The UK is heading towards an infrastructure spending shortfall of £700bn by 2040, with £1.6tn of projects currently unfunded, according to a report by EY-Parthenon, EY’s global strategy consulting arm.
The report – Mind the (investment) gap: funding and delivering capital projects amidst fiscal constraints – attributes the funding shortfall to a combination of economic headwinds.
It finds that persistently high levels of inflation, rising cost of capital and expanding government balance sheets following Covid-19 have significantly increased the cost of capital projects while leaving many governments with less money to spend.
In the UK, for example, there are £1.6tn of unfunded programmes and projects up to 2040. According to EY analysis, only around £900bn of these will be covered by government funding under the current fiscal outlook, leaving at least a £700bn shortfall.
Based on EY projections, meeting the remaining shortfall without government spending would require private sector investment in UK infrastructure to more than double from the £568bn currently projected to be required by 2040.
Mats Persson, partner at EY Parthenon, said: “Almost every Western country is facing a growing gap between the capital investment needed to meet green, economic and strategic priorities, and the amount governments can afford to spend.
“Plugging this gap will require the entire value chain, from policymakers through to developers and investors, to urgently come together to find alternative sources of capital and utilise new technologies to bring down the cost of these projects.”
The report identifies three key measures that, if deployed at a project level in the UK, have the potential to plug the investment gap.
These include leveraging a range of alternative investment models that have worked successfully on individual projects worldwide, from value capture models in Japan to charging models in Austria.
The report underscores the potential for these models to attract a significant amount of private sector investment in the UK’s capital projects.
For example, EY analysis suggests that if the UK could match the average private investment levels seen in some other OECD countries, it could unlock an additional £326bn for transport infrastructure projects alone over the next 15 years.
The report also highlights the benefits of deploying AI and other technologies to produce accurate cost analysis and highlight savings opportunities. It finds that deploying such technology on capital projects could cut costs by 10-15%.
Sayeh Ghanbari, business consulting leader at EY, said: “Infrastructure projects have traditionally been slow to incorporate new technologies, even in areas where it is widely accepted as best practice.
“Unless the infrastructure sector significantly accelerates its adoption of productivity-enhancing tech, the eventual spending shortfall could delay or even prevent the completion of critical, national priority capital projects. The acceleration of AI presents an opportunity for the sector to reverse this trend.”