK many have been delayed, changed or entirely cancelled. The latest NIC progress review found that a failure to go further and faster in the next five years would risk economic growth and threaten climate targets. Challenges in delivery and financing sit alongside deciding who controls major projects and managing the impact on consumers.

Increasingly complex policy imperatives around investment in infrastructure mean that delivery is challenging whoever may be in charge. From the outset, the new government will need to balance different imperatives and desired outcomes while shoring up and attracting investment. 

Much social infrastructure, such as hospitals, schools, housing and prisons, is currently funded by government through tax revenue. Initiatives to introduce private financing to meet the upfront costs of building the infrastructure (in particular, through the PFI and PF2 initiatives) have generally been assessed, for various reasons, to have failed to deliver good value for money, even though they initially served a political purpose of moving social infrastructure off the government balance sheet. The next government potentially faces a significant challenge in renewing ageing social infrastructure and, without strong public finances, may well need to find a new model to fund any significant building programme. 

The UK is facing challenges in developing new economic infrastructure, which is often seen as the key to economic growth, and increased productivity requires ever-improving economic infrastructure, such as utility and transport networks. Over the past 50 years, there has been an increasing move towards private ownership and delivery of economic infrastructure which has created tensions where governments want to use infrastructure to deliver economic policies, but neither control the project, nor have responsibility for its delivery. 

Government often counters this lack of control through either using regulation to drive the provision of particular infrastructure (such as using environmental standards to drive sewerage companies to deliver improved wastewater networks and treatment), or incentivising private sector investment (such as through guaranteeing income over the economic lifetime of the infrastructure (or a fixed period)), which guarantees the long-term funding position (e.g. the use of a contract for difference in the Hinckley Point C project). 

However, any policy developer also needs to be mindful of the impact on consumers, who traditionally fund the provision of infrastructure – the cost of the infrastructure over its economic lifetime is passed on to customers through their bills and therefore impacts both current and future consumers. This has proved challenging when regulators are under a duty to balance network improvements with controlling consumer bills and ensuring that network-providing companies are financeable and have access to affordable capital to finance their infrastructure programmes. 

Meeting the challenge of funding economic infrastructure in the UK

A large proportion of economic infrastructure in the utilities sector in the UK is privately owned and, generally, privately financed. Elements of transport are outliers in this regard with roads, and more recently rail, infrastructure being funded by government through tax revenue. In the water and energy sectors, the private companies that own the infrastructure are subject to economic regulation, which means that the amounts they can charge consumers are subject to an effective cap. However, there have more recently been questions over whether this model is effectively delivering value for consumers' money. 

Whilst infrastructure represents an attractive investment during its operational phase, many of the new infrastructure projects are extremely risky during the planning and construction phases – a period when the infrastructure is not generating any revenue but when costs continue to mount. This is particular acute for larger-scale projects. 

Some of the challenges that the next government will need to tackle include deep issues facing public finance generally, the decline of monoline insurance, global uncertainty and interest rate volatility. 

The NIC has commented "government needs to provide policy stability, [make] faster decisions and [commit] to them for the long term", and ensuring the stable policy environment required for long-term investment will form the challenge for the next government. Uncertainty around long-term government policy positions on planning and financing models only serves to increase investor concerns about putting money into financing UK projects. Some examples include the cancellation of elements of HS2, changing views on Chinese investment and ownership with tighter controls on foreign investment, and uncertainty over whether EU environmental standards, which have driven some projects such as Thames Tideway, will continue to be applied in the UK following Brexit. 

In addition, the next government will need to develop funding mechanisms that will unlock private sector financing. Governments have increasingly operated to provide long-term security over future funding, which provides investors with comfort that they will not be left with a worthless asset at the end of the construction phase. These government interventions have recently included contracts for difference (to guarantee levels of income generated by the infrastructure through its life) and regulated income (using, for example, the RAB model). Governments have also supported infrastructure through adjusting the regulatory environment to reduce barriers to financing or to mitigate risks which surround the project generally – for example, by creating a new licensing model to keep construction assets off balance sheet until completed and revenue-generating, or arrangements to streamline the planning processes, such as providing compulsory purchase powers to acquire land and property.

Finally, and increasingly, governments are involved in providing financing for the early stages in the project's lifecycle. This is also often a signal of government's long-term commitment and is an effort to crowd in funding, and includes financial guarantees and equity investment.

Is government intervention going to get the job done or create greater problems in the future? 

Labour's proposed body, to be called the National Infrastructure and Service Transformation Authority, is intended to stipulate from the outset how projects are planned, designed and valued, and no money will be released for a scheme unless it has clearly met the body's guidance. 

Whether government intervention will incentivise or create further issues will naturally depend on the nature of the intervention, the economic environment and how it carries out its policies. Direct investment can kick start projects that might not otherwise secure private funding and can also help where the intention is to share risks and rewards with the private sector. However, entering into long-term financial commitments, particularly if mismanaged, can lead to future budget constraints or debt burdens. Interventions that do not fully consider environmental and social impacts can also lead to failure and build up mistrust, eventually stifling innovation and deterring investment. 

One thing is clear: whoever is set to take over must carefully balance the need to stimulate investment with the potential long-term economic implications. Effectiveness will depend on strategic planning, a willingness to consistently pursue (over the long term) challenging policy objectives in a transparent and collaborative manner, and ensuring adaptability to changing economic conditions and societal needs. The sheer volume of projects requires long-term investment in upskilling the necessary parts of the civil service and developing truly effective partnerships with the private sector.

We should close by noting that these challenges are not unique to the UK. Climate change and an increasingly digital economy are driving material investment in infrastructure across all jurisdictions and a key message is that governments and private sector operators should learn from examples of what works (and what does not) from other jurisdictions in order to keep the cost effects to a minimum and to optimise the gains (social and economic) that infrastructure investment can deliver.

1. https://www.ft.com/content/4f8337e9-e0f4-4d5a-a320-eee1870ef2d6 / https://inews.co.uk/news/politics/inside-starmers-plan-to-use-private-finance-to-boost-britains-infrastructure-3075081 ↩