United Kingdom: Infrastructure Report - September 2012

Last Updated: 5 October 2012
Article by Nigel Taylor

Looking ahead: Will a NIP do the trick?

When the second National Infrastructure Plan (NIP2) was announced in November 2011, its key aim was to guarantee investment in infrastructure to support UK growth, and ensure that public and private investment would be effectively co-ordinated. This seminar, held in March 2012, debated the proposals from a funding perspertive.

"NIP2 prioritises nearly 500 infrastructure projects across the country. In fact, in the March 2012 Budget, we promised that the delivery of 280 of these projects would begin this year, with £250 billion worth of investment made available for the infrastructure pipeline. NIP2 outlined the need to attract more private investment into infrastructure. To do this, we aim to make the processes involved in the projects more efficient by reducing project costs, speeding up the consenting system and making the planning process more flexible. Benchmarking and best practice examples will also be reviewed alongside projects to find ways of making them more time and cost efficient."

Keith Waller, Senior Adviser at Infrastructure UK

Private investment is particularly important in the current economic climate, and as part of NIP2 the Government is hoping to encourage more investment from groups which have traditionally shied away from infrastructure projects, or which have previously been only minor stakeholders in these types of projects. One of the key groups here is pension funds.

To date, only the larger pension funds have invested in infrastructure, and their involvement has typically been very small – they currently invest only 2.5% of their total portfolio in this type of asset. However, with pension funds under management totalling £1,924 billion in 2009 in the UK alone, it is understandable that the Government should want to access a bigger slice of the available pie.

Likewise, gilt yields are so low that pension funds are beginning to see infrastructure projects as an attractive alternative asset class, which offers similar long-dated, inflation-linked cash flows to gilts, but with a much better rate of return.

"There are two significant trends driving pension funds to actively consider investments in infrastructure projects. The combination of the UK's population living longer and regulatory changes such as Solvency II mean that funds will have to keep taking in more money and, therefore, will need to find places to invest it."

Judith Donnelly, Partner at Clyde & Co LLP

However, if pension funds are to increase their investment significantly, certain barriers must be overcome. As Alan Rubenstein, CEO of the Pension Protection Fund (PPF), argued: "These include construction risks, the limited availability of brownfield assets, high private-equity style fee structures, a lack of trustee experience in the sector, and an insufficient amount of transparent data".

Such elements have driven the development of the Pension Infrastructure Platform, or "PIP":

"We are proposing the implementation of the Pension Infrastructure Platform to enable smaller pension funds to invest in infrastructure. Funds would join the Platform, and its managers would choose investments on behalf of the members. It would not be Government controlled, but it would be assisted by HM Treasury in measuring new approaches to bidding, for example, with an element of risk taken on by a third party".

Alan Rubenstein, CEO of Pension Protection Fund

PIP investments would be controlled by a management committee, an investment committee and an advisory committee. This structure would ensure that pension funds obtain exactly the information they need to make investment decisions, with in-house management to avoid third-party fees. Construction risk for investors would be minimised by having construction firms own the assets, with finance provided by the PIP. The construction firms would also run the project post-construction.

So far, around 12 pension funds have signed up, and the PIP aims to have around £2 billion to invest when it launches in 2013. Target returns will be in the region of 2% to 5%.

"There are great expectations that the Pension Infrastructure Platform will be a very positive step in overcoming barriers. While some of the detail is still to be established, the fact that 12 pension funds have signed up to the initiative is a very positive signal that there will be a trend towards investment in infrastructure by other pension funds in the future".

Judith Donnelly, Partner at Clyde & Co LLP

Rail: All on board?

Modernising and improving the UK's rail network is possibly the most demanding infrastructure challenge the UK faces, and the controversy over the recent announcement of the West Coast mainline franchise is just one example of the complex and often contentious issues that can arise.

This seminar, held in April 2012, included speakers and delegates from the UK's train operating and rolling stock companies, as well as contractors, consultants, government bodies and regulators.

The debate was wide-ranging, with clear consensus that 'something must be done', but with more diverse perspectives on what that 'something' should be.

The issues: Mind the gap

Sir Roy McNulty's report, Rail Value for Money1, was commissioned by the Government in 2011, and looked in depth at the issues facing the rail sector. These ranged from industry fragmentation (which encourages silo thinking), to the need for immediate returns (which is inherent in short franchises), to the lack of a structure to drive innovation across the industry, and the absence of up-to-date testing facilities.

