In a new Report published this morning, MPs have sharply criticised the lack of focus in the Government’s Infrastructure Plan, saying that they are “not convinced that the current proposals represent a rigorous plan with clear priorities for action or with a clear programme for delivery.”

The Public Accounts Committeen has published the Report, HM Treasury: Planning for economic infrastructure the  following its inquiry into Government's planning for economic infrastructure and the National Infrastructure Plan.

The first National Infrastructure Plan was published in 2010 by Infrastructure UK, an advisory unit within the Treasury. The latest update of the plan, published in December 2012, comprised over 500 prospective programmes and projects for new economic infrastructure expected to cost £310 billion. Some 64% of this amount is expected to be spent on infrastructure that will be wholly owned and financed by the private sector. The Report says that most of the economic infrastructure investment required will be in the private sector using investment supported by government with consumers expected to bear most of the cost of this new infrastructure through bills for utilities and other services.

The Report says that while the Treasury has identified 40 key projects and programmes, many of the programmes are broad categories and in total they include more than 200 individual projects. Im the Committee's view this does not suggest a properly targeted and prioritised infrastructure plan.

 The Report states:

“We have not seen evidence that a plan for such a large volume and value of projects is credible given the current challenges in raising finance to take forward projects and the limits on the costs that can be borne by taxpayers and consumers.”

The Report says there is an urgent need for the Treasury to work more forcefully with departments, regulators, contractors and investors to agree the priorities for the projects that will be undertaken and the ways in which the costs both for consumers, through bills, and taxpayers, through various forms of support, will be identified and contained.  

Likely that UK will buy ever more higher priced energy from overseas 

The MPs say that the Government also needs to ensure that the legislative and regulatory framework provides sufficient certainty to secure the necessary private sector investment in a climate where the competition for capital is internationally competitive. The Committee is warning that in this regard the statutory framework provided by the Energy Bill is coming "rather late in the day when the energy crunch is fast approaching." It is likely that the UK will buy ever more energy from overseas and at a higher price due to the failure to secure investment.

Most of the economic infrastructure investment required will be in the private sector using investment supported by Government with households bearing the costs through higher bills or fares.

 "A list of projects, not a real plan"

The Report describes the Treasury's Infrastructure Plan as “a list of projects, not a real plan with a strategic vision and clear priorities. We are not convinced that a plan requiring £310 billion of investment in infrastructure is credible.”

The Treasury maintains that it has prioritised 40 projects and programmes, but as many of these programmes encompass broad areas this list covers over 200 individual projects whose relative priority is not clear.

The MPs have called for the Treasury to assess how much investment can realistically be financed and develop a coherent strategy using tightly defined criteria to identify and prioritise projects.

The Committee’s concerns echo those expressed in a series of discussion papers published last week by Water UK with regard to investor unwillingless to invest in projects where there are currently policy or regulatory uncertainties.

The Report states:

“Uncertainty over government policy can deter or delay investment in infrastructure projects and lead to additional costs. Investors will be reluctant to invest in projects until government policy is clear and consistent. They will be reluctant to invest if they are concerned that future policy changes may affect them adversely or they may require a higher return to reflect this risk. “

The MPs also say that it is not clear what level of Government support will be required to ensure that these investment projects proceed and that in order to attract the private finance required to implement these infrastructure projects at a reasonable cost the Government may have to provide different forms of support including direct grants, guaranteed prices for outputs, or agreeing to bear certain risks.

In the water sector, the proposed Tideway Tunnel is the most visible example of this approach – the Government has already made a number of financial guarantees relating to investment in the project.

Investors must accept transparency over costs, risks and rewards involving public money

The Report says:

“…..in return, investors must accept some degree of transparency over their costs, risks and rewards in delivering infrastructure projects given that the costs of government support will ultimately fall on taxpayers and consumers.

Most economic infrastructure investment takes place in a private sector market where investor returns are often supported by government and households bear the costs of infrastructure in their bills. In return, investors should provide sufficient information to show that their returns are reasonable and that any government support is justified. The Treasury should require investors to supply the information needed to facilitate this transparency and should reserve the right to audit such information.”

Long infrastructure lead times delay short term growth 

The MPs have also commented on difficulties associated with the fact is that on certain projects there is often a long period before building work starts, citing the High Speed Rail Link 2 where the first diggers are not expected to start on until 2018. The report says:

“Experience suggests that is an optimistic start date. Although such projects are expected to benefit economic growth in the longer term the long preparation time delays the short term imperative to stimulate economic growth through construction work.”

The Report also flags up the difficulty in managing the trade-offs between alternative types of infrastructure investment - requiring balancing issues such as where demand will be greatest, the payback period and the need for spending on very large single projects which will reduce the amount of funds available for smaller projects.

Regulated water sector offers relatively predictable returns .... but no mention of flood defences

The Report says that according to investors, some aspects of the UK infrastructure market encourage investment, with specific reference to the water sector where regulated and relatively predictable investor returns created a stable environment which made it easier to obtain debt finance more cheaply.

However, investment in other areas of public infrastructure would require greater clarity over government policy. Investors are also concerned that there should be agreement across political parties on the policy underpinning infrastructure investment to reduce the risk of changes in plans in the event of a new government.

The MPs say that a more rigorous approach to prioritisation is needed given an overall scarcity of finance to take forward economic infrastructure projects.

Warning of excess private profits via pubic investment

The Report also highlights as a particular concern the potential for private profit from public investment, stating:

“ …in seeking to secure the increased infrastructure investment which Infrastructure UK has identified in its current National Infrastructure Plan, taxpayers' money may be used to incentivise private investment in a way that leads to excess profits in the private sector at the expense of the taxpayer or consumer.”

“If investors receive a government guarantee over their revenue stream this may encourage them to commit their money; but it also creates an opportunity for them to benefit by capitalising their income stream and making a large and early profit on their investment which may not be shared with the public sector. “

The Committee says that a balance must be struck between encouraging investors to participate in UK infrastructure projects and the reasonableness of their returns for doing so bearing in mind the risks involved. The Report draws attention to the fact that investors it examined would not disclose the minimum returns, the "hurdle rate", they seek from projects, commenting:

“While they are not under any contractual obligation to provide this information they are, nevertheless operating in markets where their activities may be receiving taxpayer support and where the ultimate cost of their projects will be borne by consumers."

"In addition, co-operation and transparency between the government and investors are needed to ensure that projects which will be paid for by consumers are taken forward in a cost efficient manner so that consumers are not burdened with high bills."

The Report also criticises the Government for its failure to make an overall assessment of the future impact of infrastructure spending on consumers. Infrastructure UK itself initially planned to develop an overall framework for judging affordability but subsequently decided it was not feasible to establish such an overall framework. The MPs are warning that people on low incomes are particularly at risk from the impact that infrastructure spending may have on consumer bills.