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Autumn Statement: £5.5bn more cash for infrastructure confirmed

Chancellor George Osborne has confirmed that £5.5bn more cash will be made available for infrastructure projects in his Autumn Statement, with £1.5bn for roads and specifically £400M for maintenance and renewal.

Osborne said money would be saved from other departments, with most departmental resource budgets to fall by 1% next year.

A new version of PFI, dubbed PF2, has also been set out.

The extra spending is being provided despite Osborne revealing figures from the indepedent Office of Budgetary Responsibilty that forecast that the economy will grow by just 1.2% next year. The OBR says it will then grow by 2.0% in 2014; 2.3% in 2015; 2.7% in 2016 and 2.8% in 2017.

Osborne also claimed that Britain was heading in the right direction, with borrowing falling. He said this year’s borrowing will be £108bn and will fall to £99bn next year.

“In last two years, deficit has fallen by a quarter,” he said. “Today’s figures show the deficit is forecast to fall this year,” he added, before admitting that it will take one more year than planned to get debt falling of a proportion of GDP. This is significant, as the Green Investment Bank does not get borrowing powers until public borrowing falls as a percentage of GDP.

Osborne said that in the short term, savings would be switched to capital and an extra £5.5bn investment in capital spending in this spending review period; as a result public spending in terms of GDP is to be higher than in last Labour government, Osborne claimed.

Roads

An extra £1.5bn will go to roads, with £1.2bn being spent between now and 2014/15; Osborne highlighted schemes to widen the A1 to Newcastle, construct the A5-M1 link and dual the A30 in Cornwall. However, the schemes are not immediately “shovel ready” despite having planning permission, so the bulk of the £1.2bn - £690M - will not be spent until 2014/15.

Several of the schemes included in the £1.2bn have previously been announced, including £115M to accelerate delivery of the M1, M3 and M6 Managed Motorway schemes and the A160/180 upgrade. These were announced last week, as part of a new initiative to cut the time it takes to build Managed Motorway projects in half and more complex schemes by 25%.

Not mentioned in Osborne’s speech was an extra £400M for highways maintenance and renewals, £333M of which is earmarked for “essential maintenance”. It was immediately welcomed by the Civil Engineering Contractors Association. It has been championing extra cash for small scale road schemes since the summer, a call that was also backed by the CBI, the Infrastructure Alliance, the Federation of Small Business and Campaign for Better Transport.

“There is a real need to get activity going now in the infrastructure sector,” said CECA external affairs director Alastair Reisner. “CECA has been lobbying for additional funding for highways maintenance, based on the fact that activity can be increased almost immediately providing jobs and growth for communities across the UK. We estimate that today’s announcement has the potential to bring more than 3000 people out of unemployment and into the industry. This is very welcome news that recognises the vital contribution our sector will play in rebuilding growth in the economy.”

Osborne’s package also includes the commitment to fund £150M of improvement works to Junction 30 of M25 starting in 2015/16. To support capital investment in Northern Ireland, the government has also agreed to allow the Northern Ireland Executive to defer up to £50M of borrowing to allow it to invest in the project to upgrade the A5.

There is no cash for the M4 in south Wales, however. The Statement says that the government is “engaging” with the Welsh Government to explore funding options for this scheme.

 

Transport cash2012/132013/142014/15
Accelerate delivery of four road schemes (M1, M3, M6 and A160/180)06055
Roads ‘Pinch Point’ Fund for local and national schemes0115210
Highways Agency and local authority road maintenance and renewal0260140
Development funding for Highways Agency pipeline02030
Sustainable Transport Fund (cycling)02020
A1 enhancements (Leeming to Barton)040130
A1 enhancements (Lobley Hill)0015
New A5-M1 link03080
Dualling A30 (Temple to Carblake)0010

 

There were, however, no new announcements for rail.

“We’ve already set out plans this autumn for a huge investment in rail,” said Osborne, and transport secretary Patrick McLoughlin will set out in the New Year plans to take High Speed 2 to the North West and West Yorkshire.”

Detail of departmental spending plans for 2015/16 will be set at a spending review - to be announced during first half of 2013.

Government-backed infrastructure

Osborne also announced that a UK Guarantee to support up to £1bn in borrowing for the Northern Line Extension to Battersea.

“I today confirm a £1bn loan and a guarantee to extend the Northern Line to Battersea Power Station and support a new development on a similar scale to the Olympic Park,” he said.

The full document confirms that the government will provide UK Guarantees to allow London mayor Boris Johnson to borrow £1bn at new preferential rates to
support the Northern Line extension to Battersea, subject to due diligence and the agreement of a binding Funding and Development Agreement with developers, the mayor and partner authorities before the end of 2013.