It does not take an expert to see or experience the problems facing the UK's rail system: any commuter will tell you that the network is ageing and overcrowded, and prices (both for consumers and freight customers) are some of the highest in Europe2. The network is in need of radical and substantial improvements, but the investment required to do this is potentially vast and the Government is looking to reduce rather than increase the huge subsidies the industry already receives.

The elephant in the room is the so-called 'efficiency gap': a 2010 report by the Office for Rail Regulation3 determined that it costs Network Rail up to 40% more to maintain and renew its infrastructure than the best four European operators. Some of this can be attributed to years of under-investment, but there are also systemic problems with the UK industry, ranging from a lack of collaboration to an extended and over-complex supply chain which drives up costs.

"Aggressive revenue forecasting still exists despite the economic crisis, but with most costs fixed and the variables hard to reduce, a lack of innovation and investment is leaving businesses out of pocket."

Gianluca Favaloro, Director at Ernst & Young

The level of innovation in the industry is also too low: Graham Smith of the Rail Delivery Group shared research published by Atkins4 showing that, while innovation in the UK rail industry has improved over the last 10 years, we still lag behind overseas railways and other industries:

The answers: Collaborate, innovate, decentralise?

One immediate result of Sir Roy McNulty's report was the creation of the Rail Delivery Group, comprised of the CEOs of passenger rail-owning groups, major freight operators and Network Rail. This group is spearheading practical change to bridge the efficiency gap.

"We are leading the charge for change in this area but if the challenges we face were easy, they would have been dealt with before. A key role for the Group is to close the efficiency gap."

Graham Smith, Secretary of the Rail Delivery Group

Participants at the seminar agreed that greater alignment behind common objectives, a more proactive approach to innovation, and more integrated supply chains will be the most positive ways to accomplish this.

"There is a real need for new and evolving business processes, tools and techniques. Sometimes it is in the detail that the best savings can be found. We need clients, contractors, operators and investors to work together to achieve efficiency and an integrated service."

Richard Graham, Head of Strategic Development at Balfour Beatty

'Service' is an important word here. Some attendees observed that there is much the rail industry could learn from the airline business, ranging from the details of ticketing and service standards to the wider way in which the industry organises itself. As private businesses in competition with each other, the airline companies benefit from a relatively flexible regulatory regime. As one of the delegates who attended pointed out, many of the rail sector's complaints about excessive Government intervention might be mitigated if the industry took a leaf out of the airlines' book and assumed greater control of its own destiny.

"The cost to the taxpayers is considerable which is why rail needs to be seen in the context of the broader public policy debate. The irony is that, if the industry does not grip the issues and really deliver, then the Government will feel a need for more – not less – intervention".

Cathryn Ross, Director at the Office of Rail Regulation

Some attendees were strong advocates of more de-centralisation as a way to cut costs per passenger mile. The Government has recently been consulting5 on the possible benefits of devolving more decision-making from the Department of Transport to local bodies such as Passenger Transport Executives and local authorities.

Alexander Jan, Head of Transport at Arup, believes this could lead to cost savings of £100-300 million per year by 2018/19, rising to £300-900 million from 2023/24. It could also improve innovation and benchmarking, make the industry more accountable to its users, with infrastructure decisions made in response to customer demand, and address the need for economic development. Crossrail is a perfect example of a project where local involvement and multi-party funding is contributing to successful implementation.

As Britain's railways carry more and more passengers and freight, the need to find new ways of increasing capacity and efficiency is critical for future growth. Embracing innovative solutions to these high-level problems is something that is pre-occupying the rail industry, and is a priority for the Rail Delivery Group (RDG).

The RDG has focused its activities in the areas where Sir Roy McNulty identified the greatest potential for cross-industry efficiencies. In some cases the RDG has set up powerful ad-hoc groups to look at specific subjects, for example in the areas of asset, programme and supply chain management. In other areas the RDG has undertaken to give guidance to existing cross-industry groups which were looking to improve industry efficiency. It has also recognised the benefit of working with organisations such as the Rail Safety and Standards Board (RSSB) that were supporting the industry in a range of initiatives.

Full support was provided by the RDG to the creation of a rail innovation team, which is now being put in place. It will be led by David Clarke (formerly of the DfT) and will be hosted by the RSSB. The team will manage an innovation fund, with initial pilot funding from the DfT of £16 million. A key part of the programme of innovations will be to offer to support early practical cross-industry projects.

