Insights on Infrastructure: Perspectives across the project life cycle series

Funding UK infrastructure: why we need to tap into new models – and harness the power of regional pride

There is no question that the UK urgently needs major investments in infrastructure to revive the economy and sustain the quality of life for its citizens. This was recognised when the Government published its National Infrastructure Delivery Plan 2016-2021, mapping out an ambitious programme of infrastructure development and regeneration including transport, energy, housing and education.

The vision of our country’s infrastructure presented in the document is an inspiring one for citizens and businesses alike. But the plan came with a vast gap built in. It envisaged that delivering the full pipeline of UK infrastructure would require £483bn of investment over the five years. Yet the Government committed to provide only £100bn of that funding itself.

Mind the gap

This gap is a key issue impacting the future pipeline and delivery of infrastructure in the UK. And it means that funding the UK’s infrastructure needs, is the single biggest challenge facing the country today, with the possible exception of the Brexit negotiations.

Why? Because for the delivery plan to become reality, the gap will have to be closed. And because both of the traditional sources of long-term funding (taxpayers and the users) for infrastructure projects are currently problematic.

By pursuing a fiscal policy defined by austerity, the Government’s scope to use traditional forms of grant funding to close the funding gap has declined. While subdued levels of economic growth have limited the extent to which existing sources of taxation can be relied upon to enhance revenue generation. It has also made it difficult to justify implementing new taxes. Infrastructure users have proven equally unlikely to be willing to stump up the additional cash for the development of new infrastructure assets. Pricing mechanisms such as road charging remain as unpopular as ever in the UK. Although we have seen recent rises in rail fares, fare freezes continue to underpin transport policies, in London and elsewhere, as politicians attempt to offer voters some respite from the squeeze on earnings as inflation picks up following the slump in the value of the pound.

What’s certain is that gap won’t go away by itself. In fact, given the huge demands on Government to prioritise social spending on assets like schools and hospitals, and the urgent need for investment in energy to keep the lights on, the pressure on the infrastructure pipeline is probably more upwards than downwards.

New approaches are needed….

The way forward lies in finding new and innovative ways to fund infrastructure. Put simply, anyone now involved in building an infrastructure asset needs to think carefully, laterally and creatively about the income streams and benefits it will generate and then see if they can work out how to capture these to help fund its construction.

More than ever, there is a need to develop ways of capturing the benefits that investing in new infrastructure creates. For example, the additional connectivity and access to jobs from building or upgrading transport infrastructure, such as a road or rail link, can often manifest in significant uplifts in the value of land and property along the route and around stations.  While businesses benefit from increased productivity and access to labour markets. Eradicating these benefits through an overly aggressive programme of clawing back costs would clearly undermine the purpose of investing in the infrastructure in the first place. However, achieving a sustainable programme of investment in our nation’s infrastructure fundamentally depends on our ability to identify, monetise and capture a portion of the benefits that infrastructure investment creates.

…and have already started to emerge

Approaches aimed at tapping into the financial value of such impacts have already started to emerge. The Crossrail 1 project in London has been part-funded by a business rate supplement levied on London businesses and the Crossrail 2 project is looking to capitalise on rising land and property values by building houses in Chessington South. Residential property developers in Battersea have been asked to contribute to the development of the new Northern Line spur. The challenge for government is that the land and property around key infrastructure projects is typically owned by the private sector, meaning that it is difficult to access the uplift in values that result from the infrastructure development (in contrast to say Hong Kong, where the public sector has substantial land holdings and where the MTR has received considerable funding from land value uplift). The UK government needs to be more creative to capture land value uplift.

Traditionally its options have included:

  • Asking developers, landowners and occupies to pay through new levies or taxes;
  • Capturing the uplift in existing sources of taxation (e.g. increased business rate revenues, as in Tax Increment Financing); and
  • Acting as a commercial developer that participates in buying, developing and selling land and property.

Although successful in some places, the scale of the infrastructure gap means that more innovative ideas are required. There is evidence of new ideas beginning to emerge. In transport, the Wolfson Prize winner and other finalists brought together a range of innovative funding mechanisms for road infrastructure.  Many of them enabled by new and emergent technologies like mobile data and driverless vehicles. The government can also learn from private businesses to find new and innovative approaches: for example, Uber’s “surge pricing” could represent a model for variable road pricing based on time of day or level of congestion on the network.

However there’s no ‘silver bullet’ approach for funding infrastructure. None of the models used to date are perfect. For example, an approach based on using housebuilding as a source of funds is exposed to any reversal in the property market. And applying a levy on business rates may be more difficult in the future following the furore over the recent revaluation.

As the rest of the UK does not have the same level of wealth as London, some solutions may be harder to implement. The challenge of paying for more strategic regional or national infrastructure projects, which are intended to improve the economic competitiveness and prosperity of whole regions, but which also have financial benefits that are highly concentrated within specific areas.

Thinking outside the box…

The good news is that there are other ways of funding projects that have strong chances of success and not just in the South-East.  For example, taking direct funding from private-sector third-parties who will benefit directly from the infrastructure.

An early example of this has been Canary Wharf’s contribution to Crossrail. But why not borrow from models such as naming rights on football stadiums and expand these to offer companies sponsorship deals on infrastructure like railway stations? Increasingly, large organisations are coming to see that sponsoring critical infrastructure that benefits people’s lives is in line with their core values and commitment to good corporate citizenship.

...and from a regional perspective

The recent mayoral elections, in six regions of England, demonstrated the progress made in pushing power and decision-making out from London.  Arguably local government is best placed to be agile in terms of identifying where value can be captured. Newcastle’s Stephenson Quarter and Sheffield’s New Retail Quarter both represent examples where the local authority has taken a proactive role in supporting and stimulating city centre regeneration. This opens up opportunities for new thinking on how to fund infrastructure at a local and regional level.

Similarly, what can local governments do to collaborate and work together to create a compelling narrative and the scale of opportunity that investors are looking for? The demand for pan-regional strategic infrastructure, creates new challenges of local levels of government, but also new opportunities for pooling funds and having an impact that extends beyond their traditional reach.

Such a model of locally focused yet collaborative investment could also bring further benefits. By helping to focus both the decision-making and funding around infrastructure within the local area and community, it could enable the creation of a more direct link between the people who decide what infrastructure is needed and the people who will ultimately use it. That closer linkage could then be used to help create the payment model for its ongoing operation.

True, there’s a wide funding gap around the UK’s current infrastructure plans. But by applying ingenuity and creativity, we can bridge it. We need to think big and think radical.

We need to think beyond funding models to solve the funding gap. Can we build traditional forms of infrastructure more cheaply and cost effectively, making it easier to fund? And, what forms of technology can we harness to radically reduce the cost of infrastructure?

If we do solve this challenge, the funding model for UK infrastructure will never be the same again – to the benefit of future generations.

Contact us

Charles Johnson-Ferguson

UK Transport & Logistics Leader, PwC United Kingdom

Tel: +44 (0) 7841 561 340

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