黑洞社区

The last few years have seen a retrenchment of government spending on construction. From a peak in 2009-10 of 拢56bn at the height of Gordon Brown鈥檚 fiscal stimulus, government capital spending fell by a third to a low of 拢36bn in 2012-13. And while it is now, slowly, on the rise again, with George Osborne having diverted more revenue spending to capital projects than originally planned at the start of the parliament, budgets remain severely constrained.

Osborne has pledged that capital spending will return to 拢50bn by 2015, and then rise in every year of the next parliament, with at least 拢300bn to be spent overall. Of this, 拢100bn will be on construction and infrastructure projects.

黑洞社区鈥檚 Agenda 15 campaign is asking the industry to give its views on the policies that it would like to see from the next government in a bid to influence political party manifestos ahead of the election. This week we鈥檙e asking what spending measures the industry would call for to stimulate both construction and the UK economy from 2015. So what is the case for extra spending in each of the six major construction spending departments?

Department: Health

• Main construction spend: Expanding and renewing the NHS Estate, worth over 拢31bn
• Current capital spending*: 拢4.16bn a year
• Change on previous spending period**: 18% cut
• Post-2015 promise: 2015-16 budget 拢4.74bn, no further promises on capital specifically, though the pledge to protect NHS spending as a whole remains

_{*Average annual spend 2011-15
**Difference from annual spend 2010-11}

What is the case for more funding?

It is very difficult to quantify the exact amount spent by government on the construction of health facilities, as much of the headline capital spend will actually be on health equipment, and procurement is dispersed around the multitude of NHS bodies. However, what is possible to quantify is the growing backlog of maintenance work, worth more than 拢4.5bn this year, up from 拢4.4bn in 2013. In particular, there is a growing volume - 拢1.54bn this year - of 鈥渃ritical鈥� maintenance work that has not been done. This has the potential to have a serious impact on patients and staff and the delivery of services. Conor Ellis, health partner at consultant EC Harris, says: 鈥淭his is the stuff that should be really worrying people and needs to be addressed.鈥�

However, at the same time as this backlog of work is growing, the NHS has been passing back 拢650m of unspent capital funding to the Treasury for each of the last two years, with hospitals and the newly formed clinical commissioning groups seemingly unwilling or unable to commit to large capital projects. This is despite an overarching strategic priority for the NHS to move the delivery of care to smaller facilities closer to patients鈥� homes, while focusing specific complex and acute services in large specialist centres of excellence, both of which aims require new facilities.

Peter Wearmouth, health sector director at Capita Property and Infrastructure, says the spectre of funding cuts to services are making trusts unwilling to commit to building facilities that will require future revenue funding to run. 鈥淭rusts are seeing the need to reduce overall expenditure. Foundation Trusts are able to borrow to get capital, it鈥檚 not that that is stopping them - it鈥檚 whether they can afford the revenue implications of new buildings.鈥�

What other options do the politicians have?

Foundation hospitals already have the ability to raise private capital for construction projects, but are likely to be concerned about their ability to fund new services. Likewise the updated PFI model, PF2, has been linked to new hospitals such as Papworth, but concerns remain over the long-term liabilities this can impose on cash-strapped trusts. Long-term planned changes to the NHS Estate may see the health service sell off up to a fifth of its landholdings via the recently established NHS PropCo, bringing in capital receipts.

In brief: The government needs to clarify the shape of the funding of services before capital can be spent.

Department: Communities and Local Government

• Main construction spend: Affordable housing, local infrastructure and supporting the private housing market
• Current capital spending: 拢4.15产苍
• Change on previous spending period: 39% cut
• Post-2015 promise: The government will spend 拢3.3bn to fund construction of 165,000 homes between 2015 and 2018 with 拢5.2bn promised in total. Its scheme to support the private new build housing market - Help to Buy equity loan - is due to end in 2016

What is the case for more funding?

