Civils action: infrastructure pipelines remain strong


Despite short-term uncertainty and the HS2 cutback, there is no shortage of infrastructure work in the pipeline

In September, as speculation around HS2 mounted, the leaders of 21 businesses wrote to prime minister Rishi Sunak and chancellor Jeremy Hunt, urging them to commit to the second phase of the megaproject, which was set to run from Birmingham to Manchester.

They called on the pair not to “pull the rug” from under the scheme, warning them about the impact on jobs and businesses should phase two not go ahead.

It didn’t work. Two weeks later, Sunak announced that the phase would be axed and the money redirected to other, smaller projects.

But as the months have passed since the decision was taken, have the prospects for contractors working on infrastructure projects in the UK significantly worsened? Or are the opportunities still out there?

Uncertainty

“For ground-investigation works, there were approximately £315m of contracts across a number of different organisations set to start in September 2023 that have been put on hold,” says Roni Savage, managing director at geoengineering specialist Jomas Associates. “There is the promise that there will be further northern projects to take the place of HS2, which obviously will create opportunity, but until there is full certainty of what that will entail, affected businesses are unlikely to commit to growth.”

“I would like to see a proper conversation running up to the next election about what is that long-term strategy for UK plc”

Eddie Tuttle, CIOB

The Network North document, released after the changes to HS2 were made last October, initially appeared to detail the projects that would be funded by the £36bn saved on the rail megaproject. But Sunak later revealed that it was only “illustrative”, with nothing definitely set to go ahead.

It may be some time before the reality of any replacement works is known, according to Simon Rawlinson, head of strategic research and insight at Arcadis. He notes that there are “a lot of steps which will determine spending priorities coming out in the next couple of years”.

These include a government response to the National Infrastructure Commission’s (NIC’s) latest assessment detailing the UK’s needs to 2055 and beyond, as well as the next Comprehensive Spending Review – where the Treasury sets future spending limits – due in 2024/25. (Nevertheless, the government has now finally published plans for its £775bn infrastructure pipeline.)

“I’m not going to say people need to hold their breath, but they have to be realistic about the possibility that priorities might change over the years before we get to when those funds are actually allocated,” Rawlinson says.

Among its many points, the NIC’s National Infrastructure Assessment described the scrapping of HS2’s second phase as leaving “a major gap in the UK’s rail strategy around which a number of cities have based their economic growth plans”.

It called for a “new comprehensive, long-term and fully costed plan” for rail in the North and the Midlands and suggested that the National Infrastructure Commission itself could be involved in devising this.

NIC chair Sir John Armitt said in the report that the UK needs “clarity and consistency of policy and regulation alongside an improved planning system to get major infrastructure projects built on time”.

A formal government response is due by October this year.

Electoral cycle

However, with a general election due no later than 28 January 2025, there is the impact of a potential change of government to consider too, as well as what happens before that.

NG Bailey chief executive David Hurcomb says: “My experience over 30 years is that in the run-up to a general election you find things tend to slow down because the private sector is not quite sure which way things are going to go, therefore they tend to wait.

“And, of course, the public sector goes into a bit of a slowdown because they’re waiting to see who’s going to get into power and what that may mean. It will all have a knock-on effect as the government is the largest buyer of construction services.”

“The volume of pipelines that need to be built or modified has not been done in a generation or more”

Jim Blanchard, United Living Group

Eddie Tuttle is the director of policy, external affairs and research at the Chartered Institute of Building (CIOB). He previously worked for the civil service in senior roles. “As a former civil servant, I know that as you move towards election time with purdah, things do tend to slow down,” he says.

However, as the future of the country is being debated, a positive plan could be formed.

“I would like to see a proper conversation running up to the next election about what is that long-term strategy for UK plc,” says Tuttle. “I don’t think that’s a party-political conversation to have because we will still have the same issues whether it’s ageing infrastructure, ageing buildings, [and] an ageing public sector estate.

“How do we address all of those things? You can only do that through a coherent strategy and pulling the right people together and making the industry the economic driver for UK plc.”

Finances

Tuttle points out that in the near term, supply-chain uncertainty following recent record levels of insolvencies are a big concern.

“With the contracted-out model that we mostly operate in our industry, you need a strong supply chain, otherwise you won’t deliver things,” he says. “And an industry that lives on margins of 1.5-2 per cent is never going to make the investment that it needs into things like the skills base.”

Tuttle concedes that it may not be easy to make the case for clients to pay more at a time when megaprojects are being cancelled because they are running over budget. But he insists that it is necessary.

