The government has pledged £23bn to UK ‘infrastructure and innovation’ over the next five years in an attempt to revive Britain’s low rate of productivity, but industry figures are sceptical of the scale and subject of the projects targeted.
Delivering the last ever Autumn Statement in the House of Commons today, Chancellor of the Exchequer Philip Hammond announced a new National Productivity Investment Fund to be spent on “innovation and infrastructure”.Hammond said the decision had been driven by a growing need for technological innovation and reliable transport networks, both of which were essential to reviving the country’s lagging growth and productivity rate.According to Hammond, in terms of productivity the UK lagged the US and Germany by some 30 percentage points, as well as France by over 20 and Italy by eight.Meanwhile, the Office for Budget Responsibility (OBR) has forecast growth in 2016 to be 2.1%, but has predicted this to drop to 1.4% in 2017 as a result of lower investment and weaker consumer demand.Transport, broadband and housingThe government has pledged an additional £1.1bn of investment in English local transport networks, including £220m to address traffic pinch points on strategic roads; £450m to trial digital signalling on railways to achieve a step-change in reliability; and £390m to continue development of low emission vehicles and connected autonomous vehicles.Hammond also said the government would “squeeze more capacity out of our existing rail infrastructure”.Elsewhere, government committed over £1bn to digital infrastructure to catalyse private investment in fibre networks so that the UK becomes a “world leader in 5G”.To assist this, from April the government will introduce 100% business rates relief for a five-year period on new fibre infrastructure, supporting further roll out of fibre to homes and businesses.Other areas targeted include a new £2.3bn Housing Infrastructure Fund to deliver infrastructure for up to 100,000 new homes in areas of high demand, as well as a further £1.4bn to deliver 40,000 additional affordable homes.Hammond also said from 2020 the government will commit to spending between 1% and 2% of GDP on economic infrastructure.And he said that he had written to the National Infrastructure Commission to ask it to make recommendations on the future infrastructure needs of the country.An ‘upside down’ plan…Investment specialists were, however, sceptical of the scale and subject of the government’s infrastructure spend.Barings investment manager and director of asset allocation research, Christopher Mahon, described the Chancellor’s infrastructure plan as “upside down”.He added: “The treasury has already committed eye watering sums of money to programmes such as HS2, Heathrow and Hinkley that won’t be completed for another 20 years. Billions upon billions have been promised, with those projects costing £56bn, £19bn, and £18bn respectively.“Meanwhile only token amounts of money are being spent on practical projects that are needed today such as easing rail and road bottlenecks. For example, the £2bn announced today is fifty times smaller than the amounts committed to the three mega projects alone. This is despite the Treasury’s own analysis showing these smaller less glamorous projects give the bigger payback to the taxpayer. So it is a great shame that the Chancellor continues to be seduced by the glamour of the mega and ignores the utility and timeliness of the micro.”Goldman Sachs Asset Management head of UK institutional sales David Curtis said government investment in infrastructure is often seen as an attractive investment for pension funds in need of reliable long-term investments, but its value depends on the kind of projects being pursued.He said: “More modest projects such as broadband extensions or improvements to local roads, while vital to the economy of the regions they benefit, are not on a sufficient scale to help pension funds so we await with interest further detail on the individual projects the government intends to support.”Franklin Templeton UK equity income fund manager Colin Morton described the statement as “somewhat of a non-event”.He added: “Infrastructure and innovation were the buzzwords of the statement, but in reality the sums of money announced will be spread thinly and it is not enough to move the dial.”… but encouraging nonetheless But Local Pensions Partnership chairman Sir Merrick Cockell said it was “encouraging” that the Chancellor has identified infrastructure as a priority and will work with the National Infrastructure Commission on a plan.“There is no shortage of funds to invest in UK infrastructure.,” he said. “What is lacking are the appropriate assets and the right deals to invest in. Hopefully an economic infrastructure plan will include how to finance such developments and involve potential asset owners, such as UK pension funds, right from the beginning.”The Investment Association (IA) also said it supported the increased focus on infrastructure investment, but said to turn this policy into practical solutions “requires a partnership between policymakers and the industry”.IA chief executive Chris Cummings added: “That is why we are today giving our formal backing to the development of a UK municipal bond market, which will help local authorities secure much-needed financing to invest in new infrastructure projects and meet their refinancing needs, by launching a position paper outlining our support and the benefits of municipal bonds for investors, borrowers and the wider economy.”Mercer principal, Amarik Ubhi said the statement’s approach to infrastructure appears to be “evolutionary rather than revolutionary” and while the government’s commitment to building out and upgrading the UK’s infrastructure was positive, the exact details of these latest initiatives – and specifically, what opportunities they may present for institutional investors such as UK pension schemes – are yet to be disclosed.“We look forward to the publication of a new pipeline of projects in 2017 which we would expect to provide further details,” he added. The economic outlookIn the Autumn Statement the Chancellor announced the Office for Budgetary Responsibility (OBR) had forecast growth in 2016 to be 2.1%, but predicted this to drop to 1.4% in 2017 as a result of lower investment and weaker consumer demand, driven, respectively, by greater uncertainty and by higher inflation resulting from sterling depreciation.However, the OBR has said it expects growth to recover to 1.7% in 2018, 2.1% in 2019 and 2020, and 2% in 2021.Borrowing in cash terms is set to be £68.2bn this year falling to £59bn next year; £46.5bn in 2018-19; then £21.9bin; £20.7bn, and finally £17.2bn in 2021-22. Elsewhere, the OBR forecast that debt will rise from 84.2% of GDP last year to 87.3% this year, peaking at 90.2% in 2017-18 as the Bank of England’s monetary policy interventions approach their full effect.In 2018-19, debt is projected to fall to 89.7% of national income – the first fall in the national debt as a share of GDP since 2001-02 – and it is forecast to continue falling thereafter.“Infrastructure and innovation were the buzzwords of the statement, but in reality the sums of money announced will be spread thinly and it is not enough to move the dial.”
Colin Morton, Franklin Templeton