The supply of new housing increased significantly in 2013, with the NHBC reporting a 28% rise in housing starts last year, on the back of the undoubted success of Help to Buy. But it nevertheless remains significantly below the 240,000 homes that are thought to be required to meet demand in England. Historically England has only ever produced that volume of housing with the help of a major public sector building programme. The government鈥檚 proposed programme of affordable housing construction, equalling 55,000 homes a year, will not come close to the amount of public housing construction the last time England built 240,000 homes, in 1978. That year more than double the number of public homes were built, almost 115,000, than is planned post 2015. Richard Jones, housing partner at EC Harris, says: 鈥淲e鈥檙e not going to get to 240k without more coming in from the public sector and housing associations. We can鈥檛 expect the private sector will deliver anything like that amount.鈥�

Jones adds that housing associations are also raising significant doubts about their ability even to build the 55,000 homes a year planned under the programme, because of the low levels of grant. Catherine Ryder, head of policy at the National Housing Federation, says that more upfront grant is needed to make the programme both sustainable in the long term and cheaper overall to the public purse, and that the doubling of funding to 拢2bn a year could see 65,000 homes a year built. 鈥淲e鈥檝e been making the case for a significant rebalancing of funding for affordable housing to see more capital put in,鈥� she says.

What other options do the politicians have?

The coalition has successfully stimulated the private sale market through government funding of equity loans to home buyers under the 拢3.5bn Help to Buy scheme. This does not impact on the UK鈥檚 national debt and therefore isn鈥檛 classified as CLG departmental spending, but is due to be withdrawn anyway in 2016 at the latest, amid concerns the market is overheating. The government is also using its balance sheet strength to sit behind loans to housing associations, and is facing calls to allow councils to borrow more to build homes.

In brief: Amid private sector recovery, the injection of capital funding or removal of council borrowing restrictions could have an immediate impact on the number of affordable homes built.

Department: Defra

• Main construction spend: Flood defences via the Environment Agency
• Current capital spending: 拢289bn a year
• Change on previous spending period: 21% cut
• Post-2015 promise: The government has agreed with insurers to provide at least 拢370m a year in funding of flood defences for the next six years

What is the case for more funding?

Government funding for flood defences has suffered a small cut in recent years, despite growing public clamour over extreme weather causing flooding at increasing regularity. However, the last week has seen the government divert a further 拢130m to flood defence repairs this year and next in the wake of the ongoing flooding situation in the South of England. Nevertheless, the government鈥檚 committee on climate change has said that, with flooding the greatest threat to the UK from a warming world, the pledged funding will still fall 拢1.4bn behind the minimum amount thought necessary by the Environment Agency, and will result in at least 250,000 more households being put at serious risk of flooding by 2021.

These scenarios do not even take into account the impact of new development, with 40,000 properties being built in areas of significant flood risk between 2001 and 2011, and floodplain development continuing. The committee adds that the expected bill from flood damages in the period due to the projected underspend will run to over 拢3bn. Alasdair Reisner, chief executive of the Civil Engineering Contractors鈥� Association (CECA) says: 鈥淭here is a both a strong economic and emotional case for increased investment in flood defences.鈥�

What other options do the politicians have?

The government is already attempting to draw in additional funding for flood defence development, by making private developers and other public bodies contribute where necessary. This funding is expected to hit 拢131m by the end of the parliament, and if taken into account leaves the funding over 2011-15 4% higher than the previous spending period.

In brief: The experience of this winter, alongside regular flooding in recent years and the view of experts that planned spend will not be enough, is sure to make additional funding a high priority.

Department: Transport

• Main construction spend: Funding for the construction of roads through the Highways Agency and local authorities; and funding for railway construction, renewal and maintenance via Network Rail, Transport for London, Crossrail and HS2
• Current capital spending: 拢8.26bn a year
• Change on previous spending period: 7.3% growth
• Post-2015 promise: The government has said it will spend 拢16bn on HS2 before the end of 2021, and Network Rail looks set to invest an average of 拢5bn a year in its next five-year spending plan (2014-19). Osborne also announced last summer that the government will spend 拢28bn on roads, trebling the current rate of investment to a maximum of 拢3.8bn a year

What is the case for more funding?

Of all the areas of government spending, transport can probably argue to have the best outlook from the government鈥檚 current plans. George Osborne has been clear for a number of years that his priority for investment is economic infrastructure - roads, bridges airports, energy - and with last summer鈥檚 spending review he backed that up with promises of real government funding.