It will:

  • Transfer innovation from other sectors into the rail industry
  • Cultivate, identify and exploit innovation in UK universities and SMEs
  • Secure funding and investment for innovation
  • Support the implementation of the outputs of research
  • Direct resources at the most transformative and value-adding innovations
  • Create a clear and direct pathway for the introduction of innovation
  • Support a new culture of innovation in the rail industry

While it would have been easy for the rail industry to just focus on today's challenges, the need to be prepared to take advantage of future opportunities is equally important. The way in which the Technical Strategy Leadership Group (one of the cross-industry groups established by RGD to provide guidance on industry efficiency) and the RSSB have stepped up to the mark on innovation is a demonstration of the forward thinking of the industry.

The support and leadership of the RDG for this new approach illustrates that, by working together, the UK rail industry can recognise and tackle the fundamental issues facing the railways today.

Graham Smith Secretary of the Rail Delivery Group

Air: Turbulence ahead?

In recent weeks the issue of airport capacity in the South East has once again hit the headlines, with a high-profile and increasingly strident public debate about the competing merits of a third runway at Heathrow or an entirely new airport in the Thames Estuary.

The Government insists that all options remain open, and David Cameron has said6 he is fully aware of the need to increase airport capacity: "we are acting now to make use of existing capacity – Gatwick is emerging as a business airport for London, under a new owner competing with Heathrow. But we need to retain our status as a key global hub for air travel, not just a feeder route to bigger airports elsewhere in Frankfurt, Amsterdam or Dubai."

If we are to act, decisions will have to be made – and quickly: if current DfT forecasts prove correct, the three largest London airports will be at full capacity by 20307.

The issue: Keeping London competitive

At this seminar, held in May 2012, the one issue on which all panel participants – and 100% of the audience members – agreed was that London needs to catch up with other major world airports if it is going to maintain its status as an international hub.

As panel member Daniel Moylan (Board Member of Transport for London (TfL) and lead advisor on aviation policy at the Mayor's office) illustrated: twenty years ago, both Heathrow and Paris CDG served 159 destinations; today, however, Heathrow has slipped to 156, while CDG is connected to 231 destinations, and Frankfurt and Amsterdam have seen an even greater increase. Britain has 39 flights a week to three Chinese cities, while Germany has 84 flights to five cities, and France can offer more than double the number of flights to South America as the UK and to twice as many cities.

In the medium to long term, the UK aviation industry will see its competitive position further eroded without significant increases in capacity. As other hubs capture transfer flows, UK aviation will lose its share of lucrative long-haul passenger and freight traffic.

Daniel Moylan spoke for everyone when he commented: "Aviation is crucial to London's future. It pays to concentrate flights out of a hub and encourage people to come to the country to change flights." David Leam, of London First, added: "Doing nothing is not an option".

"We will not be able to lead new industries without the infrastructure in place to support them. We would end up outsourcing all our trade, sending our capacity overseas, just as we did with the docks."

Huw Thomas, Partner at Foster and Partners

The answer: Heathrow, or the Thames Estuary?

Where attendees disagreed, predictably enough, was on the best way to achieve the increased capacity the region and the country needs. Some argued for a third runway at Heathrow, while acknowledging that the campaign to oppose this was possibly the most bitterly fought in recent planning history and that a similar level of opposition would no doubt be encountered again. Even if planning permission could be secured, the practical challenges would be enormous, from clearing a large residential area, to building new access links, and ensuring adherence to European air pollution limits.

A far larger number of attendees were in favour of a new 4-runway airport on an artificial island in the Thames Estuary on the basis that, even if it could be built, a third runway at Heathrow would only succeed in postponing the need for a completely new airport at some future date. Committing to a new airport now would build on the legacy of the Olympics and would support further regeneration in East London.

"Creating a new airport in this location would ensure less noise, less loss of amenity for Londoners and would mean a state-of-the-art hub built for the 21st Century. We need a tough aviation policy from the Government; we need leadership to make the big decisions."

Daniel Moylan, Board Member of TfL

Others agreed with the idea of a new airport in theory, while arguing that the Isle of Grain, which sits further out in the Thames Estuary, would be a better location.

"What we really need is joined-up infrastructure which allows people in London and the rest of the UK quick, simple access to a new airport. A brand-new hub is a possible and viable option, but will require rail, road and sea transport to be coordinated. The current system, where all transport ends in London, leads to over-crowding and the underperformance of systems in the city centre. If, for example, we have a new rail network circumnavigating the city, this would take the pressure off. The Isle of Grain airport – which would displace far less people than building a new runway at Heathrow – would be a very logical step in this debate".

Huw Thomas, Partner at Foster and Partners

To read the entire Report please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Nigel Taylor
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.