Others agree. Jim Blanchard, partnering and new business director – infrastructure services at United Living Group, says if margins are too low, some contractors have no choice but to try to increase what they can bill for in order to remain profitable.

“If clients work in collaboration with the contractor and there’s much more clarity on the programme of work, [and if] there’s much more co-location, much more collaboration, [and] more shared ownership of problems, then it allows the job to get done and us both to trust each other,”
he says.

Jomas Associates’ Savage is also the policy chair for construction for the Federation of Small Businesses. She also raises concerns about the financial health of some firms, but says that the current state of play could have a beneficial effect.

“We’ve got a period of uncertainty but that gives us an opportunity to step back and look at how we operate,” she says. “How can we, from tier ones to SMEs, collaborate better for the greater good? I think if we collaborate better and in so doing deliver better quality, it will enable us to grow as a sector and build confidence. And by collaborating better that enables us to eliminate some wastage.”

Major opportunities

Blanchard, whose company does not work in the rail sector, believes contractors have myriad opportunities in the coming years, especially in water and energy, regardless of any potential political change.

“On water, I think public sentiment is so high about spills into rivers and the sea at levels that were previously considered acceptable 25-30 years ago, that it just wouldn’t be accepted not to have a programme to remove those. To stop them, and keep the networks operating, they’ve got to spend more money.”

He points out that a proposed £96bn spend for the next asset management period in water (for 2025-2030) is significantly higher than the current £51bn pot.

However, one major client could be in trouble. PwC has noted “material uncertainty” over the future of Kemble Water Holdings Ltd, the parent company of Thames Water. In annual accounts for the year to 31 March 2023, filed in late November with Companies House, auditors added that there was “no certainty” that a £190m loan would be refinanced by April this year.

But there are still opportunities in the gas sector, which many expected to be on its last legs as net-zero policies took off, Blanchard says.

“We find ourselves heading to 2026 where the gas industry supplies 40 per cent of energy to power stations, and 85 per cent of the population have a gas boiler. It’s going to change, but it will be on a more gradual basis [than previously thought],” he predicts. Alongside this, there is the emerging potential for upgrades to enable green gas to run in existing networks.

The gas sector is yet to outline proposals for its future spending plans, but all the indications are that these will need to rise, he adds.

Energy pipelines also need to be developed and upgraded, Blanchard points out, with only one – from Southampton to London – having been built in the past 15 years.

“You look at the forecast: one a year is going to be needed for the next 25 years. The volume of pipelines that need to be built or modified has not been done in a generation or more,” he says.

In fact, there is so much forthcoming work for the infrastructure sector that Blanchard foresees the real challenge is more likely to be a skills shortage than a market slowdown.

“I don’t believe we as a sector have seen anything quite like this pressure,” he says. “It’s a positive pressure, but it’s going to be really tricky: there isn’t enough dialogue centrally about all these schemes coming to market at the same time, which could lead to a bottleneck.”

Others are also optimistic for the medium term. “I think we have got to accept 12 months of uncertainty,” says Savage. “But then hopefully going into 2025 we’ll be back on the trajectory we were on before Covid.”

For at least the next few months though, the only certainty is that uncertainty will remain.

Areas of opportunity

Network Rail
Control Period 7 (CP7)
Apr 2024-Dec 2029 – £44.1bn

Network Rail is set to allocate a large pot to renewing core assets like track, structures and earthworks to keep trains moving in the face of unpredictable weather. The planned spend is up from the £40.8bn committed during CP6, but is a below-inflation increase, and chief executive Andrew Haines says “our funding will need to go further than ever before”.

National Highways
Road Investment Strategy 3 (RIS3)
Apr 2025-Mar 2030

Plans for the major spending period are due to be announced in 2024. However, the work is set to favour firms delivering maintenance and repairs over those building major new schemes. This shift comes after inflation set back several projects during RIS2, prompting a delay to the start of National Highways’ biggest scheme: the £8.3bn Lower Thames Crossing.

Water
Asset Management Period 8 (AMP8)
2025-2030

Proposals put forward by the industry would see £96bn spent in the period, an 88 per cent increase from AMP7, to fund new reservoirs, upgrade pipes and clean waterways. The plans have been lodged with Ofgem, the regulator that decides whether to approve them, and generated some opposition because domestic water bills could rise to pay for them.

Nuclear
EDF’s Sizewell C
Date unknown

Last August, the government allocated £341m to help site preparation for the only approved new nuclear build in the country. Both the Conservatives and Labour back the delivery of the facility that is expected to cost at least £20bn to build. The creation of the Great British Nuclear body in 2023 was intended to kick start a drive to deliver a new series of large and small nuclear power stations.



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