Public spending: the challenge faced by the infrastructure industry

(by Scott Brown)

As Britain's budget deficit heads towards £200bn and national debt swells towards 100% of national income, savage cuts in public expenditure are back on the agenda. This will create a particularly challenging environment for the infrastructure industry.

The likelihood is that whether we have Labour or Conservative government in office, the knife will be taken to public sector spending. What are likely to be high on the agenda are cuts in capital procurement and infrastructure programmes; the slashing of public sector jobs; and addressing the significant difficulties of public sector pay and pensions. The focus of procurement decisions is likely to swing back in the direction of price over quality. At best, ‘value for money’ will no longer be a ‘nice to have’ it will become a contractual imperative.

As the public sector increasingly recognises that most companies can deliver a technical solution, the challenge facing the players within the industry is how to differentiate themselves from the competition. Demonstrating an ability to deliver projects and services, which respond to community needs; and driving improvements in efficiency, will be critical to success.

Construction

After a decade-long boom, which has seen the rebuilding of many of Britain's schools and hospitals, and an enourmous commitment to the Public Fianace Initiative (PFI), the tide may be about to turn. Since 1997, the sector which include big names such as Amey, Carillion, Costain, Galliford Try and Bovis, have thrived on the huge increase in government infrastructure investment. In the last 12 months the Government has ‘pulled forward’ a large proportion of their capital investment programme for the next 5 years. The real question is where this leaves the construction sector over the next few years, as the government struggles to address their public finance deficit.

The infrastructure industry is closely linked to the public sector, which currently accounts for 40% of all turnover generated by UK construction firms. Over the last few years, the sector has become even more dependant on work from government and local authorities. Even as the economy pulls out of recession it is unlikey that the private sector will generate the level business to fill the hole left by public sector cuts. If the industry is not to be seriously damaged, then any cuts will have to be carefuly managed and implemented gradualy.

Transportation

Investment in the transformation of the transport infrastructure could also be subject to substantial cuts. One project that could be exposed is Crossrail, the £16bn plan to build a railway line from Heathrow airport to Canary Wharf in London's Docklands and Essex. The shadow chief secretary to the Treasury, Philip Hammond, is understood to have concerns over the funding of the scheme, which involves £5bn of public money. There is industry speculation that the project could be delayed or scaled back.

Scott Brown is the Managing Partner of Excellence in Business.