The UK falls to number nine in this year’s Infrastructure Index. Brexit has created political stasis, dominating the political agenda at the expense of other priorities and creating uncertainty over the future of key infrastructure projects. But while its infrastructure and renewables market tackles the impact of this political uncertainty, the UK is placing a bet on global renewable energy leadership with its “net zero” strategy.
Uncertainty takes its toll
The result of the 2016 EU membership referendum has meant that government time and resource has been diverted to Brexit at the expense of other matters, including infrastructure. The impact of political uncertainty has handicapped the UK’s 2019 score, without which it would have ranked 5th rather than its current position of 9th.
Since the referendum, lending to UK projects has decreased significantly and the country could face a multi-billion-pound funding gap should the European Investment Bank (EIB), a key source of long-term investment, cut the UK’s membership. The UK government is deliberating the option of creating its own national infrastructure bank to support vital infrastructure after Brexit.
The sectors most likely to experience severe, but short-term, costs in the event of a no-deal Brexit are those with operational assets such as ports and airports that are heavily exposed to trade and passenger traffic with the EU.
At the same time, the Labour Party’s re-nationalisation plans for the UK’s energy, railway and water infrastructure are causing mounting concerns for investors.
Confirmation by the then-chancellor Philip Hammond in his 2018 Autumn Budget that the Project Finance Initiative (PFI) was coming to an end, has left the UK market wondering how the government plans to mobilise private capital for UK infrastructure. Knock-on pressure is now being felt in the UK’s construction industry, as it heads for a downturn due to limited greenfield projects.
In a bid to address these concerns, plans for a national infrastructure strategy were announced after Boris Johnson became Prime Minister in July 2019. Simultaneously, Scotland launched consultations to revise its national transport strategy aiming to increase spending over the next 20 years.
Until future concrete proposals are set in motion, delays on some flagship projects – such as the expansion of Heathrow Airport, HS2 and Hinkley Point C – are contributing to a general perception of uncertainty.
However, the country still has several greenfield projects that are moving forward, such as London’s Thames Tideway and Silvertown Tunnel. In July 2019, Highways England launched a tender for the A303 (Stonehenge) tunnel, with the scheme now set to use public money rather than private finance.
Overall, the UK still offers plenty of opportunities, particularly in the secondary market, as demonstrated by the acquisition of a 39% stake in Cadent Gas for GBP 1.9bn by Macquarie Infrastructure and Real Assets in July 2019.
Full fibre by 2025
The UK lags some of its European peers – notably Spain – in the rollout of fibre-to-the-home broadband infrastructure. The digital divide is felt in both hard-to-reach rural communities and inner cities like London and Manchester.
Sizable investment from the private sector is expected, given new Prime Minister Boris Johnson’s goal to reach full-fibre by 2025, instead of 2033 as previously scheduled.
The UK’s broadband gap already offers opportunities to new entrants – alt-nets such as CityFibre – that are challenging the market leadership of BT-owned Openreach.
Other opportunities are likely to spring out of the 5G rollout, as all UK mobile operators (EE, Vodafone, O2 and Three) are set to deploy the technology in the country before the end of 2019.
Net zero 2050
Counterbalancing the current hesitancy in delivering big infrastructure projects, the UK is now securing leadership amongst G7 economies in the race to decarbonisation.
In June 2019, the previous UK government led by Theresa May pledged to reach net zero carbon emissions by 2050, up from the previous goal of an 80% reduction from 1990 levels by the same year. The power sector remains a key driver of this goal and one in which the government can effect change with the relevant regulations and incentives as the energy transition is crystallised as a firm national policy.
Scotland, however, will beat the rest of the UK to net zero. The Scottish parliament has unanimously approved legislation committing Scotland to achieving net zero emissions by 2045.
Already the cradle of offshore wind development, driven by the contracts for difference auctions – with its third-round results awarding 5.5GW out of 6GW to six offshore wind allocations – the UK is now among the countries spearheading the global transition to subsidy-free renewables.
In particular, the country boasts a growing track-record of corporate PPAs, thanks to a relatively high number of creditworthy industrial companies eager to lock in energy prices while enhancing their green credentials.
Another crucial factor in accelerating the UK’s energy transition will be the development of new interconnectors with other European countries. The first subsea UK-Belgium interconnector, called Nemo Link, came online in January 2019, and new projects are currently being developed with France, Norway, Denmark and Ireland.
Rolling stock renewals
The UK’s rolling stock market has been gathering steam in 2019 as investors position themselves for substantial introduction of new rail vehicles.
Political uncertainty in the country has not deterred major rail players like Greater Anglia – jointly owned by Abellio and Mitsui – which is embarking on a GBP 1.4bn rollout of 38 bi-mode trains and 20 electric trains and aiming to replace 169 trains by 2020.
The UK Department for Transport’s rail franchise schedule indicates that the Cross Country network – the most extensive network in the UK – is likely to be the next franchise to execute new rolling stock orders from November 2019 onwards.
New fleet deployments and franchising are also triggering secondary market activity as investors see more value in competitively priced new fleets compared to financing the refurbishment of existing fleets. For instance, in May 2019 a consortium consisting of Japan Infrastructure Initiative, Rock Rail, Equitix and Dalmore Capital acquired an additional 15% stake of concessionaire Agility Trains from Hitachi Rail for the first phase of the Intercity Express Programme which will replace 125 carriages and expand the fleet.