Speech

Speech by the Commercial Secretary to the Treasury, Lord Sassoon, at Innovations in Financing European Infrastructure

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Speech by The Commercial Secretary to the Treasury.

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Introduction

Thank you Tim Stone and to Partnerships Bulletin for inviting me here today. It’s a great opportunity for me to speak to such a cross-section of the infrastructure financing industry and to give you a progress report on the Government’s infrastructure policy work.  Tim and I were colleagues together at Warburgs many years ago working on different infrastructure projects - my first one being the reshaping of the UK electricity industry in the late 1980s. So I’m especially excited to be working on infrastructure in the Coalition Government today, because this Government has put infrastructure at the heart of its growth strategy. And only this week, our Energy White Paper makes possible the £110 billion investment we need to meet our power needs over the next four decades. 

Our economy is, of course, still in its recovery phase following the financial crisis.  And in March this year we released our Plan for Growth. The aim is to fundamentally rebalance the economy by moving from over-dependence on the public sector and away from debt-fuelled consumption to growth based on export and investment.

Investment in infrastructure is critical to that ambition.

For many international businesses the quality of our infrastructure is a pivotal factor in their decision whether or not to locate in the UK. And high quality infrastructure stimulates new growth in key sectors such as construction but also future high growth industries from advanced manufacturing through to the digital and online sectors.

But the UK is lagging. We are poorly positioned compared to our international peers when it comes to the quality of our infrastructure.

In last year’s World Economic Forum infrastructure quality index, the UK was ranked just 33rd. Below France, Germany, and Spain. We need to improve, but the task is not getting any easier.

We face a significant challenge to replace ageing and outdated infrastructure, some of which has been around since the 19th Century. For example, 40 per cent of London’s water mains are over 100 years old, and 12 per cent are more than 150 years old.

We also face ever growing competition from other countries that are investing heavily in their infrastructure. In 2009 alone China invested over $100 billion in its railways, and Brazil has announced plans for over $500 billion of infrastructure investment to 2014.

And we also face ever increasing demands on our infrastructure. UK roads are amongst the most congested in Europe, and in London alone almost 35 per cent of roads suffer delays every day.

Infrastructure priorities

These are the challenges we face but we have not shied away from the task.

On coming to Government we tasked Infrastructure UK with providing a much stronger focus on the UK’s economic infrastructure needs. Under Andy Rose’s leadership and with Paul Skinner’s guidance, IUK has done a tremendous job in identifying our infrastructure priorities and galvanising the whole of Whitehall to focus on the infrastructure challenge.

And last year we published the first ever National Infrastructure Plan which set out our vision of the economic infrastructure that our nation needs. 

The Plan sets the stage for some £200 billion of investment over the next five years.

It includes significant growth in transport and energy. And it also includes a significant increase in the private sector share of investment, rising from under 60% to 70%.

We also set out our hierarchy of investment priorities within the plan. Our principles on how we will deliver our infrastructure needs.

First we need to ensure the maintenance and smarter use of assets. For example, we are pioneering smart demand management techniques to maximise the efficiency of our infrastructure, in energy, water, and in transport… where the managed motorways programme is using technology to maximise available capacity by varying speed limits and enabling use of the hard shoulder in busy times.

Second we will take targeted action to tackle network stress points and develop new networks. That means focusing investment on pinch points to substantially enhance resilience and capacity. Small, targeted investments can be hugely cost effective. That is why we are investing £2 billion in flood and coastal erosion schemes, providing £10 billion for maintenance and investment in road and local transport schemes, and £14 billion to Network Rail to support maintenance and improvements.

And finally, we will invest in transformational large scale capital projects where they are part of a clear long term strategy. This includes providing the best superfast broadband in Europe by 2015, investing in the construction of London’s Crossrail, and developing a national high speed rail network.

