Steves Blog

Infrastructure Investment is the Way Forward

21 September 2016

Infrastructure investment relates to roads, airports, railways, energy generation, ports and waterways, which in turn leads to social and economic benefits by improving employment, connectivity across regions and productivity.

Levels of investment are measured as a percentage of GDP - the Office for Economic Co-operation and Development (OECD) argues that investment in infrastructure should be more than 3% of GDP to ensure that a country provides the infrastructure to remain progressive and competitive in the global market. Currently the UK is investing 1.9% of GDP in infrastructure projects, equating to circa £35Bn per annum, which falls short of the OECD guidance and could impact long term economic growth.

For many months there has been a view by a number of "think tanks" that the austerity measures of the Cameron/Osborne Government, although instrumental in getting the UK through the recessionary years, have served their purpose and now is the time for increased investment in major infrastructure projects to drive the UK forward. The time for a change in policy became evermore necessary following the outcome of the EU referendum vote in June, which has meant that the Government must find new ways of attracting inward investment to deliver major infrastructure projects and creating jobs, both directly and indirectly.

One of the positives, following Brexit, and the subsequent reduction in interest rate by the Bank of England, is the increased levels of interest in UK infrastructure funds. Unlike property funds, which tend to be more volatile in the current market, infrastructure funds, particularly those dealing in government backed assets, are seen to provide a more secure and long term investment. This is further strengthened by the Chancellor showing signs that he is willing to borrow and invest in such schemes to stimulate the UK's economy.

The big questions are – what level of funding will be assigned to this stimulus and what is the Government policy and appetite for introducing increased levels of private investment into the market? We could see a return of the PFI, or its revamped version PF2, which to date has received criticism due to its complexity, resulting in low take up. UK pension funds could be a source, but they typically only invest 1% of their assets into infrastructure, compared to their counterparts in Australia and Canada invest up to 15% - this is certainly an area the Government could focus on as a source to provide the levels of funding required to meet the OECD's target of 3%.

This said, in recent months there are a number of high profile public sector organisations that are currently subject to funding cuts and the net result is projects are being shelved and people are being laid off – not the stimulus the OECD would advise. If the Government is to intervene I hope their priority is the transport infrastructure across the UK and the systems in its major cities. We are in the early days of the Theresa May Government, but a sign of her appreciation and response to the investment in such projects will become apparent in the Chancellor's Autumn Statement.

I await with bated breath!

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