The UK is heading towards an infrastructure spending shortfall of £700bn by 2040, with £1.6 trillion of projects currently unfunded, according to analysis published by consultants EY (Ernst and Young).
EY’s report Mind the (Investment) Gap: Funding and delivering capital projects amidst fiscal constraints focuses on spending commitments identified by the National Infrastructure Commission, the Department for Health and Social Care and the Ministry of Defence.
Commitments to critical national infrastructure include transport network projects, hospitals and schools. Projects also include decarbonising public buildings. It also factors in the prime minister’s decision to increase defence spending to 2.5% of GDP.
EY said: “If the UK maintains historical levels of capital spending up to 2040, adhering to current fiscal rules capping borrowing and debt, then it would be in line to commit £1.8 trillion in cumulative capital spending over the next 15 years.”
However, EY has identified an additional £1.6 trillion of projects and programmes that are currently unfunded up to 2040.
It goes on to say that the UK government may allocate future spending over the next 15 years to cover this shortfall, but by using historic patterns of government spending on existing versus new projects, analysis estimates that only around half of the £1.6 trillion could be covered by government investment by 2040. This would leave a potential funding shortfall of at least £700bn.
EY goes on to explain that, based on these 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.
The report also warns that future risks could also see the £700bn deficit increase.
“If the same level of infrastructure project cost overruns of the last decade recur in the coming 15 years, almost £1 trillion could be added to the shortfall, with a further £390bn if further geopolitical tensions escalate to economic strains like inflation and more defence spending,” it states.
How to address funding challenges
In its report, EY suggests costs could be addressed by leveraging a range of alternative investment models such as those that have worked successfully on individual projects worldwide, for example value capture models in Japan to charging models in Austria.
The UK government has made signals that it is investigating new models for private funding of public infrastructure – most notably to pay for the £9bn Lower Thames Crossing. Further clarity may be given in the Autumn Budget on 30 October.
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 (Organisation for Economic Co-operation and Development) countries, it could unlock an additional £326bn for transport infrastructure projects alone over the next 15 years.
Further, the report recommends that infrastructure projects incorporate a series of efficiency improvements, with particular focus on the design phase, which could reduce the average cost of a capital project by 20-25%. Lengthening the design phase of major projects has been highlighted as a way of reducing risk and cost by several bodies, including the ICE in its recent report on the failures of High Speed 2 (HS2).
EY also promotes the benefits of deploying artificial intelligence (AI) and other technologies to produce accurate cost analysis and highlight savings opportunities. Analysis by the EY AI Value Accelerator highlights that deploying these existing AI techniques on capital projects could cut costs by 10-15%, driving £158bn in savings across the UK infrastructure pipeline by 2040.
EY business consulting leader Sayeh Ghanbari noted that “infrastructure projects have traditionally been slow to incorporate new technologies, even in areas where it’s widely accepted as best practice”.
She continued: “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.”
Reasons for cost increases
Israel’s fresh ground invasion of Lebanon threatens an escalating regional war, and Russia’s constant ratcheting of nuclear war threats to the West, all raise the prospects of higher spending requirements for UK projects.
Geopolitical tensions increase costs for UK projects by interrupting supply chains and making investment managers less confident in markets generally, including in the UK.
Interrupted supplies of natural gas from Russia to continental Europe raised supply chain costs significantly, which had the knock-on effect of raising general inflation levels in the UK.
Explaining the cause of the cost increases, EY said: “This high collective cost is partially due to the impact of economic headwinds. Persistently high levels of inflation have already significantly increased the cost of capital projects in recent years.
“PPI inflation, an indicator of manufacturer and infrastructure costs, peaked at 24.4% in the UK in 2022, meaning that a capital project undertaken in the UK in 2016 was on average already 46% more expensive by 2022.
“Meanwhile, UK debt interest payments increased threefold from £38bn in 2019-20 to £104.7bn in 2023-24, reducing the level of spending available under current fiscal rules.”
EY Parthenon partner Mats Persson 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.”
Like what you’ve read? To receive New Civil Engineer’s daily and weekly newsletters click here.