The government describes the trebling of funding for road-building as the 鈥済reatest investment in our roads since the seventies.鈥� But CECA chief executive Alasdair Reisner says it is vital that this promised funding is sustained. 鈥淭here is a 拢78bn cost to the economy of the substandard economic infrastructure in the UK. It would add five basis points to GDP if we invested in improving this now and heavily.鈥�

Including HS2, the programme of rail investment is also strong comparative to recent years. However, local transport spending, where cash-strapped councils have been diverting money to deal with problems elsewhere, is likely to remain a major problem.

What other options do the politicians have?

Road charging has been floated by the government but then put on the back burner, with confirmation that the A14 improvement project will be built without private funding. It is thought that further funding will be needed to back Osborne鈥檚 roads promise given the predicted falls in the car tax and fuel duty revenues that are used to fund current road works.

In brief: Existing pledges are already more than the industry was expecting.

Department: Education

• Main construction spend: 黑洞社区 new schools and maintaining the existing school estate
• Current capital spending: 拢4.63bn a year
• Change on previous spending period: 39% cut
• Post-2015 promise: Chancellor George Osborne last summer pledged to spend at least 拢21bn on school building projects by 2021, and in doing so completely address the backlog of school repairs

What is the case for more funding?

Osborne鈥檚 pledge to put 拢21bn into school building after 2015 sounds impressive, but analysis shows it may still fall well short of what is required. The 2011 James Review found that the general maintenance backlog at the time was 拢22bn on its own. In addition the coalition estimates that there will be a need for 275,000 extra primary school places and 245,000 additional secondary school places by 2021. At the current average build cost, this will cost 拢4.6bn. Add in the 拢1bn or so spent each year on routine maintenance to 2021, and this takes you to over 拢30bn. So the funding required to meet Osborne鈥檚 pledges is likely to be much higher than that so far promised.

Stephen Beechey, education director at Wates, says: 鈥淎t the moment education spending doesn鈥檛 even keep up with keeping buildings in the same condition. There does need to be a significant increase in spend.鈥� In addition even these estimates may fall short of what is actually required: current average build costs of 拢9,000 per child place will be very hard to hold to as prices rise and more complex projects come on stream. Marcus Fagent, head of education at EC Harris, says prices could more than double: 鈥淭he reality is many projects now will be expansions of existing schools which cost a lot more per place than simple new build. Our estimate is that costs will rise from 拢9,000 to more like 拢15,000-25,000.鈥�

What other options do the politicians have?

The education sector is the only one to already have a significant programme using the updated PFI system, PF2. This is currently worth 拢700m to build 46 schools, but this has already been reduced from initial expectations by 拢1bn amidst nervousness about PFI liabilities. It could be an option for a government keen to expand social infrastructure without raising government borrowing.

In brief: The sheer scale of need with a growing population requires further funding.

Department: Energy and Climate Change

• Main construction spend: Nuclear decommissioning programme. However, the department also promotes private investment in energy infrastructure such as new build nuclear power through market levers such as price guarantees
• Current capital spending: 拢2.04bn a year
• Change on previous spending period: 20% growth
• Post-2015 promise: the only promise has been to set the capital budget for 2015-16, of 拢2.51bn

What is the case for more funding?

Nuclear decommissioning spend is one of the few areas of capital spend by government to have actually risen in recent years, with the Nuclear Decommissioning Agency having a budget of 拢3bn in 2013-14 for its site programme. There is little appetite from any of the political parties to radically increase this investment beyond what is essential, given the hopes that cheaper technical solutions to decommissioning may be developed in coming years.

Mark Stewart, UK sector leader for energy at EC Harris, says: 鈥淭here is a case for spending more money now by taking some key decisions, but the political environment, the prospects for future technological change and limitations in the supply chain鈥檚 ability to step up all militate against it.鈥�

What other options do the politicians have?

The DECC鈥檚 programme of energy market reform, designed to promote investment in new energy generation capacity, is effectively government subsidy, albeit working through guarantees of future revenue rather than capital outlay. Continued market and political uncertainty has seen investment in new nuclear and offshore wind stall, with creation of offshore wind capacity running at half the expected rate, and the Hinkley nuclear project on hold until an investment decision is made. Some, such as Olympic Delivery Authority chair John Armitt, have suggested direct public funding to get nuclear projects under way, but Stewart says: 鈥淚t鈥檚 better to let the private organisations that have the capacity take this risk on.鈥�

In brief: Decommissioning work will carry on as planned, and there is still hope private funding will be forthcoming for new build nuclear.