The Budget and Potential Implications for the Infrastructure Sector

Ben Davies gives his views on the infrastructure sector in wake of the forth coming Budget. His views make interesting reading for anyone connected to the interim management sector.  Read on and see if you agree.

Naturally, what the Budget says it will do, and its on-the-ground impact on the infrastructure sector, are two different things; I think it is important to remember that the document is an inter-mediatory between providing a blueprint for economic growth, and conveying blind political cynicism.

With HM Treasury still displaying some uncertainty about the best methods from which to incite the growth of the infrastructure sector, Chancellor George Osborne’s 2014 Budget may offer an indication as to the degree of stimulus this Coalition Government is willing to offer the infrastructure sector. Osborne has given numerous indications that this will not be an easy Budget, with austerity still a leitmotif of broader economic policy, and with the Chancellor reaffirming that there will be a further £25 billion of spending cuts by 2020 - the outlook for some is bleak.

Opportunities for Interim Managers in the Infrastructure Sector?

However, the Office of National Statistics recently revealed that the UK economy had grown by 1.9% in 2013, the fastest rate since 2007, and both the IMF and the Office of Budget Responsibility have revised their growth forecasts for 2014 upwards, and as such, there is some expectation that infrastructure projects could benefit from the cautious optimism shrouding the UK economy. 

The Transport and Aviation Sector

The Chancellor is coming under increasing pressure to address infrastructure, and associated transport capacity issues. I will be interested to see whether Osborne will heed to pressure for the London lobby to provide increased funding for the capital’s transport infrastructure, with calls for HM Treasury to match Mayor Boris Johnson’s commitment to extend the London Overground to Barking Riverside, in addition to upgrading the rail link to Stansted Airport, and develop Crossrail 2.

I’m also intrigued to see whether the Chancellor addresses any of the issues surrounding increasing London’s airport capacity. Following the interim report by the Airports Commission, led by Sir Howard Davies, in December 2013, this issue has again come to the fore of Westminster’s agenda. The report shortlisted three options for expanding UK airport capacity, including:

• The possibility of a third runway at Heathrow
• A second runway at Gatwick,
• Lengthening an existing runway at Heathrow

With the final report due in 2015, and ahead of a closely-fought General Election, it is unlikely that Osborne will begin to outline potential funding options in this area.  Could this present infrastructure sector opportunities?

The Energy Sector

The issue of advancing the UK’s energy infrastructure still faces some critical hurdles, as to develop the UK’s capability to generate power, the Government has to create an attractive investment environment to bring investors into the country. Many commentators state that a robust EU carbon price is necessary to incentivise investment, but currently in the UK the price level of the EU Emissions Trading Scheme is lower than the UK Carbon Price Floor.

This has resulted in firms in the UK paying more in top-ups to make up the difference. The result of this is that British businesses, especially those that are energy-intensive and are operating internationally, are therefore being put at a disadvantage.

Osborne, acutely aware of this, may start to make concessions towards freezing the Carbon Price Floor from 2015/16, and extending the Energy-Intensive Industry Compensation Package.  

These will prove critical to attracting foreign investors to invest in Britain’s energy infrastructure sector, but given the fractious relationship between Osborne’s Treasury, and Energy Secretary’s Ed Davey DECC, I suspect we will see a continued lack of clarity on this issue, which has unfortunately been lost in the broader ideological tensions between the Coalition partners.

HS2 and Euston

The Chancellor has been uncharacteristically mute on HS2 of late, which given the disillusion from the Home Counties Tory heartlands to the project, can be attributed to an act of classical political PR. Osborne has however outlined his support for the redevelopment of Euston Station as part of the building of the High Speed 2 rail line. Given that plans to demolish and rebuild the station buildings had been dropped by HS2 last April, it is now unclear if the Budget will contain any specific proposals to support this development.

The Housing Sector

Housing is one of the key issues likely to emerge from the Chancellor’s budget. Osborne, speaking to the Economic Affairs Committee in early February 2014, was keen to demonstrate that the Government was considering a wide-reaching response to lack of supply in the housing market, whilst also admitting that demand was likely to outstrip supply for at least a decade. I think it is likely that the housing sector will receive some stimulus, particularly in the face of mounting criticism from the Labour Party. This will be mostly focused around the statistic that the UK has the lowest peacetime rate of house-building since the 1920s.

The nature of how the Government intends to build remains unclear, with Conservative voters and MPs, in the majority, aligned on the need to preserve the green belt. This was reaffirmed by Conservative Housing Minister Kris Hopkins in January 2014, who said that the Conservatives were “suppressing” plans for two new garden cities, adding that the Government had “absolutely no plans to impose new towns on any part of the country”.

Needless to say, Labour and the Liberal Democrats are keen to develop the new town idea. In the case of the latter, given the urban base of their support, and accordingly the associated pressures, the housing market is impacting on the socially-mobile political middle that is every party’s key demographic, this is unsurprising. Subsequently, Osborne needs to find a counter-weight to Labour’s claims that they will build 200,000 houses; whether he achieves this without hurting his activist base, remains to be seen.

Summary

Given the uncertainty surrounding the UK’s infrastructure sector development programme, Osborne will have to make decisive decisions, having previously estimated that £250 billion of investment is needed by 2015 to upgrade the UK’s infrastructure sector. With much of this funding having to be raised through the private sector, I expect the Chancellor to make concessions to stimulate this funding.

Although the trickle-down effect will not be immediate, this will begin to stimulate investor confidence, and in terms of the interim community, large scale programmes that have been on hiatus, may begin to re-emerge. I believe it is a time for cautious confidence, but the Chancellor is acutely aware of the importance of large-scale infrastructure sector development, and the associated impact on the employee supply-chain, and he remains aware of the need to act now to facilitate growth.

What are your views on the infrastructure sector and its implications in wake of the forth coming budget?  Will there be opportunities in the infrastructure sector?  Are the views here insightful, wrong, or on the money?  We would love to read your opinions and thoughts.  

Photo Credit: Jacek_Sopotnicki 

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