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Infrastructure

UK Construction Intelligence Report

Overview

Since our last update on the Infrastructure and Energy Sectors we have all been impacted by the COVID-19 Pandemic which has brought about extremely challenging times for the sectors. We are now facing the deepest recession in history with the contraction that we have all seen in the economy over last three months, albeit how long this recession will last no one really knows, will it be a V-shaped or a L-shaped recovery, not even the leading economists seem to know the answer to this question. What we do know is there are some green shoots of recovery appearing within the sectors and with welcome commentary from the government that they see investment in these sectors as being a key part of their strategy to get the country through this crisis it provides some hope.

Since our last update in January we have seen some significant changes over the last few months some welcomed and some not so. Since our last update the Aviation sector was just taking in the news of the delay to the Heathrow Expansion project as a result of the legal challenge which has resulted in that project being severely ramped down for the next couple of years or even longer. More recently, there has been the welcomed news of the government delivering on it’s commitment to the UK’s largest infrastructure capital investment project, High Speed 2, this is a much needed lifeline for the sectors at this time and has brought welcomed relief across the sector.

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What we should not forget there has already been significant commitment by the government to the sectors, as we reported in January, to the following expenditure:

  • Government has committed to the Highways England (HE) ‘Roads Investment Strategy’ (RIS2) programme with funding of £25.3bn for the 5-year period.
  • OFWAT’s Final Determination for the five-year period of AMP7, which commenced in April 2020 is £51bn for the Water & Sewerage Sector
  • 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.

Albeit, there is likely to be some delay to the above spend because of the COVID-19 crisis.

However, there are parts of the infrastructure sector which have been extremely hard hit and for which we are expecting there to be a much longer route to achieving the Pre-COVID-19 outputs. Aviation is probably the hardest hit part of the Infrastructure Sector, it was already having some challenge in respect of the Heathrow Expansion Project but then quickly following this the COVID-19 has decimated the Aviation market. We have seen our major clients in Aviation close down their capital programmes at Heathrow, Gatwick, Birmingham and Stansted and we have had to de-mobilise large teams from these clients. How long before we are all flying again, and aviation clients have the confidence to re-start their investment in their assets is anyone’s guess.

Within the Nuclear Sector, Hinkley Point C is continuing to be delivered whilst it has it challenges during the COVID-19 crisis it is still delivering and has achieved a major milestone during this time, with the completion of the largest ever concrete pour in the UK, the Unit 2 J0 Common Raft Foundation, on time, having poured a total of 20,693m3 of concrete in a single pour.

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There are two nuclear projects in the development stages namely, Sizewell C and Bradwell B with a third currently on hold at Wylfa Newydd. These projects are either progressing or achieved the DCO planning process with the key enabler for all these projects going forward being the funding stream. At this time the government is still to complete its consultation on the use of the Regulated Asset Base Model for Nuclear, this is expected to happen this year. This is vital for this segment of the sector since it is an enabler to unlocking funding from the likes of pension funds which are looking for long term secure infrastructure in which to invest, it also reduces the burden on nuclear developers balance sheets and significantly reduces the cost of financing for these projects. The good news is there is still significant levels of private funding available within the international markets for these projects provided the RAB model is confirmed as being suitable for nuclear. At this time, we are still seeing the Sizewell C and Bradwell B projects continue with their development phase certainly for the near future, albeit how the recent rows with China on Hong Kong and Huawi will affect the Chinese backed Bradwell B project, we will have to wait and see.

In addition to the nuclear new build segment there is the on-going nuclear de-commissioning programme and whilst funding for this segment has not been confirmed beyond 2021 we fully expect the government to maintain existing levels of funding for the Nuclear Decommissioning Authority (NDA). The NDA typically spends circa £2.3bn per annum on nuclear clean-up cost with circa 50% of this spend at Sellafield.

In summary, the infrastructure and nuclear sectors have been wounded by the COVID-19 crisis but we are anticipating good levels of recovery in the short to mid-term on the basis that it is part of the government’s strategy to back these sectors for the UK’s recovery.