The Infrastructure Pipeline
Since our last edition the Government has published an update on the National Infrastructure Pipeline (NIP) which is currently forecasting £190bn of infrastructure investment spend occurring in the next three years through public expenditure, regulated sectors and private investment.
This investment is across the following sectors:
- Social Infrastructure
- Digital Infrastructure
- Flood & Coastal
- Science & Research
Adjusting the spend for the removal of the Social Infrastructure and Science and Research Sectors, since the projects allocated to these sectors are in the main built environment projects (with some infrastructure works), then the investment spend forecast to occur within the traditional infrastructure sector over the next three years is £151bn and this is allocated between the sectors as shown in the table below;
Previously, at the beginning in January 2018 the NIP was forecasting the following spend;
On the surface the pipeline is looking positive with a greater level of spend being forecast over the next three years, than forecast in January 2018. Beyond 2020/21 the pipeline includes a further spend of £224bn. In respect of the UK’s nuclear new build programme the forecast only includes for the spend for the Hinkley Point C Project, significant spend on other nuclear new build projects will not occur until after 2021 at the earliest. The pipeline also does not include any spend for the £14bn Heathrow Expansion mega-project which only received its approval in the autumn with the significant spend to happen beyond 2020.
The above investment will be delivered by a 50:50 mix of public and private funding. 80% of the public funding is expected to be from Central Government. Previously, the pubic to private funding allocation was 55% to 45% so the NIP is currently forecasting greater private investment than previously.
As a percentage of spend of GDP the National Infrastructure Commission (NIC) is proposing public expenditure is maintained at 1.2% of GDP beyond 2020 and up to 2035. If private investment is maintained at a proportion of 50% of overall spend then this will provide for an on-going spend of 2.4% GDP for infrastructure, consistent with the level of spend over the last three years. So, the sector is looking stable with a reasonable level of spend being projected over the long term.
In respect of the Government’s response to the NIC’s National Infrastructure Assessment (NIA) and the recommendations there-in, Philip Hammond has confirmed the Government will respond to the NIC’s recommendations with a National Infrastructure Strategy to be published in 2019. This is due between six and twelve months after the publication of the NIA, so hopefully we will have an update on this in our summer issue.
The key risks to the forecast are Brexit related. Firstly, Brexit has been described as the civil services “biggest and most complex challenge…. in peacetime history”, resulting in less focus on the delivery of the government’s major projects. This is evident in the analysis undertaken by the Infrastructure and Projects Authority (IPA) which is set out in the table below. There is a clear trend since of projects moving into the Amber and Red Zones where successful delivery is assessed as being ‘in doubt’ or ‘unachievable’, this rating accounts for 36% of all Government Major Projects, double the percentage five years ago.
Figure 1.0 – Delivery confidence Levels for projects in the government major projects portfolio
Secondly, is the risk of securing the private investment required and this has most recently been highlighted in the nuclear sector with firstly, Toshiba pulling out of the Moorside Project and then Hitachi putting the Wylfa Project into a long-term suspension, both for reasons of failing to attract investors to the projects.
In the event of a ‘No Deal’ the UK will no longer have access to the European Investment Bank or the European Investment Fund, whilst the UK has a 16% shareholding in the bank the rules state only members of the European Union can be shareholders. UK organisations that have received funding from the bank though have their rights preserved under Section 4 of the EU Withdrawal Act 1918, but of course this act is subject to on-going debate. The bigger picture is the UK is reliant on international private investment for many infrastructure projects and the key question is what will the appetite be for these investors post-Brexit?
The government in the last budget also abolished the use of PFI/PF2 procurement with no proposals for replacement of this procurement route. The impact on the infrastructure sector is limited since this procurement route is not widely used across the infrastructure sector, albeit, Highways England (HE) was planning to use PF2 for two of its Complex Projects, namely, the A303 and Lower Thames Crossing (an explanation for their risk rating by the IPA). In respect of both these projects the HE is progressing the procurement of these contracts along more traditional funding routes, with both projects now being subject to full public funding.
The forecast is for a steady stream of delivery in infrastructure sector, certainly not a boom, but there does appear to be over the next three years a consistent level of investment in the sector. There is however a risk to the delivery of projects and securing the private investment required and this is dependent on how the challenge of Brexit is resolved.
Funding Nuclear New Build Projects?
What is happening with the United Kingdom’s nuclear industry? With the recent news of firstly, Toshiba pulling out of the Moorside Project and more recently Hitachi’s confirmation they are going for a long-term suspension (rumoured to be 18 -24 months) for the Wylfa and Oldbury Sites, it seems the UK’s nuclear renaissance is faltering. It does rather call into question how these projects should be supported by the UK Government, at this time there is not a consistent policy coming from the government with different funding models being developed for these projects.
At Hinkley Point C, EDF signed a Contract for Difference with the government which prices the cost of nuclear electricity at £92.50 per megawatt hour, this was on basis of the project being equity financed through its investors EDF and China General Nuclear (CGN). There has been much criticism of this arrangement with the financing arrangements making this an expensive funding route. At least the Contract for Difference has provided sufficient confidence in the business case to attract the necessary private investment. There is unlikely to be another nuclear new build Contract for Difference with the government moving away from this approach for Wylfa, Moorside, Sizewell C and Bradwell.
