Why our infrastructure will win General Election 2019

Adding to a landscape’s worth of unknowns, the forthcoming general election might be creating yet more levels of uncertainty. But with the main parties’ manifestos revealed it seems the one thing we can count on is the direction of travel on infrastructure spend, both citing ultra-low interest rates to justify their position.

Our latest Support Services sector research quarterly report shows evidence is mounting that companies involved in major UK infrastructure projects, and in particular rail, are likely to be the big beneficiaries of either party’s plans, if they keep their promises.

What follows is a summary of our findings. Please contact our Support Services team to read the quarterly report in full, or read the executive summary here.

The big election pledges

Naturally, we’re not here to predict either way which way the vote will swing. Nevertheless, both main parties have promised a significant increase in spending to help our infrastructure.

The Conservatives have promised an increase of £20 billion per year, increasing the budget to £67 billion. This was first announced in the ‘Chancellor’s speech’ on 7 November, highlighting the newly proposed fiscal rule #2 that would facilitate this level of spending: it states that “investment in long-term projects like roads and railways will not exceed 3% of GDP” – a considerable step-up relative to the long-run average of c.1.8% and 2018/19’s figure of 2.2%.

The Conservatives’ manifesto highlights Northern Powerhouse Rail, the Midlands Rail Hub, upgrading flood defences and a £28.8bn investment in roads, as priorities for the additional £100bn.

John McDonnell meanwhile has outlined Labour’s plans and has proposed an increase in infrastructure investment of £55bn per year under a Labour government.

Labour’s investment will be made through its National Transformation Fund; £250bn will be invested through its ‘Green Transformation Fund’ over the next 10 years in energy, transport and other networks, alongside another £150bn to be invested over 5 years through its ‘Social Transformation Fund’, which is to be used to “replace, upgrade and expand... schools, hospitals, care homes and council houses”. This promises to more than double net capital spending to £102 billion, making the UK’s capital spending amongst the highest in the world.

Major rail projects shift up gears

It appears that rail will likely benefit most from these plans. The major national rail projects currently in progress now appear to be moving from early stage development to more significant and advanced spending plans.

Network Rail’s Control Period 6 – CP6 – the ambitious strategic business plan outlining all rail projects, works and improvements to be delivered between 2019 and 2024 promises a 25% increase in renewal and maintenance spend in rail.

The delivery plan details train performance that has been in decline for the past seven years and undermined public trust in Network Rail’s ability to deliver a reliable service as rail systems have grown ever-more complex and interconnected. CP6 allows for a fresh look at the industry, which should result in better services for passengers.

As part of CP6, Network Rail will make it easier for third parties to fund, finance or deliver work and to this end is implementing reforms that should reduce bureaucracy and red tape. The intention is to make it easier for external providers to compete for work and carry out work on the railway directly, make third-party funding easier to achieve, and attract and reward third-party finance and delivery.

The growing rail network needs to be maintained and supported, and the forecast expenditure of £53bn will provide significant growth opportunities for suppliers and partners.

Meanwhile a leaked document on HS2 – the Oakervee Report, leaked to The Times after its official release had been pushed back to after the election by the Government – suggests support for the project is continuing. Failure to complete the project in full would result in a decade-long wait for alternative rail projects to be developed in its place. Meanwhile, the strain is already being felt on existing networks, with peak travel growing almost 3x faster than previous estimates.

The report states that the current budget of £56bn for HS2 is “not affordable”. The latest estimates put its total cost at £88bn, and expected to rise further. 

From an economic perspective, all of the benefit of HS2 to taxpayers comes from the later phases, extending further North. This lends its support with the report’s conclusion that the project must be completed in full.

Who are the companies involved?

Perhaps we’ll need to wait until the dust has settled on the 2019 General Election to really know how much extra is in the infrastructure wallet. To caveat, there is considerable doubt over whether these levels of investment can be delivered in practice; the IFS has found that incumbent governments have repeatedly undershot their capital-spending target, falling short almost every year between 1992 and 2015.

That said, the evidence is mounting that companies involved in UK infrastructure projects will be the likely big beneficiaries of the improvement in market conditions.

Our Support Services sector analysts note two multidisciplinary engineering services providers that we follow, as an example:

• Renew, whose recent results impressed, is perfectly positioned to see the benefit of increased renewal and maintenance spend in rail.
• With Van Elle, meanwhile, we expect to also see both the benefit of higher rail spend and the competition being lured off onto HS2. Albeit the very short term is likely more subdued before management improvements gain traction.

Whatever the outcome of the election, high times are ahead for UK infrastructure and in particular our rail networks.

We’d certainly be interested to discuss our findings further with companies operating in this space with considerable growth ambitions. Please contact our Support Services team.