Breaking the UK’s infrastructure impasse

Infrastructure plays a crucial role supporting productivity and therefore economic growth.

Old and outdated infrastructure drives inefficiencies, leaving industry unable to compete with better equipped countries. Failing to invest in infrastructure that serves future needs can lead to congestion and delays, which can deter investment.

Poor quality infrastructure can be more expensive to maintain and repair and be energy inefficient relative to new infrastructure. Ageing transport, energy and social infrastructure can result in regional inequality, which if it isn’t dealt with means certain parts of the country are left behind.

In short, infrastructure underpins everything.

Unfortunately for the UK, the quality of its infrastructure has deteriorated significantly relative to its competitors, especially since the pandemic.

According to the World Competitiveness Ranking, the UK’s infrastructure has fallen from between 12th and 14th place during the period 2019-21, to 22nd in 2023.

The poor state of the UK’s infrastructure is naturally a concern for the country’s energy sector. Installing onshore and offshore wind, building our carbon capture and storage (CCS) capacity, and updating the UK’s ageing power grid for the energy transition. It all depends upon the urgent need to build.

Slow and expensive

A recent report by consultancy BCG compares the unit costs of delivering rail, road, and social projects (for instance hospitals and schools) projects in the UK. It compared the UK to a peer group of jurisdictions including the European Union, the US and Australia.

The UK performs relatively well on social projects, albeit worse than the EU average. However, it lags all its peers when it comes to rail and road infrastructure.

Digging into the data is quite revealing. For example, the report finds that the cost of at-grade rail construction in the UK – when a railway line is at the same height as the existing ground level – is more than twice as expensive as the global average. This suggests UK construction is not expensive simply because it’s trying to placate local opposition with expensive infrastructure. Rather, doing the basics is costly in the UK.

BCG’s analysis of the time taken to complete projects shows that 65% of projects in the UK take longer to deliver than similar projects elsewhere. Although this is broadly in line with the experience in other European countries, it is much worse than in the US and Australia.

Delays divert resources and prevent infrastructure firms from pursuing other projects. The UK is slow and expensive. It has the worst of all worlds.

Beware of fat tails

Nevertheless, averages never tell the whole story. As author and former options trader Nassim Nicholas Taleb put it, “Never cross a river that is on average four feet deep.” Data variability can make averages useless and basing a decision on them can lead to catastrophic mis-steps.

For example, assuming infrastructure projects conform to a normal distribution is a mistake. According to Bent Flyvbjerg, author of the book, How Big Things Get Done, “[most] projects are not merely at risk of not delivering as promised. Nor are they only at risk of going seriously wrong. They are at risk of going disastrously wrong because their risk is fat-tailed.”

Flyvbjerg’s database of over 16,000 projects, from 20-plus different fields in 136 countries, shows that 55% of nuclear power projects have a 50%+ cost overrun. Of these, the average cost overrun is 204%.

The data show that 45% of nuclear storage projects have a 50%+ cost overrun, but their average cost overrun is an eye-watering 427%. At the other end of the scale, only 2% of solar projects have a 50%+ cost overrun. Of these, the average cost overrun is a mere 50%.

We don’t have the data to extend this analysis to the UK and make any comparisons versus the EU and others. However, the point is that both policymakers and the infrastructure industry need to be acutely aware of fat tails. Not planning for this risk could be disastrous.

Minority rules

All major developed countries suffer delays due to the vagaries of planning policy. The issue is a particular bugbear for UK infrastructure investors.

It wasn’t supposed to be this way.

The last Labour government introduced the Planning Act 2008 to speed up the process for approving major new infrastructure projects. This shifted responsibility from the local to the national level. It was expected to reduce the average time it took to receive consent from up to seven years to less than a year.

Nationally Significant Infrastructure Projects (NSIPs) are large-scale projects considered to be of such importance they require permission to be given by the government. They were defined in the Planning Act and cover energy, including fossil fuels and renewables, oil and gas supply and storage, electricity networks and nuclear power. It also covers both transport and water infrastructure.

Notable examples included Hinkley Point C, HS2 and the Lower Thames Crossing. Incidentally, all these projects occupy the fat tail in the distribution of project outcomes.

Delay or develop

For an NSIP to move forward, the Secretary of State must grant permission in the form of a Development Consent Order (DCO). According to Treasury, the time taken to grant a DCO has increased by 65% between 2012 and 2021 to 4.2 years. This follows a pre-application process that take an average of two years, although for more complex projects it can take much longer.

National Policy Statements (NPS) were also introduced under the Planning Act 2008. These are supposed to outline the UK government’s approach to major infrastructure projects and be updated every five years, but this didn’t happen. This failure created uncertainty and delays, as developers could not be sure how to approach development trade-offs.

Planning policy was supposed to act as a guardrail for the government to help structure and prioritise development. Instead, it has evolved into a means to block development, or at the very least delay it. Democratising the process means that it now only takes the objections of a small vocal minority to overrule the views of the majority.

