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Infrastructure blog

What does the Autumn Budget 2018 mean for infrastructure?

31 October 2018
Now that the dust has settled following the announcement of the Autumn Budget on Monday it’s important that we – the infrastructure sector – take a pause and a deeper look at what the strategic implications could be for us.
What does the Autumn Budget 2018 mean for infrastructure?

There were a number of spending commitments that touched on infrastructure, including £1.6bn extra for R&D as part of the Industrial Strategy, plus a boost to the National Productivity Investment Fund (NPIF) that will take total investment to £37bn by 2023-24.

There was also confirmation that the government will publish a National Infrastructure Strategy in 2019 in response to the infrastructure assessment recently carried out by the National Infrastructure Commission. 

In preparing to do so, it was confirmed that proper consideration will be given to how the UK replaces any loss of EIB finance following Brexit; a key recommendation made in ICE’s Budget representation.  

But perhaps the two most eye-catching announcements that the chancellor made relate to the way in which road funding is paid for and the potential end of public-private contracting for major construction projects as we know it.

VED hypothecation: a short-term fix?

From 2020-25 all Vehicle Excise Duty (VED) will be hypothecated into the National Roads Fund raising £28.8bn.

The second Road Investment Strategy (RIS) covering the same period will receive approximately £23.5bn of this funding in what represents a 66% increase on the capital that was made available for RIS 1.

This is a huge uplift in funding for England’s Strategic Road Network (SRN) and therefore, on the surface, one that is very welcome.

Yet, on deeper inspection there are underlying challenges to the long-term sustainability of the hypothecation model.

Government policy to phase out the sale of internal combustion engine vehicles by 2040 is likely to lead to a reduction in the revenues collected from VED (and fuel duty).

As such, linking the funding of the SRN to VED revenues will not be sustainable in the long-term without bringing electric vehicles worth below £40,000 under the VED scheme.

As outlined in State of the Nation 2018: Infrastructure Investment, the time has come for a thorough examination of alternative approaches to funding roads, including pay-as-you-go schemes.

Further still, the SRN only accounts for 2% of the overall road network. The local roads that make up the vast majority of the network are widely considered to be in a poor state of repair.

The £420m allocated for repairing potholes is only likely to scratch the surface of the maintenance works that are required. The Autumn Budget has arguably failed to deliver in this respect.

The end of PFI

The fairness and effectiveness of Private Finance Initiatives (PFI) in construction has been fiercely debated recently. This has been fuelled in the main by the collapse of Carillion and a growing public perception that PFI contracts do not provide good value for taxpayers.

An end to this debate may now have been reached with the chancellor also signalling in Monday’s Budget that the government will not enter into any future PFI contracts. Another eye-catching pledge that provoked a great deal of media attention.

However, given that the government has made minimal use of PFI since 2010 and has signed no new contracts during the last two years, this shouldn’t come as a major shock to the construction industry.

In any case, what's important moving forward is that risk sharing in construction moves to a model that's more equitable, and that risk is allocated throughout supply chain in a way that will ensure the best project outcomes for society.

Full Autumn Budget analysis

The ICE policy and public affairs team has undertaken a full analysis of the Autumn Budget, which is available here.

It includes details of the consultation that HM Treasury has asked National Infrastructure Commission to undertake on the resilience of the UK’s economic infrastructure.

  • Ben Goodwin, lead policy manager at ICE