Osborne said that government was ready to guarantee infrastructure investment worth a further £40bn in total, with £10bn of guarantees already allocated.

Osborne: “On top of £5bn new capital spending in infrastructure & support for business we’re ready to provide guarantees for up to £40bn more – today I can announce that projects worth £10bn have already prequalified.”

Osborne added that the government was offering £10bn worth of guarantees for housing too.

He also promised that UK pension funds will launch their new independent infrastructure investment platform next year.

PF2

On the new-look PFI, Osborne said that the public sector is to “share the rewards” under the new scheme.

“We have today published full details of the replacement for the discredited PFI,” he said. Since we can all see now that the public sector was sharing the risk, we will now ensure we also share in the reward.” The government will look to act as a minority equity co-investor in future projects to make this happen.

PF2: Public & private equity unites

Public sector equity

In order to strengthen significantly the partnership between the public and private sectors, the government will look to act as a minority equity co-investor in future projects. This will enable:

  • greater alignment of interests between the public and private sectors, and a more collaborative approach to improving project performance and managing risk;
  • better partnership working, with the public sector having greater visibility of project information and more involvement in strategic decision making;
  • more transparency, including in relation to the financial performance of the project company, through its project company board membership;
  • value for money to be improved as, subject to the appropriate management of project risk, the public sector will share in the ongoing investment returns, reducing the overall cost of projects to the public sector

To ensure an effective role is played by the public sector as an equity investor and to minimise the potential for conflicts of interest between the public sector acting as both investor and procurer, the equity investment will be managed by a commercially-focused central unit located in the Treasury, separate from the procuring authority.

Private sector equity

The PFI review was triggered by concerns that the equity returns achieved in PFI projects have been too high and that some investors have made windfall gains. Yet the government is keen to see more investors with long-term investment horizons, such as pension funds, investing in projects at an earlier stage. So these concerns and objectives have been addressed in the following ways:

  • the introduction of funding competitions for a portion of the private sector equity, to enable long-term equity providers to invest in projects before financial close. This will widen access to different types of investor and is expected increase competitive tension, with downward pressure on equity pricing in the longer term.
  • the structure of PF2 curbs the ability of primary investors to generate excessive profits and, consequently, the potential for windfall gains on secondary market sales through measures including a mechanism to share unutilised funds in the lifecycle reserve, the removal of soft services where contractors have typically included a risk premium in the pricing and the introduction of public sector equity

The first programme to which PF2 will be applied is the £1.75bn privately financed element of the Priority Schools Building Programme.

In addition, the Treasury is working with the Ministry of Defence, as it finalises its strategy and infrastructure investment plans for a more cost effective estate that meets requirements of the new-look Armed Forces to explore how much of this investment - including construction and maintenance activity - can be delivered through PF2.

And in the health sector, the Sandwell and West Birmingham Hospitals NHS Trust project is working with the Department of Health to assess the suitability of PF2 to deliver around £325M of new investment that would consolidate its services from multiple sites.

Infrastructure UK (IUK) will be given strenthened powers to increase its commercial expertise to boost the delivery of such schemes.

Osborne said that taken together it was a “revolution” in the sources of finance for upgrading Britain’s infrastructure, and claimed that the annual average investment in infrastructure ws now £33bn.

But the Association of Consultancy and Engineering said the guarantees scheme was still confusing.

“The government has rightly recognised that it is uniquely placed to cover risk as it looks to get infrastructure projects underway and drive growth through the economy,” said ACE chief executive Nelson Ogunshakin. “The project guarantees announced demonstrate the potential for generating a real economic impact. However, industry needs clarity if it is to feel confident in securing both the guarantees and the private investment needed to get projects off the ground, and government must work hard to make the use of guarantees more transparent.”

Energy and flooding

Osborne said there will be new incentives for shale gas exploitation. “Today we publish our gas strategy to ensure we make best use of lower cost gas power, including new sources of gas,” he said.

A commitment to allocate an additional £120M over the current spending review period to building new flood defences had already been announced.

Contractors

Osborne also moved to encourage construction by cancelling the 3p a litre rise in fuel duty planned for January 2013 and increasing tax relief on the purchase of new plant.

“We’re going to help our construction industry too,” Osborne said.

So starting on 1 January and for the next two years, Osborne said he was going to increase by tenfold the Annual Investment Allowance in plant and machinery.

Instead of £25,000 worth of investment being eligible for 100% relief, £250,000 worth of investment will now qualify.

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