How can the Department for Infrastructure fund delivery of its infrastructure pipeline?
Northern Ireland’s infrastructure development was neglected for decades. There are now plans in place to rectify this but how this will be funded remains uncertain.
Northern Ireland differs from the other UK regions in that transport functions remain highly centralised with the Department for Infrastructure (DfI) responsible for the planning, delivery and financing of transport.
A previous blog post has compared the level of transport expenditure across the devolved UK jurisdictions and shown that while public spending per capita is higher in Northern Ireland than in any of the other UK regions, less is spent on transport. For example, the Scottish Government spends twice as much per person on transport as the NI Executive.
That blog article also addressed an imbalance in public spending between roads and public transport since the turn of the century. It also raised the question of whether or not this could change under the current institutional arrangements where it could be interpreted that a conflict exists between roads and public transport as they compete for a finite pot of money. Would a degree of separation, in the form of separate highway and public transport agencies with some degree of independence, better facilitate the development of Northern Ireland’s transport infrastructure?
Northern Ireland’s infrastructure pipeline
DfI has a broad range of transport schemes, at various stages of planning, that will greatly enhance NI’s strategic transport network. However, the timeframe for delivering these, if indeed they will be delivered at all, is highly uncertain, mainly due to the availability of funding. This uncertainty impacts the region’s attractiveness to investors whilst it causes difficulties for the supply chain in terms of forecasting workload, income and future staffing needs.
The Executive relies heavily on the funding provided by the UK Government, via the block grant, to fund infrastructure investment. Expenditure has therefore been curtailed in recent years in line with the wider cuts to public spending. The UK Government made it clear in the 2016 Autumn Statement that it views infrastructure investment as critical to the UK’s future prosperity, committing to spending £300 billion by 2020/21 (£91 billion on transport) and 1 to 1.2% of GDP until 2050. On the basis of the Barnet Formula, Northern Ireland will receive an additional £250 million. Whilst this is welcome, when consideration is given to the funding requirements of other Executive departments, notably health and education, as well as demands for investment in housing, energy, telecommunications and water infrastructure, how much of this will be allocated to transport remains to be seen.
In the last ten years (2006-2015) Northern Ireland, through the former Department for Regional Development, successfully attracted over £100m of European funding for transport related schemes. Indeed, Northern Ireland remains eligible to apply for funding until the UK officially leaves the EU with the UK Government guaranteeing successful bids post-Brexit. The forthcoming Brexit process does, however, raise serious questions around the delivery of some planned schemes, notably the strategically significant York Street Interchange (pictured above), aimed at easing congestion on the region’s busiest roads and the Belfast Hub (pictured at the top of the article), designed to improve transport integration and connectivity in Belfast. It is only when Brexit negotiations develop that we will learn what type of measures the UK Government will introduce to offset the removal of European funding.
Leveraging private finance
The UK Government’s plans for infrastructure investment will rely heavily on leveraging private sector investment. In contrast, private finance has been used sparingly in Northern Ireland. The DfI is currently committed to two contracts for the completed works to the A1 and Westlink, each lasting for a period of 30 years. According to the OECD, this type of commitment has been a cause of concern within government where it is felt the overall level of exposure to long-term commitments will remove flexibility from departmental revenue budgets.
Around half of the projects in the UK’s infrastructure pipeline to 2020/21 will be financed and delivered by the private sector. This approach is in line with recommendations by the OECD which has stated that leveraging private sector investment in strategic transport infrastructure will be essential and that governments that fail to attract this type of investment will fail to deliver the infrastructure they need.
Public–private partnerships, or PPPs, are seen by some as an effective way to build and implement new infrastructure or to renovate, operate, maintain or manage existing transport infrastructure facilities. However, the uptake of PPP programmes varies significantly around the world, with many countries viewing it as a first choice for strategic infrastructure above a certain cost threshold, whilst others are more reluctant to expose themselves to the long-term debt liability.
The Scottish approach to PPP
Key transport infrastructure projects in Scotland have been delivered in partnership with the private sector. For example, the £500m motorway improvement scheme involving the M8, M73 and M74, was delivered through a new type of PPP called The Non-Profit Distributing (NPD) model. As with other PPPs it involves a partnership with a private sector provider which will design, build, finance and maintain the asset. This enables the Scottish Government to greatly reduce the requirement for up-front capital, enabling it to spread the payments over the 30-year life of the contract. Significantly it differs from PPP in that it:
- Fixes the rate of return for the private sector partner;
- Allows the public sector greater control and improves transparency of the private partner; and,
- Surplus profits are not distributed to the private sector; instead, they can be returned to the public sector, used to pay off debt, or invested in more or higher-standard services or infrastructure.
PPPs in the EU
There is a plethora of approaches taken to PPPs across the EU, often reflecting the unique environment in which they are to be employed. In Belgium for example, the regions, given their size, have had difficulty in achieving the scale of scheme to be attractive to private companies; an issue it shares to some degree with Northern Ireland. The Flemish Government has therefore adjusted its PPP practices accordingly, opting to cluster a number of schemes to optimise the return of a project, and to attract private partners.
Despite the noted benefits of PPPs, concern around the long-term liability involved in contracts of this type is not unique to Northern Ireland. The German model addresses this by employing user charges. PPPs on the strategic road network are effectively paid by HGV charges; in 2013, toll revenues totalled around €4.39 billion. PPPs on the local interstate highway system are financed by charges applied to all road users.
The German Government has now launched a ‘new generation’ of PPPs to improve the federal trunk road network (motorways and federal highways). This will involve 11 projects and investment totalling around €15 billion for the construction, structural maintenance and operation of around 670 kilometres of federal trunk roads.
Improvements to Northern Ireland’s transport infrastructure have the potential to make a significant contribution to regional development. This is the reason the UK Government has placed infrastructure investment at the forefront of its plans to grow the UK economy. The problem is that as public spending budgets continue to be squeezed, and we begin to come to terms with the impacts of Brexit, there may be a need for some debate around what alternative funding models would facilitate the level of investment required for NI to remain competitive. The Executive has looked to the private sector in the past, however, there has been an understandable reluctance to tie up future revenue budgets with long-term debt. That said, NI’s closest competing regions in GB and ROI do appear to be pressing on, and embracing the benefits of, long-term private finance.
The question for the NI Executive is to what extent it believes continued uncertainty around budgets and project delivery may undermine our competitiveness in the future and whether or not the benefits of leveraging private finance outweigh the costs.