Balfour Beatty is warning that the scale of the challenge needed to upgrade the country’s infrastructure has been increased by the recent vote to leave the EU, which is likely to have a significant impact on the UK economy for at least the next decade.

The warning comes in a major paper released today by the international construction group - Infrastructure 2050: Future Infrastructure Need - which examines how UK infrastructure needs will change in key areas such as rail, roads and energy.

The opening section sets out Balfour Beatty's initial thinking and recommendations about the outcome of the EU Referendum and the actions that can be taken to avoid or reduce any negative impact on the UK’s ability to deliver much-needed improvements to the country’s infrastructure.  

The paper also looks at the impact of factors such as demographic change, evolving public expectations and the need to decarbonise and adapt to a changing climate. It also covers upgrading ageing infrastructure and building new infrastructure to give the UK a competitive edge over other countries.

According to Balfour Beatty, the construction industry has a big challenge to ensure that the UK’s infrastructure continues to meet the growing and increasingly complex needs of a modern society. The papers sets out how industry, government and funders need to work together if they are going to meet the challenge.

Commenting on the scale of the challenge needed to upgrade the country’s infrastructure, Balfour Beatty said that this is increased by the recent vote to leave the EU, which is likely to have a significant impact on the UK economy for at least the next decade.

According to Balfour Beatty, there is “little doubt” that a prolonged period of uncertainty will impact infrastructure investment and delivery in the medium to long term in a number of ways. Commenting on the current skills shortage in the infrastructure industry, the paper says:

“The free movement of labour has allowed us to find the skilled staff we cannot currently source in the UK. Given the number of major infrastructure projects in the pipeline, uncertainty around the free movement of labour could cause the industry recruitment and staffing difficulties and may increase costs where demand for labour outstrips supply, with the subsequent risk of project delays. This will be particularly relevant for mega projects such as HS2 and the nuclear new build programme. “

“In our view, this requires an early and integrated policy response to both retain the skills of those who have migrated here and to ensure that the UK remains an attractive place for talented people to move to. The country must maintain its skills base.”

In addition, as an unprotected department, Department for Business, Energy and Industrial Strategy and Skills Funding Agency budgets may be at risk of being used to backfill gaps left by the withdrawal of EU funding elsewhere.

In terms of infrastructure investment, at the very least while the UK’s  exit from the EU is negotiated, private investment may slow, the paper says. Longer term, the impact on private investment in infrastructure projects is unclear, but some investors are likely to postpone decisions to make investments until the UK-EU relationship is renegotiated. Given the long lead times for major infrastructure projects, this risks delaying some of the key planned projects.

Impact on private investment in infrastructure is significant

The impact on private investment in infrastructure is significant since, according to the National Infrastructure Pipeline, private finance dominates the UK’s planned infrastructure investment as follows:

• 69% private sector - £260 billion
• 19% public sector - £73 billion
• 12% mixed financing - £46 billion

Referring to the 2016 Arcadis Global Infrastructure Investment Index which says the UK has moved up to ninth position in the 2016 global rankings, “with the current political and policy uncertainty, any gains we have made in these rankings over the past few years are likely to be lost in the next few,” Balfour Beatty says.

Losing stake in European Investment Bank means UK will lose £billions in infrastructure funding

The paper also highlights the £16 billion the European Investment Bank (EIB) has invested in UK projects over the last three years, including the extension of the M8 motorway between Edinburgh and Glasgow and a £700m loan to the Thames Tideway Tunnel. The paper states:

“At the moment, the UK is the joint largest shareholder in the EIB but will have to give up its equity upon leaving the EU, meaning that the UK will lose billions of pounds in infrastructure funding. This is likely to have an impact on some of the larger infrastructure projects such as Crossrail 2 and London Underground upgrades. It is unlikely that HM Treasury will be directly able to make up the amount in the short to medium term.”

Urgent debate about funding of UK infrastructure now needed

Balfour Beatty is now calling for an urgent debate about the financing of infrastructure with a number of questions to be answered, including:

• What percentage of GDP should we spend to deliver a sustainable rate of economic growth and international competitiveness?
• How much should the taxpayer fund and how much should be privately funded?
• What are the new financing mechanisms that could be explored, alongside initiatives such as British Wealth Funds and Infrastructure Premiums to make up the shortfall in international investment and investment from EU sources?

Brexit gives Govt chance to borrow at low interest rates to finance infrastructure projects

However, the paper also points out that every set of challenges also presents opportunities, saying that current low interest rates - predicted to sink even lower - mean that now is an ideal time for government to borrow money in order to finance infrastructure projects.

Rejecting the view that this is an “irresponsible course of action”,  Balfour Beatty says that infrastructure investment delivers significant benefits, including the well-documented multiplier effect. Economists estimate that every £1 spent on construction generates £2.84 in total economic activity  at least 90% of which stays in the UK.

Economy could move away from financial services back towards industries like engineering, construction and manufacturing

The paper also suggests that this could be an opportunity for the much talked about diversification of the economy away from financial services and back towards industries such as engineering, construction and manufacturing, as the UK may no longer be bound by single market rules which restrict a more active industrial policy.

Beyond Brexit, Balfour Beaaty says the challenges for those predicting future need are many, including demographic change, the need to decarbonise and adapt to a changing climate and to upgrade aging infrastructure and build new infrastructure that helps give the UK a competitive edge on other countries. The way people use infrastructure and expect it to perform for them is also changing. …Better technology will also result in improved scenario planning, helping us manage the demand and risk facing our infrastructure, which will in turn enable future infrastructure systems to be designed based on more accurate data.”

The UK  also needs to create a skilled workforce with the capacity to deliver the planned infrastructure, the paper says. “New technologies, for example, smart motorways and the digital railway, mean that we will need people trained with new skills to maintain a more technically advanced and data rich infrastructure. “

The paper goes on to set out Balfour Beatty’s expert views on the infrastructure developments planners need, looking at six areas which it describes are key in terms of infrastructure:

• Roads
• Rail
• Aviation
• Energy
• Nuclear decommissioning
• Flooding

Tmeline needed for UK’s exit from EU and early answers to questions on doing business during and after Brexit

According to Balfour Beatty, the UK must ensure that the political and policy landscape are stable enough to attract private infrastructure investment, saying:

"To achieve this, we need government action to maintain economic stability, a timeline for the UK’s exit from the EU, and early answers to the many practical questions about doing business during and after Brexit."

Recommendations contained in the paper include the need for further initiatives to improve climate projections of wind and extreme weather events which should be implemented by the Environment Agency. Improving accuracy in future short-term climate projections and impacts would help companies make the right choice on whether they extend an asset life or not, Balfour Beatty says.

Next UK Climate Change Risk Assessment must focus on interdependencies 

The paper is also calling for the next UK Climate Change Risk Assessment to focus on interdependencies and the next National Adaptation Plan to further enforce cooperation between regulators, government departments and infrastructure operators across sectors – for example via the UK Regulators Network or the Infrastructure Operators Adaptation Forum.

Click here to download the full report Infrastructure 2050: Future Infrastructure Need