Running through these priorities of course, is our commitment to build a low carbon economy. It’s a thread that runs through all our investment decisions, and it is an ambition that will be supported by our wider structural investments in the economy. But we are also pursuing discrete investments to support a green recovery, including the Green Investment Bank, the UK’s first Carbon Capture and Storage project, and £200 million for the development of low carbon technologies.
 
The National Infrastructure Plan is an unprecedented strategy document for the UK. No previous Government has articulated such a vision of our country’s infrastructure requirements across all our economic sectors.

Delivering the plan

Of course the next step is to move from vision to reality. To put the principles in to practice. And as we work towards publishing the second stage both of the Government’s Growth Review and of the National Infrastructure Plan this Autumn, we are tackling the key obstacles to delivering infrastructure in the UK:

  • Lowering the barriers to private sector infrastructure investment
  • Pursuing innovative solutions to tackle the  pinch points in our infrastructure; and
  • Ensuring that Government provides sustained central leadership on infrastructure

All these steps are vital to bringing down the cost of infrastructure investment and construction in the UK. Indeed, last year we published our Infrastructure Cost Review which confirmed there is scope for substantial savings - at least, 15 per cent, or an estimated £2 to 3 billion annually, on the costs of building and maintaining the UK’s infrastructure.

We have to tackle the barriers to infrastructure investment if the UK is to remain attractive to inward investment.  And we are taking the steps to ensure that is the case.

Barriers to investment

Planning

The biggest barrier is our 60 year old planning system.

As many of you will know our planning system presents a huge and tangled web of obstacles. In the last five years alone, over 3,250 pages of guidance have been issued. Complexity, planning lead times, and inconsistencies between regions, put up a significant obstacle to infrastructure investment in the UK. It’s been estimated that delays in the planning process cost the economy up to £3 billion a year.

We are tackling this issue head on. We are embedding in the new planning rules a presumption in favour of sustainable development, and we are incentivising local communities to welcome new infrastructure. And we continue to implement and build on the Penfold Review to improve the way the wider consents regime supports infrastructure development.

We are also ensuring that all planning applications and appeals will be processed in 12 months - not in the many years that is all too often the case now.

And in particular, we are ensuring that major infrastructure projects will be fast-tracked through the Major Infrastructure Planning Unit.

My colleague, Eric Pickles, will very soon be publishing the radical new planning framework that will enshrine all of this - ensuring a system that is more democratic and accountable, and which reduces the risks to the delivery of our infrastructure.

Transparency and certainty

Now, if we can considerably ease the planning burden, I also recognise that we need to offer greater certainty and transparency to the industry about what infrastructure is going to be built in the coming years.

The National Infrastructure Plan is part of the story, but we have also committed to develop National Policy Statements for each of our major infrastructure sectors.

By the end of this year we will have published the Statements for UK ports and waste water. Next year, we will publish the Statements for UK national networks and hazardous waste. Of course there are other vital areas to cover, not least aviation, where we are consulting on the scope of a new sustainable framework for UK aviation.

But it is also clear from our Cost Review that industry needs a visible and continuous pipeline of work, not confused and erratic stop-start investment programmes.

That is why we are also increasing the transparency of planned investment in infrastructure. In the next iteration of the National Infrastructure Plan this Autumn we will publish the UK’s long term forward view of projects and programmes. This greater transparency will give investors more certainty on how we will be delivering our infrastructure vision.

The Government will also publish quarterly a rolling two year programme of projects where public sector funding has been agreed, to enable the construction sector to respond more effectively to new market opportunities. In this way, the sector will be able to strengthen its supply chain and further invest in the skills we need in construction. Indeed, sustained infrastructure investment will be a significant generator of high quality, skilled jobs for the long term.

But this pipeline can’t be developed in the ivory towers of Whitehall. We need your engagement to identify where the key stress points are in the UK’s infrastructure. Which are the top 20 projects where investment can have the biggest impact? Is it relieving congestion on major transport arteries? Is it better connecting our major ports? We have to work closely with those in the industry and those businesses who rely on the industry to correctly identify those pinch points.

