The UK is burdened with significantly higher construction costs than European peers, according to research that lays bare the challenge of upgrading British roads, bridges and energy systems at a time of tight public finances.
Infrastructure project costs are much higher in the UK than in France, Germany and Spain, according to early findings from a Boston Consulting Group study that compared more than 1,600 projects around the world.
The findings underline the tricky situation for politicians grappling with how to upgrade the country’s tattered infrastructure, fund the transition to a low-carbon economy and drive down public debt.
The pressure has piled on since Covid-19 as big construction projects suffer from sharp rises in material, labour and energy costs. Infrastructure construction costs in September 2023 were 25 per cent higher than in January 2020.
“The focus needs to be on how we can improve right across every stage of delivery of large infrastructure projects. Pushing more money into the pipeline alone won’t address much of the root causes,” said Raoul Ruparel, director of BCG’s Centre for Growth.
The National Infrastructure Commission has said overall public and private sector investment needs to increase from an average of about £55bn per year over the past decade to between £70bn and £80bn per year in the 2030s, to respond to global warming and bolster growth across UK regions.
This would entail one of the steepest jumps in UK infrastructure spending since the second world war, BCG estimates.
Infrastructure impasse
This is the fourth in a series of articles on the infrastructure challenges facing the UK
Part one: Building up Birmingham
Part two: Budget blowouts and delay
Part three: Cambridge plan at risk from lack of water supply
Part four: Can the UK afford its infrastructure bill?
The BCG analysis, due to be released next week, compares the unit costs and build times of road, rail and social infrastructure projects such as hospitals across six economies.
The report shows that on unit costs the UK spends more than Germany, France and Spain, as well as a wider grouping of countries across the EU. British costs are similar to those in the US, however, and below those of Australia.
UK rail projects were found to be particularly expensive, with costs driven up in part by a handful of very large, complex projects. But even on more basic projects, such as flat roads, UK unit costs are higher, said Ruparel.
For example, the average cost for a flat road in the UK is £8.45mn per km, compared with a European average of £5.77mn per km and £4.22mn per km in France, according to BCG.
Among the problems the UK faces are long planning times. While the UK is not the worst performer on unit costs, Ruparel said: “The picture becomes less rosy still when you consider decades of under-investment and the likely increase in demand for larger and more complex infrastructure projects.”
Infrastructure has moved up the UK political agenda after Rishi Sunak’s decision last year to cancel the northern leg of HS2 and a scandal over a potentially dangerous lightweight concrete used in schools and hospitals.
But hopes this might sow the seeds for a renewal have been overshadowed by political plans for a harsh retrenchment in public investment.
While UK public sector net investment is relatively high as a share of GDP, at 2.6 per cent in the current year compared with 1.5 per cent 10 years earlier, the Treasury has now pencilled in a cash-terms freeze after the election expected this year.
As a result, public sector net investment will be crunched by nearly £20bn between now and 2028-29 in real terms, according to the Institute for Fiscal Studies think-tank.
Even under the Labour party’s £28bn green spending programme, public investment will end up lower in 2028-29 in real terms than its current level, said Ben Zaranko, a senior research economist at the IFS, warning of a “big squeeze” on infrastructure spending over the next five years.
Already UK private and public investment across a range of categories, including infrastructure, is about 5 percentage points lower as a share of GDP than the G7 median excluding the UK. The country would have to invest £130bn extra per year to close the gap.
“Not only has public investment in infrastructure been low by international standards but it has been highly uncertain and volatile, which impacts private sector willingness to participate,” said Jagjit Chadha, director of the National Institute of Economic and Social Research think-tank.
“We have an investment shortfall that is manifest in appalling utilities and transport services — which is a disaster for the country,” he added.
British politicians are looking to the private sector for help, hoping to encourage more insurers and pension funds to invest.
The government is also trying to accelerate infrastructure delivery via planning and grid reforms, as well as setting up a UK Infrastructure Bank.
“The government is committed to delivering high quality infrastructure to boost growth across the country,” the Treasury said.
The opposition Labour party has also pledged to improve investment if it wins the general election. Darren Jones, Labour’s shadow chief secretary to the Treasury, said the party wants to “identify thematic problems” such as on budgets, performance management and delays.
“The big question is, why is it always more expensive to build something in the public sector in the first place?” Jones said.
Under Britain’s regulated utility model for water, energy and telecommunications, large swaths of infrastructure are financed by the private sector. “You can do more to unlock more private capital to get investment higher,” said Tom Smith, director of economic policy at the Tony Blair Institute think-tank.
Pension funds are being targeted by both main UK political parties. Australian and Canadian pension funds invest three times as much of their portfolios into infrastructure than UK funds, Smith said.
However, specialists warn that overseas investors are deterred by the UK’s problems in delivering new projects.
Alison Fagan, partner and head of international infrastructure funds at DLA Piper, said: “The UK is increasingly seen as a challenging market because of the lack of a defined infrastructure policy and the wealth of alternative opportunities elsewhere.”
Letter in response to this report:
Water group claims key to UK infrastructure puzzle / From Peter Simpson, Chief Executive, Anglian Water, Huntingdon, Cambridgeshire, UK