Infrastructure pipeline project budgets will be constrained by inflation

The delivery of planned infrastructure work in England will be constrained by budget erosion due to inflation unless investment is increased, according to BCIS civil engineering forecast data.

The updated National Infrastructure and Construction Pipeline, published by the Infrastructure Projects Authority (IPA) and HM Treasury this month, sets out planned and projected investment in major economic and social infrastructure over the next 10 years, the workforce requirement to deliver it, and a list of near term planned procurements.

Published IPA figures are at 2022/23 prices adjusted for inflation using the GDP deflator, which is forecast to increase at 2% per annum. The BCIS General Civil Engineering Cost Index (GCECI) is forecast to rise by closer to 3% per annum.

While GDP is a measure of the market value of goods and services produced in the UK economy as a whole, the BCIS civil engineering input cost indices are based on cost models which represent typical expenditure profiles for the infrastructure sub-sectors.

Dr David Crosthwaite, Chief Economist at BCIS said: ‘The forecast increase from 2022/23 to 2032/33 in the GDP deflator is 21.9%, whereas the increase in the GCECI over the same period is forecast to be 29.6%.

‘The IPA says it has consistently used GDP indices to adjust for inflation and compare time periods and acknowledges the construction sector specific indices have been higher than GDP indices over recent periods, especially following Russia’s invasion of Ukraine.

‘Further, the IPA notes that the current pipeline range of £700-£775 billion equates broadly to the pipeline in 2021, which was £650 billion in prices of the day and £788 billion in 2023 prices.

‘Given the BCIS forecast of civil engineering costs is somewhat higher, we would expect the delivery of planned work to be constrained by budget erosion towards the end of the period due to inflation.’

Last published in 2021, the pipeline was delayed in 2022 because of the fallout from the Liz Truss / Kwasi Kwarteng mini-Budget. Finally published in February 2024, the authors note that the data in the pipeline is a snapshot from the summer of 2023, with adjustments made following the Prime Minister’s cancellation of HS2 phase 2a, 2b and HS2 East.

The pipeline consists of £700-775bn of planned and projected investment in 661 projects over the next 10 years. £164bn of this is due by 2025. Not all infrastructure spend is construction. It ranges, for example, from 20% on windfarms to 100% on roads and buildings.

Dr Crosthwaite said: ‘On the face of it, a summary of current spending plans should be helpful for increasing transparency for contractors and investors about short-term workflows.

‘As the preamble to the pipeline details, all the publicly funded elements reflect already announced spending commitments, in line with the 2021 Spending Review which set departmental budgets to 2024/25. Public spending beyond this won’t be confirmed until the next Spending Review, which is due in 2025 and will cover the period to 2030/31.

‘Network North, for example, features in the pipeline against £36bn of capital expenditure, but every other column detailing annual costs has “TBC” and the opportunity for private investment “unknown”.

‘Further, the pipeline comes with the disclaimer that it is “not a statement of need or a commitment to undertake all or any specific projects or programmes shown” and that in some sectors, such as energy, “the decision to go ahead with individual projects will be determined by the market”.

‘It doesn’t scream of the clarity and commitment that BCIS, among many others in the industry, have been calling for.’

The government has said its response to recommendations made in the National Infrastructure Commission’s second National Infrastructure Assessment will be ‘developed over the coming year’.

When the assessment was published in the Autumn, our own response was to welcome its call for ‘clarity and consistency of policy and regulation’. Cost control, as well as transparency around costs, was central to its recommendations.

As important as being able to fund projects is the workforce to deliver them. In its analysis of the pipeline, the IPA has estimated an annual average of 543,000-600,000 workers will be required across different industry groups, including construction and engineering construction. It highlighted civil engineers and civil engineering operatives, plant operatives, and plant mechanics / fitters as roles most likely to see shortages.

The IPA offers reassurance that the government is working to ‘address these risks and attract a reliable pipeline of skilled workers into the sector’. However, the only measure cited is the Shortage Occupation List. Five construction occupations were added to the list six months ago, though the scope of the list itself is in question after a major review by the Migrant Advisory Committee (MAC). The government is also due to respond to the MAC’s recommendations this year.

Further, the IPA concedes its analysis is ‘limited in its considerations of very new and emerging technologies that may reduce or influence the types of skills required to deliver future projects and programmes.’

Dr Crosthwaite said: ‘Upgrading our country’s infrastructure is a monumental task and is integral to reaching net zero. The new skills and roles that will be required in efforts to decarbonise the built environment must be forefront in ministers’ minds, otherwise output from the sector will be limited by the available labour input.

‘After peaking in 2022, materials cost inflation calmed considerably in the latter half of last year, meaning labour became the main cost driver on projects. The recent economic backdrop and reduced output in the industry, particularly in new work, has somewhat masked the true picture of labour supply. We expect that when demand picks up again, the supply and cost of labour could be impacted significantly unless shortages are addressed.

‘As the NIC commented in its assessment, “while upgrading the country’s infrastructure is a major task, it is achievable, provided government makes decisions and commits to them for the long term, removes barriers to progress and supports people through the transition in a way that is both affordable and fair”.

‘Unfortunately, we’re not convinced that the current pipeline does that.’

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