How should the UK pay for infrastructure?

The UK government has launched a multi-year spending review that will determine its infrastructure spending for at least three years.

The outcome is crucial for the future of public services and the government’s ability to deliver net zero, adapt to climate change, and grow the economy.

But transforming the UK’s infrastructure at the speed and scale needed means investing much more than the UK currently is.

The ICE’s new Next Steps programme is seeking insight into how the government can engage private investors and close that gap.

UK infrastructure investment needs to increase significantly

The National Infrastructure Commission says UK investment must reach around £80 billion per year in the 2030s – up from around £55 billion per year over the last decade.

Much of that will need to come from the private sector.

But the UK has a long-term underinvestment problem – with the lowest overall investment in the G7 for 24 of the last 30 years.

Government spending on infrastructure has been low, volatile, and short-termist. Delivery costs too much and takes too long.

Because of this, the private sector sees the UK as a risky bet. In 2022, the UK ranked lowest for business investment in the G7 and 28th among 31 OECD countries.

The government’s current investment plans

The new Labour government wants public financial institutions to “mobilise greater levels of private capital”.

The UK Infrastructure Bank will now operate as the National Wealth Fund (NWF) to support the government’s growth and clean energy missions.

The NWF will have £27.8 billion to invest over the parliament and a target of attracting three times as much private investment.

The government will also explore combining pension funds to unlock £8 billion in new investment.

It’s also creating the National Infrastructure and Service Transformation Authority (NISTA) to oversee infrastructure strategy and delivery.

It hopes that more certainty, stability, and capability will boost confidence in the private sector.

Should PPPs be part of the answer?

Given the scale of investment needed, some have called for the return of public-private partnerships (PPPs).

Private finance initiatives (PFI) – a form of PPP – were widely used in the UK to deliver infrastructure from the 1990s.

PFIs are long-term contracts where the private sector designs, builds, finances and operates public projects.

But they were dropped in 2018 amid concerns about the higher cost of private finance compared to public borrowing and the lack of data on their benefits.

Other countries, like Australia, continue to use PPPs successfully.

And new partnership models are emerging, like the Mutual Investment Model pioneered by the Welsh government, which claim to fix some of PFI’s shortcomings.

What about other investment models?

The direct benefit of infrastructure development for residential, business and land values can help pay for that infrastructure through land value capture.

It’s been used to part-fund the Elizabeth Line and Northern Line extension to Battersea in London.

The UK also has a strong track record in the contracts for difference and regulated asset base models, which could be further developed.

In Australia, market-led proposals and asset recycling have been successful in generating new funds for state governments to invest in their infrastructure priorities.

Making the most of the UK’s advantages

The UK’s binding net zero target, strong laws and institutions, and a global financial centre in London should give investors confidence.

Those advantages could be key amid fierce global competition for investment.

There’s also evidence that the UK public would support more investment.

In polling for the Global Infrastructure Investor Association:

• two-thirds (66%) of UK respondents agreed that the country isn’t doing enough to meet its infrastructure needs;
• there was strong support (65%) for more private sector investment if it improves things for the public;
• but there was less support (47%) for spending more if it meant higher taxes or bills.

We want to hear from you

Through its Next Steps programmes, the ICE convenes global public debates to discuss what needs to happen next on key policy issues affecting civil engineering and society.

There’s no one-size-fits-all approach to private finance.

The ICE is looking for views on these and other potential models that could help the UK government increase private sector investment and deliver the services the public needs.

This briefing paper, published today, provides a starting point for discussion.

The ICE wants to hear responses from infrastructure professionals and other experts on the issues set out in the paper.

In particular, we want to hear responses to the following questions:

• What are the alternative options available that would minimise the requirement for public sector investment?
• How best should private finance be engaged?
• What requirements and/or stipulations for programme management could be mandated by the Treasury to improve cost controls in delivery?

Please contact [email protected] by Friday 6 December to share your views – and be sure to sign up to the Next Steps panel debate.

This insight will inform an updated briefing paper to be published in the new year.

In case you missed it

• A joint UN Environment Programme and Enabling Better Infrastructure event showcased how countries break down siloes in infrastructure planning.
• Former HS2 minister Paul Maynard explores the need for a change in mindset to ensure the UK can complete major infrastructure projects.
• The ICE has been gathering key infrastructure takeaways from the party conferences including Labour, the Liberal Democrats and the Conservatives.