With Wylfa the government, despite its previous position of no public investment for new nuclear build, had agreed to take a one third investment in the project along with a third of the investment coming from Japanese banks and third from Hitachi itself. The issue with the Wylfa Project is twofold, i) the investment from the government and Japanese banks would not arrive until the Financial Investment Decision (FID) had been reached, leaving Hitachi to fund the development of the project itself and ii) It has always been Hitachi plans to sell their investment in Horizon at FID and to remain as the technology vendor for both Wylfa and Olbury. So firstly, Hitachi became exposed to a greater level of investment pre-FID (which for nuclear new builds is significant, Hitachi has stated it is writing off circa £2bn against its current investment for Wylfa), but more importantly it was unable to attract private investment funding for the project. The high level of investment required together with long period prior to realising any return on investment is not attractive to traditional funders of infrastructure i.e. pension funds and banks.
This is much the same story with Moorside where Nugen (Site Developer owned by Toshiba/Engie) was struggling to agree a Contract for Difference with the government and Toshiba was also unable to attract private investment into the project, resulting in Toshiba pulling out of the project.
So where does this leave nuclear new build in the UK? Well not quite dead just yet, there is still Sizewell C being developed by EDF/CGN, this is a next of a kind EPR Technology project following on from Hinkley Point C. EDF are exploring with the government using the Regulated Asset Base (RAB) funding model for the project, this is the funding model used within the UK regulated infrastructure industry i.e. rail, utilities and is being used for the Thames Tideway major project. EDF are continuing with this project and believe they can achieve significant reductions in cost compared to HPC as a result of First of a Kind savings and Next of a Kind efficiencies.
There is also Bradwell B being developed by CGN/ EDF, for which the Chinese HPR-1000 PWR technology is currently mid-way through the ONR’s Generic Design Assessment. CGN seem very focused on getting this project through its development stage and are also considering the RAB funding route. Interestingly, Robert Davies, UK COO of CGN, has expressed that CGN may well be interested in developing the Moorside Site.
Overall, what has been seen is the private financing of these massive and complex projects is fraught with difficulty and that what is really needed is government support, the question remains can the RAB model work and is it the right funding mechanism for these major complex projects.
Horizon Nuclear Power – Wylfa Project
At Faithful+Gould we have been providing support to our clients in the nuclear new build sector for over ten years, firstly with Hinkley Point C (which is on-going) and latterly with the Sizewell C (SZC) and Wylfa Newydd (WN) projects. We have been supporting Horizon Nuclear Power (HNP) with the WN project (WN) through its development stage.
The WN project, in Anglesey, is planned be the UK’s first Generation 3+ Advanced Boiling Water Reactor (ABWR) power station, capable of generating 3,000MW. It is located alongside the existing, decommissioned Magnox station on the northern tip of the island.
In addition to the power station works the project also includes associated temporary developments. The main elements of which are; a 4,000-key accommodation campus, with associated recreation and welfare facilities; a park and ride facility to transport workers by bus to the site; a logistics centre located at Holyhead to marshal and co-ordinate road and marine transportation movements to the site; a marine off-loading facility and a number of highway improvement schemes across the local road network.
HNP is a start-up utility and is developing its first NNB project in the UK and having to manage for the first time the UK Government’s Cost Discovery and Verification (CD&V) process which is a critical element of the NNB development process to be able to demonstrate ‘value for money’ of the project.
HNP recognised Faithful+Gould for our specialist knowledge and experience of current NNB projects, the CD&V process and as a leading practitioner of best-practice in the commercial assurance role of major infrastructure programmes.
HNP engaged Faithful+Gould to provide specialist commercial services to support the critical pre-FID phase of the project by; bringing commercial review and benchmarking of the project cost data, including contractor cost estimates in order to evidence ‘value for money’; fulfilling an assurance role for the client’s commercial submissions as part of the HM Government’s Cost Discovery and Verification (CD&V) process.
We deployed a core team of senior commercial staff to work as an integrated team within the client’s office; collaborative working was the key principle of HNP’s ethos and one which Faithful+Gould actively supported. The core team was augmented and supported by a Faithful+Gould reach-back team which extended to our global operations across the nuclear sector.
Services provided by us include:
- Due diligence on HNP’s existing cost data.
- Development of ‘Should Cost Model’s’ which gave an optimised view of likely project cost and be the basis of commercial challenge to the project team.
- Develop and undertake studies to analyse, challenge, benchmark and verify cost parameters and from which ‘Should Cost’ reports will be produced and issued to HNP senior management.
- Compare and analyse ‘Should Cost’ reports and outputs to the contractors estimates and assumptions.
- Preparation of cost divergence/convergence analyses between the various contractor estimates and the Should Cost Model outputs and develop cost reduction/efficiency target strategies
- Preparation of appropriate analyses and reports to support HNP with investor enquiries and the CD&V process.
- Development and implementation of a ‘3-line assurance’ strategy and fulfilling the role of the line 3 assurance entity prior to submission to external bodies, including the CD&V process.
Key Benefits and Success Factors
Faithful+Gould has an extensive knowledge base in respect NNB projects and the external governance and assurance requirements, compliance with which is a critical element to their success.
Being a member of the SNC Lavalin group of companies, provides Faithful+Gould with unparalleled reach-back within a global organisation with wide-ranging experience and knowledge.
The benchmarking studies and ‘should cost modelling’ undertaken by Faithful+Gould has informed HNP’s strategies and buying solutions in respect of temporary works accommodation, labour and Project Management Office (PMO), leading to tens of million’s pounds savings against the original proposals.
The due diligence and assurance reviews undertaken have provided expert second opinion on estimate reports provided to the UK government.