THE unexpected vote to leave the European Union has cast a shadow over the outlook for Britain’s infrastructure industry just as it was recovering from the economic shocks of the global financial crisis and eurozone debt debacle.
Many senior figures in the industry are worried the Brexit decision will undermine confidence just as Britain looked set to embark on a series of projects that would reverse decades of under-investment.
In March the National Infrastructure Plan (NIP) set out £483bn of investment in more than 600 infrastructure projects and programmes in all sectors and spread across the UK.
The vision includes the “big ticket” items such as High Speed 2 from London to the north, Crossrail 2 in the capital, the Thames Tideway tunnel, and the new runway for the Southeast. On top of that is the £18bn Hinckley Point C nuclear power station.
The impact of Brexit was visible immediately after the vote: the decision on siting a runway at Heathrow or Gatwick that had been scheduled for July was delayed until at least October.
However, Brexit will have more longer-term impacts because of increased uncertainty as the UK and the EU negotiate the exit and agree new trading relationships. A survey of infrastructure investors in the UK by S&P Global Ratings found 71% believed Brexit would halt investment for two years or more after the vote.
One key concern was that the negative impact on economic growth in the UK, which has already emerged in surveys of the services and construction sectors, together with exchange rate volatility would make investors less keen to commit to the long-term funding needed for infrastructure projects.
Julia Prescott, chief strategy officer at Meridiam, a private equity firm specialising in infrastructure assets, pointed out the NIP assumed half the funding for projects would come from private finance. “There are fairly significant concerns that global investors will not be as enthused by investing in the UK as they were before,” she said. “The movements of sterling [since the vote] is clearly indicative of the sorts of risks those investors will face.”
While Meridian would continue to invest in the UK she said it was important to start a dialogue with UK institutional investors about taking up some of the slack if overseas investors pulled back. “There hasn’t been sufficient engagement to get them involved in infrastructure at an early enough stage,” she added.
A key element of that funding mix is money from the EU. The UK receives £1.8bn a year of structural grants from Brussels. UK projects also benefit from loans from the European Investment Bank, which is owned by EU member states and which funds major infrastructure projects. Last year EIB invested €7.8bn in the UK.
Another worry is access to skilled labour from other EU countries who make up between 20 and 30% of the UK construction workforce. Tony Meggs, chief executive of the Infrastructure and Projects Authority, which published the NIP, says the culture has changed in the wake of the vote.
“One of the biggest risks is that these extraordinarily skilled and hard-working people will be put off by the climate and tone that has appeared in some parts of the country,” he told the City & Financials Annual UK Infrastructure Policy Summit held a fortnight after the vote.
Projects in the pipeline will require 400,000 workers according to the Institution of Chartered Engineers. Its president, Sir John Armitt, warned a lack of skilled workers could cause delays. “They could certainly become more expensive.” he said.
“Investors could delay because they are concerned about the ability of the industry to deliver. We want to see certainty around these issues as soon as possible. Free movement of people is very important and that is an area the government can hopefully make progress on. There will be gaps in the future of infrastructure without very close relationships with Europe.”
According to Sir Merrick Cockell, chairman of the Municipal Bonds Agency, which issues bonds to finance local authority projects, investment is needed urgently to address shortfalls in infrastructure that may have contributed to the Leave vote.
“Infrastructure investment — or the lack of it in the constituencies in which they live — has proved to be of a great concern to the UK electorate,” he said.
“It is not surprising that many of the constituencies where the Leave vote was most popular are also the communities most in need of investment who feel they have been missed over the years.”
He cited two council leaders from Cumbria who intervened in a conference on High Speed 2 to say their voters wanted “any speed rail”. “They didn’t feel they’d had a fair share,” he said.
“It is more important than ever that investment in infrastructure is maintained but it is vital that we create the capacity to meet the country’s infrastructure needs that may be different from when we were part of the EU.”
Join Financial Director, Oracle and a host of ‘Fast Data’ experts to discover how financial professionals can help create a Fast Data business
The biggest threat of turmoil relates to uncertainties over the US November elections. The markets will have to seriously consider the possibility of Donald Trump being elected
The UK faces a “challenging period of uncertainty and adjustment”, despite the economy proving resilient following the referendum result to leave the European Union, the Bank of England said
For those expecting the UK economy to suffer after the EU referendum, things aren't going quite according to forecast, writes Adam Chester, head of economics, commercial banking, Lloyds Bank