Reform is long overdue

The Labour Party is expected to secure a majority after the General Election on July 4. For this new government, reform of the planning system in the UK is a central plank of their agenda for the next parliament.

At the annual Mais Lecture in March this year, Rachel Reeves, the shadow Chancellor, described the planning regime as “the single greatest obstacle to our economic success”.

She said the next Labour government will deliver a “once-in-a-generation overhaul of the nationally significant infrastructure regime, updating all [NPS] within six months of coming into office, modernising the regime to reflect the types of infrastructure crucial in our changing economy, and cutting red tape by embedding principles of proportionality and standardisation”.

Labour has since proposed merging the National Infrastructure Commission (NIC) with the Infrastructure and Projects Authority (IPA). The government set up the NIC in 2015 to advise on infrastructure policy.

This merger would create a new organisation to set design and planning guidance from the outset. The new body is expected to be called the National Infrastructure and Service Transformation Authority (NISTA). It would only release money once an infrastructure project had clearly met its guidance.

Reform of the planning system will help alleviate some of the bottlenecks. But it won’t necessarily open the floodgates and drive a construction boom.

UK infrastructure building has been sclerotic for some time. That means skills, experience, management expertise and the economies of scale necessary to deliver huge infrastructure projects have degraded over time.

Time to respond

Members of the UK Sustainable Investment and Finance Association (UKSIF) identified the state of the UK’s power grid as one of the biggest obstacles to investment. Operators seeking a connection are sometimes quoted as long as 15 years.

Reform of the planning system will help the energy sector meet net zero targets. But it’s clear that unprecedented levels of investment are required to update the power grid. National Grid Electricity System Operator (ESO) estimates UK’s electricity network needs £58 billion of investment to meet the 2035 decarbonisation target.

Yet, securing the UK’s power grid future is not completely within its control. For example, one of the most unappreciated yet essential components in the power grid infrastructure are transformers.

As explored previously in E-FWD, the average age of a distribution transformer in the UK is 63 years old. This is well beyond the typical design lifespan of 35-40 years.

The skills and resources necessary to maintain existing infrastructure and build new transformers have largely been lost.

Other examples illustrate the challenges involved in major energy infrastructure projects when there is scant opportunity to learn by doing.

Regulatory complexity

For example, the largest piece of energy infrastructure under construction in the UK is the Hinkley Point C power station. Earlier this year, EDF announced the 3.2 GW nuclear plant could be delayed for up to three years. The operator may not complete the plant until as late as 2031.

Managing director of Hinkley Point C, Stuart Crooks, cited cost inflation, shortages, Brexit and Covid-related disruption as reasons for the delay.

However, he also gave an insight into the substantial changes required to adapt the reactor design to satisfy UK regulations. In total, the country’s nuclear codes required some 7,000 changes, resulting in 35% more steel and 25% more concrete.

Prior to Hinkley Point C, the last nuclear power station to be built in the UK was Sizewell B. Construction began in 1987 and it was commissioned eight years later in 1995. The scattered track record and the paucity of the order book means there is little incentive for UK engineering firms to invest in the necessary resources.

Fragmentation

Companies that build the UK’s infrastructure have been held back by inconsistent and unpredictable political decisions. These have prevented them from investing in a permanent workforce of skilled professionals.

The upshot of this is that the UK’s supply chain is highly fragmented. Firms have responded to this uncertainty by relying on subcontractors to provide flexibility.

Nowhere is this more self-evident than in the UK’s progress towards railway electrification, a key lever to decarbonise the transport system. Approximately 38% of the UK rail network is electrified, compared with 56% in the EU.

India, meanwhile, has managed to reach 94% electrification, with 45% of its network switched to electric in the past five years alone. In contrast to other major economies in Europe, the UK does not have a long-term plan to electrify the railways. That discourages investment in the tools and skills necessary to build.

Wrong precedent

In October 2023, UK prime minister Rishi Sunak decided to cancel the northern leg of the HS2 project that would have stretched north from Birmingham, all the way to Manchester. The expected final bill for HS2 had spiralled, more than doubling from the initial £37.5 billion estimate.

Taken in isolation, there is always a time where you should cut your losses and walk away from a project. This is especially true if it represents poor value for money. Sunak has extolled the virtues of saving more taxpayer funds from being ploughed into the project.

However, HS2 cannot simply be considered separate from the rest of the country. Besides the lingering rail congestion issues, the decision to cancel has a powerful knock-on effect on investor psychology. Furthermore, the decision came shortly after the disappointment of Allocation Round 5, where no contracts were awarded to offshore wind.

Up until recently the presumption among investors is that big infrastructure projects would always survive. Sunak’s decision showed that line of reasoning was no longer safe.

The next government must reform the planning system. It must help companies bolster their supply chains, if the UK’s infrastructure impasse is to be broken. Even more importantly though, it must send a clear signal to investors that it can be trusted not to change its mind.