Britain’s creaking infrastructure

Decent infrastructure is critical to business success. Britain has some work to do to get it up to scratch, says Simon Wilson.

Is our infrastructure really sub-par?

Yes. Compared with similar countries surveyed by the Organisation for Economic Co-operation and Development (OECD), the UK does have a particular problem, especially with transport. The OECD argues in its Going for Growth' reports of 2011 and 2013 that long-term underinvestment has led to the UK having more congested and less reliable infrastructure than its rivals, with all the damaging effects on growth this implies.

The World Economic Forum paints a similar picture. Switzerland, Singapore, Finland and Hong Kong come top in its rankings for overall quality of infrastructure: the UK lies in 24th place, behind similar-sized European economies including France (5th) and Germany (9th).

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Why does this matter?

In the words of David Cameron (in a speech last year), infrastructure development is "the magic ingredient" that "affects the competitiveness of every business in the country". Sub-par infrastructure damages growth and deters investment.

Britain's biggest issues lie in its transport and energy networks. A Confederation of British Industry (CBI) survey conducted last summer found that 61% of British businesses (up from 47% in 2011) believe the UK's transport networks are "below average", compared with other international business destinations.

Meanwhile, the proportion of UK businesses that felt transport was "significantly below average" had jumped from 12% to 26% in just a year.

The results for energy infrastructure are less extreme: 36% think we are behind the pack; 20% ahead; and 44% think we're around the average. On energy, businesses are more concerned by cost than they are about quality. Historically, wholesale energy prices have been higher in Britain than in other EU countries.

Are there any bright spots?

A few. British businesses are broadly content with their transport connections within the EU (accounting for about half Britain's total global trade) and other major established markets. They also think the railways are improving (especially the Tube and intercity rail connections), though they regard the congested road network and aviation capacity crunch as major problems.

Firms are more positive about the UK's digital networks. A full 82% say they've improved over the last five years, and 79% think they'll carry on improving, with the caveat that mobile networks are less well developed than fixed-line ones.

What about the role of government?

British businesses take heart from the country's reputation for political and institutional stability and its record in pioneering public-private partnerships in the field of infrastructure both factors that are attractive to global investors. But they have become increasingly sceptical that the British government's planning initiatives are doing any good.

In 2011, says the CBI, 43% of firms thought the impact of the government on infrastructure investment would be positive; 33% negative. By summer 2012 the balance had switched: only 35% were positive and 42% negative. But confidence in the government among firms that actually provide infrastructure is higher: 48% think its measures will help investment.

Yet the proportion thinking that Whitehall will have a negative impact has leapt up, doubling from 21% in 2011 to 42% in 2012, reflecting a growing disappointment with the government.

What's the government done wrong?

It's talking a decent talk, but not yet turning it into much action. The Treasury published Britain's first National Infrastructure Plan in October 2010 (an idea it inherited from Labour). It has updated it each year, most recently in December 2012 identifying a project "pipeline" with a value of £310bn it expects to be taken forward to 2015 and beyond (64% of it projected to come from private sources).

Of this £310bn, £176bn relates to energy, of which £123bn is for electricity. Of that sum, £72bn is for projects that are expected to complete before 2020, including investment in renewables to meet "decarbonisation" targets.

But, as a recent report from the National Audit Office (NAO) notes, the Department of Energy projected in 2011 that £110bn investment in electricity infrastructure would be needed by 2020. That's more than twice the rate of current investment just one example of a lack of clarity and consistency in the government's policy framework.

No wonder the NAO has criticised it for posing "risks to value for money" due to policy uncertainty and failure to assess the costs to consumers. In such an environment, investors (including the sovereign wealth funds and pension funds Britain is keen to attract) are likely to remain wary.

An Olympian takes charge

The House of Commons Public Accounts Committee recently issued a damning report on the Treasury's infrastructure plan. Chairman Margaret Hodge called it "a long list of projects requiring a huge amount of money, not a real plan with a strategic vision and clear priorities".

Meanwhile, the influential London School of Economics Growth Commission (members include Richard Lambert, Rachel Lomax and Lord Browne) damned the government's approach to investing in transport and energy as beset by "procrastination and instability". It argued for a national infrastructure body, independent of ministers.

In March, George Osborne announced that he had commissioned Lord (Paul) Deighton, the ex-Goldman banker who led the delivery of the Olympics, to scrutinise the Treasury's pipeline/wish list and get it moving. Wish him luck.