Innovative solutions to pinch points

With greater certainty and longer time horizons, we also have the opportunity to exploit innovative new ideas to tackle the key stress points in our infrastructure and do so with better value for money.

As we know, many infrastructure networks rely on each other for effective service provision. The interdependency between these networks creates opportunities for integration to increase efficiency, resilience, and the impact of the investment on growth.

And we have already seen this approach bear fruit in developing the 2012 Olympic Park where the simple idea of shared tunnels which are capable of serving more than one utility at a time, have been used to increase efficiency and reduce costs.
 
But as a starting point, we have to be far more innovative on how we use our existing assets and resources.

We have to consider options to release additional radio spectrum for new digital services to support innovative businesses such as high-speed mobile broadband.

We have to consider how to use existing assets to increase climate resilience of infrastructure, by for example capitalising on dual-use infrastructure such as road and rail embankments acting as flood defences.

And also at the local and regional level, we need better integration of infrastructure strategies to better capture efficiencies. And in this task we want to see Local Enterprise Partnerships play a greater role.

Infrastructure at the centre of government

We are committed to embedding more certainty, transparency and innovation in the UK’s approach to infrastructure.

And we are committed to driving the infrastructure agenda domestically, but also promoting our industry internationally. Because we know that there is huge international appetite for investment in UK infrastructure.  Canadian and Chinese interest in UK high speed rail; Qatari interest in the Olympic site; Hong Kong interest in our electricity networks and water companies, to take a few recent and public examples.  We have to capitalise on these opportunities. We want, and we must, forge long term relationships with international investors.

And we are also committed to widening our infrastructure investment base, working with Sovereign Wealth Funds and other major investors to promote UK infrastructure opportunities. We are tasking Ministers across Government to act as relationship managers for our key international relationships. Government needs to get into selling mode - just like you in the private sector.

But we are also ensuring that across Government policy we support the infrastructure industry. In particular, we need to maintain a competitive tax and regulatory system so as not to undermine our investor base. Obviously, in the aftermath of the financial crisis there is a huge domestic and international agenda on regulation, and we are fully supportive of efforts to make the system more stable. But at the same time we have to ensure that new regulation is proportional. That it delivers real improvements in financial stability, but does not arbitrarily undermine growth.

For instance Insurers are a major investor in UK infrastructure, and we know that Solvency 2 is a significant issue in the regulatory debate. That is why we are committed to ensuring that it allows and encourages insurers to continue their vital role as long-term, stable investors.

PFI

I also want to say a few words about the Government’s approach to Private Finance Initiatives as part of our overall infrastructure plans. The starting point is that private finance will continue to play an important role in underpinning our country’s future infrastructure needs.

It’s impossible to deny that PFI projects have a better track record of delivering on time and to budget, compared to conventionally procured public sector projects.

More than that, they allow us to achieve a real transfer of appropriate risks away from the public to the private sector.

But at the same time, we must acknowledge that there is room for improvement. To ensure that we are making the most out of every pound spent.

To that end, earlier this year I launched a pilot project at the Queen’s Hospital in Romford to test the Government’s draft PFI savings guidance. That project is reaching its conclusion and I will shortly be in a position to announce the findings from that and similar Defence pilots; and to set out our next steps.

Conclusion

I hope you’ll agree that we have come a long way in just a year to reform the UK Infrastructure environment.

Unlike any other Government before us, we have set out to industry with a clear vision of the country’s infrastructure needs and the Government’s infrastructure priorities.

But more than simply articulating a vision, we are delivering real change to doing infrastructure in the UK.

We have provided more certainty to the industry, and at the same time reduced costs, by reforming planning and improving transparency

Of course, we still have much further to go. Our Infrastructure plan takes a four year rolling time horizon and we have to ensure we maintain the level of commitment, engagement and innovation that we have done to date.

Your ideas and your input will be vital to identifying where our key infrastructure needs are, the real pinch points where investment will deliver the maximum output.

I look forward to working with you in the years to come.

Thank you.