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Infrastructure

UK Construction Intelligence Report

Overview

We finished last year on a wave of pessimism within the infrastructure and energy sectors arising from:

  • The postponement of a major nuclear new build project for Wylfa on the Isle of Anglesey as Hitachi decided to write off their £2bn of investment, well certainly in the short to mid-term anyhow.
  • Sirius Minerals massive North Yorkshire Polyhalite Mining project coming under serious threat as a result of funding failure.
  • The Government’s commissioning of a review into the viability of the High Speed 2 Project, raising questions over the future of the biggest project in Europe
  • And of course, we cannot forget to mention Brexit and the uncertainty this was bringing to the overall economy.

How quickly things can change as we start 2020 on a wave of optimism; with the UK having now resolved the first stage of Brexit and a strong and stable Government brings with it a stronger sense of political stability within the UK. With the Governments drive to still maintain high levels of private sector investment in our country’s infrastructure, this political stability is vital in unlocking overseas investment into the UK which many of our clients are reliant on for a source of funding for their projects

It has confirmed by the Government the HS2 Project the green light to progress Phase 1 and 2a with a new focus on delivering the project more efficiently and cost effectively. Phase 2b is to be renamed High Speed North and will be subject to a further review, specifically how it will integrate with the “Northern Powerhouse Rail” proposal for the east-west link across the Pennines. This news reinforces the risk to the sector around market capacity and should be a key consideration for all projects looking to progress over the next few years.

An offer of a rescue package for the Sirius Minerals project from Anglo American; and the Government considering an alternative funding model for nuclear new build projects, through a Regulated Asset Base (RAB) model, which may encourage Hitachi to re-start the Wylfa project, but is certainly good news for the other nuclear new builds in development at Sizewell and Bradwell. This is all good news and supports why we should all be feeling more optimistic within the sectors.

Looking into the future for the whole infrastructure sector. If you believe the recent RICS Civil Engineering Forecast, the future looks quite promising. The RICS are forecasting the civil engineering output will grow on average at 8.4% per annum over the next four years.

This aligns to our understanding of the market, as we see a significant number of mega-project’s, accounting for circa £160bn of capital spend, moving from their development stage into construction over the next four years, such as;

  • Heathrow Expansion Project
  • High Speed 2
  • East/West Rail
  • Highway England’s major projects
  • Lower Thames Crossing project
  • A303 Amesbury to Berwick Down (Stonehenge)
  • A428 Black Cat to Caxton Gibbet improvements project
  • A12 Improvements project
  • Sizewell C Nuclear New Build project
  • Bradwell B Nuclear New Build project
  • Transpennine Upgrade project
  • CfD’s secured for seven offshore wind projects accounting for circa 6000Mw of generation capacity

Also, we are seeing record levels of investment in capital intensive programmes such as;

  • Highways, where the Government has committed to the Highways England (HE) ‘Roads Investment Strategy’ (RIS2) programme with funding of £25.3bn for the 5-year period which runs from April 2020, of which £4.6bn is for 2020/21.
  • Water and Sewerage, OFWAT’s Final Determination for the five-year period of AMP7, which commences in April 2020 is £51bn, albeit this will not all be recorded as construction output, this is an increase from AMP 6 of £7bn and in addition to this will be the remaining spend on the £4.2bn Thames Tideway project.
  • Rail, Network Rail’s Business Plan for the five-year Control Period 6 (CP6) period where the Government has given Network Rail funding to spend £53bn from April 2019 to March 2024, this allows for increasing planned spend on renewals in CP6, but reduced spend on enhancements, compared with CP5.

All this together supports the RICS forecast increase in construction output over the next five years albeit this is levelled off a bit by the recently published Experian UK Construction Forecast which forecast New Infrastructure construction output being stagnant for 2020 with growth forecast of 4% for 2021 and 8% for 2022.

What can we take from all this, well we are talking about growth in the sector running up to the mid 20’s, importantly this is underpinned by the High Speed 2 project, which if it did not go ahead would have a significant impact on the forecasts. There are risks to the forecast, there is of course the next stage of Brexit and the trade deal with the EU and the trade deal with the EU and the sourcing of sufficient labour resources. Overall, there is reason behind the newfound optimism.

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Sector Talking Point

Market Capacity

Having been discussing the newfound optimism within the infrastructure and energy sectors we immediately turn to a potential capacity issue which is looming in the next few years for these sectors. We highlighted above several mega-projects which are currently in the development stage and will over the next couple of years moving into their delivery stages. The overall value of these projects between them represent circa £170bn, but this does not take account of the current projects in delivery such as Hinkley Point C, Thames Tideway, Sirius Minerals Potash project etc. and whilst this seems a lot, they do not represent the majority of the market, since there is considerable expenditure from capital investment programmes and other projects, but they do provide a good weather vane.

There is circa £51bn of annual capacity in the civil engineering market and running up to 2025 mega-projects (in development and delivery) will account for circa £31bn of this annual capacity, as we said they do not represent the majority of the market and therefore we seem to be heading for a capacity issue.

At this time there is no organisation really looking at this issue, HS2 is undertaking some work in considering the impact on its own supply chain and it is sharing data with the Infrastructure Client Group (ICG) but this is all painfully slow. The Infrastructure and Projects Authority (IPA) are doing nothing on this issue currently, the last update to the UK Infrastructure Pipeline was in 2018. So, as a civil engineering industry we seem to be sleepwalking into a capacity issue. If this is then aligned with the potential risks the industry is facing with the ending of the Brexit Transition Period with no trade deal in place and scarcity of labour resources from Europe as well, this could well present a perfect storm scenario.

The UK’s track record of delivering major projects behind schedule a new approach to collaborative working should be considered. Faithful+Gould discussed it in this article published in Building Magazine Faithful+Gould Creating a Collaborative Delivery

When reviewing the above mega-projects, we have started to consider the actual impact this may have on the civil engineering, so for example;

  • Earthworks -The volume of earthmoving required by these major projects is circa 150 million m3, this is dominated by HS2 which accounts for most of this movement. Having spoken to several clients with major earthworks as part of their projects, they were all currently only talking to the same two major Tier 2 Earthworks contractors about their programmes. The question must be asked, do we have enough earthmoving equipment in the country to deal with the volumes required up to 2025?
  • Piling -HS2 have undertaking some analysis of the piling market and the consider they may utilise near 70% of the current market capacity. This will have a considerable impact on construction and how the rest of the industry will be affected.
  • Tunnelling - Of the twelve project in the table above ten of them have significant tunnels to construct overall will involve construction circa 150km of tunnes, we probably do not have enough capacity in the UK to deliver these works and will have to place heavy reliance on European contractors to help deliver these projects i.e. Strabag is the tunnelling contractor for the Sirius Minerals project.

So what do we need to do, it would help everyone to understand the risk by sharing data between the projects to enable the capacity issue to be truly understood. This will aid the development of strategies to manage capacity and provide pro-active management of the very real risk the industry faces.

As we approach publication of this article, the news of the climate challenge to Heathrow’s Expansion Project has broken, seemingly putting this mega-project at risk. Heathrow seem confident the climate issue is eminently fixable and that they will win their case at the Supreme Court. What of the wider implications for this court ruling for other major projects which have not fully considered the environment in their development plans, are there other legal challenges ahead? It certainly brings an element of uncertainty but will probably only result in delaying the projects rather than stopping them altogether.