Building back better: A brief view on whether infrastructure investment will really drive economic recovery

Some brief thoughts on what all the hype about an economic recovery led by infrastructure investment might mean in practice.

For those who can’t read on, the key points: Having dealt with the immediate operational challenges thrown up by the pandemic, infrastructure will no doubt be a big part of the Government’s economic response. But the approach will change, with Government focusing on short-term growth and job creation, with the ‘build back better’ slogan becoming synonymous with any infrastructure-linked programme that can deliver against those objectives. The pandemic will result in a new set of priorities, including a sharper focus on resilience, climate change and corporate responsibility

Short-term: steady as she goes

While many sectors of the economy have ground to a halt during the pandemic, the core infrastructure sectors – transport, energy, water and digital – have continued to grind on. Business service demand has reduced and people are using public transport less, but in the main, business providing essential services continue to power the economy through this hibernation period. 

During the crisis, companies have had to adopt new workplace rules and projects have been paused. In many cases, regulators have offered companies leeway on regulatory obligations and Government has delayed new policy interventions so companies can focus on more immediate challenges. As lockdown rules ease, projects are getting underway again and focus is shifting back to more familiar issues, such as water shortages in the warmer months. Britain is already back building.  

Recovery phase: start digging what is shovel-ready 

As the true economic consequences of the pandemic start to bite, the ‘build back better’ tagline will become a rhetorical wrapper for any intervention that can create jobs and get the economy moving again. As many Governments have promised over the years, the Prime Minister was planning to make infrastructure a key pillar of his economic strategy before the pandemic struck. Government is now determined to double down on its previous ambition, given the macroeconomic benefits that infrastructure investment can bring in a period of economic mayhem.

Government is, however, already coming up against the classic supply side challenges that make bringing forward infrastructure projects quickly so difficult. Work is underway on a potential retraining scheme to increase the supply of skilled workers and hints that planning law may be radically reformed to speed up decision making. 

While political ambition remains largely unchanged, the approach to infrastructure is likely to shift dramatically. Given the focus is now on short-term growth and creating jobs, more attention will go to projects that can be bought forward quickly, including through investment in existing assets. Government is already looking for businesses to bring forward shovel ready infrastructure projects, with new projects potentially being given the green light by the Treasury in July as the Chancellor announces the first stages of the economic recovery plan. 

Despite the sense of urgency being stronger than before, the economic and social changes brought on by the pandemic will have an impact on what gets actually gets built. We have already seen a shift in the transport sector, such as a focus on cycling infrastructure at the expense of promised investments in public transport. Working from home is becoming more prevalent, putting greater pressure on the need to boost digital connectivity. Decisions on some major infrastructure projects have been parked until it is clear whether they will still provide value for money – politically beneficial in the case of a decision on Heathrow’s third runway. The uncertainty that hangs over the post-COVID economic model will continue to frustrate some of the more difficult, strategic decisions that the Government is still yet to take.

Rebuilding phase: a new set of priorities for the new normal 

The fiscal outlook facing Government is truly daunting. With the annual budget deficit likely to run to well over £200bn, Government will eventually have to accept that it cannot meet its infrastructure ambitions purely through public funding. Alongside any economic stimulus the country can still afford, Government will have to look once again to the private markets for capital. This will require Government to look at the regulatory settlement afresh, working with companies to support new investment following years of political pressure on consumers bills and the spectre of nationalisation. It will also require the development of new financing frameworks where investment in greenfield assets has stalled.  

Building greater resilience into our fragile economic model will be a key theme of the rebuilding phase. This will go beyond simply preparing for the next pandemic, with the focus being on what needs to be done across the core infrastructure sectors to insure against low-probability, high-impact events, such as catastrophic climate change. There are already calls for sectoral regulators to be given specific resilience duties and for the regulatory settlement to better support companies to invest in addressing long-term risks. We are likely to see a wider definition of what is classed as ‘critical national infrastructure’ given the difficulties in accessing personal protective equipment during the pandemic, potentially coming at a material cost to some businesses. 

The pandemic is also sharpening the focus on Environmental, Social and Governance (ESG) issues. Given the substantial taxpayer funds that have been used to prop of businesses through the crisis, the public will rightly be asking what business will provide to society in return. Companies will need to show they are actively playing their part in building a better new world. There will be a particular focus on how the private sector is actively supporting the transition to net zero emissions, with Government looking to make great strides on green infrastructure ahead of COP26 in 2021. 

Conclusion: time to get building

The political ambition on infrastructure remains as solid as ever. The immediate priorities will clearly change, with the focus turning to projects that can be bought forward quickly, while economic and social shifts may make the major projects of the recent past no longer relevant. Government will still have to grapple with the familiar supply side challenges if it wants to deliver. To maintain a licence to operate in the new world, businesses will have to show more clearly how they are contributing to a better and more sustainable future following the crisis, as well as delivering economic value in the regions that suffer worst as a result of the pandemic. But given the strong political tailwind, the actual builders could well be foundation of helping the UK ‘build back better’.

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