Plans for the capital’s infrastructure pipeline require massive investment - public and private - and more needs to be done to make the case for private investment, argues London First’s Daniel Mahoney.
We all know that London’s population is booming. After hitting a record in 2015, the capital continues to add 120,000 people to its population every year.
This dramatic growth will require massive investment in new infrastructure projects to boost capacity – some of which are, thankfully, near to being delivered. While the delays have been frustrating, the Elizabeth line - currently Europe’s largest infrastructure project - is expected to increase central London rail capacity by a whopping 10% when completed. This will certainly alleviate some of the East-West strains in London’s transport system.
However, while this enormous increase in the capacity of London’s transport network is welcome and will undoubtedly boost the capital’s international reputation, it will not be sufficient to cope with growing demands in years to come. Crossrail 2, tube upgrades and expansion, market-led proposals for new railways and aviation expansion are just some of the transport projects that will need to be delivered across London within the next generation. And, of course, other infrastructure sectors will need large investment. For example, London’s infrastructure will need to facilitate a booming electric vehicles market and resilience will need to be improved in sectors such as the water industry.
The key question is how will all of this new infrastructure be funded, financed and, in turn, delivered?
Across the UK, the government has announced that there is a planned £600bn infrastructure pipeline over the next decade. Half of this investment will come from private sources, which highlights the importance of private capital in delivering London’s future infrastructure.
Despite having a higher cost of capital compared to the public sector, it is important to stress that private capital can bring benefits to infrastructure projects. These can include stable investment streams that are not subject to political cycles, the transfer of risk to the private sector and the promotion of the right incentives that encourage good management of infrastructure assets. For example, a study published by First Economics showed that, in the water sector, the additional cost of capital associated with private investment was more than offset by the avoided inefficiency.
And London has experience in getting private capital to deliver for Londoners. Economic regulation has promoted stable investment into many of London’s brownfield assets, including the £12bn of investment flows since 2006 into Heathrow that has transformed the airport from being one of the poorest performing globally to one of the best. Moreover, an innovative finance package involving private capital is delivering the Thames Tideway project at competitive costs for water bill payers. And the sale of the High Speed 1 railway on a 30-year concession exceeded expectations in raising revenue for the Treasury and has successfully transferred operational risk to the private sector.
"London has experience in getting private capital to deliver for Londoners, including the £12bn of investment flows since 2006 into Heathrow that has transformed the airport from being one of the poorest performing globally to one of the best."
Of course, while there are clear examples of private capital delivering benefits for consumers, more needs to be done to make the case. The National Audit Office has pointed out that we need more empirical evidence relating to the use of private capital, so further work is needed to inform the public of the rationale behind the use of private investment in infrastructure.
And risks to the delivery of London’s infrastructure pipeline need to be mitigated. Domestic and foreign investors worry about the signals coming from the UK – which we will be discussing at length at Building London in the new year. They perceive a growth in political and regulatory risk – and many believe that, in any case, much of the pipeline is not an investable prospect for the private sector. There are also concerns about whether supply chains, particularly the domestic construction sector, currently have the capacity to deliver big infrastructure projects. And, as demands for central government resources grow, London’s infrastructure will likely require new localised funding streams, potentially requiring the use of land value capture models and greater fiscal devolution. Yet these reforms will be difficult to drive through politically.
Solving some of these issues, and others, will be critical to delivering London’s future infrastructure pipeline – as well as the pipeline across the country as a whole. So, London First has set up an infrastructure funding and finance working group to help promote solutions that break down potential barriers in delivering essential infrastructure investment into the capital.
The creation of this group is particularly timely given the National Infrastructure Strategy and HM Treasury’s infrastructure finance review are expected to be published after the general election. Whatever form the government takes after the general election, these publications will be a critical test of the government’s credibility with business – not just for those looking to invest in Britain’s infrastructure, but also those looking to invest in the UK more broadly.
Daniel Mahoney is programme director for infrastructure at London First.