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What now for infrastructure investment in a post-referendum UK?

In recent years the UK has seen significant capital committed to infrastructure at a scale not witnessed since the Victorian era.

The National Infrastructure Plan sets out £400bn of investment, the National Infrastructure Commission endorsed Crossrail 2 and Transport for the North projects as national priorities, and money continues to be put towards High Speed 2, tube modernisation, highways, airports and ports.

Furthermore, the UK has historically benefited from significant availability of capital for infrastructure.

Historically, the UK has underspent on infrastructure. According to a report by McKinsey, between 2008 and 2013, approximately 0.4 per cent of GDP was spent on infrastructure projects. This is less than Australia, Japan and China, who have all seen significant investment recently.

Regional priority

With London delivering around 25 per cent of UK GDP (by comparison, Berlin contributes 5 per cent of Germany’s), the role of the Northern Powerhouse, Transport for the North and devolution to rebalance the UK economy becomes even more important.

Greater devolution was proposed, in part, to help facilitate infrastructure investment decisions to be made regionally, accelerating growth and allowing enhanced delivery capacity. The Leave vote has amplified the need to continue investing in the regions.

“We have learned that continuity of investment in transport and infrastructure is critical to enabling economic growth”

Market uncertainty may dampen the appetite for infrastructure spending in the short term, as foreign investors and lenders grapple with currency and economic risks. Non-sterling investors might seek to avoid exposure to the pound for a period of time due to the uncertain environment.

It also remains to be seen how the UK replaces the role of the European Investment Bank, which historically has been one of the largest lenders to UK infrastructure.

The UK will need to leverage its history of generating innovative solutions for infrastructure financing – as demonstrated by the Thames Tideway Tunnel and Northern line extension.

Reasons for optimism

Economic forecasts suggest UK growth is likely to decline in the short term following the EU referendum vote. However, there are factors that provide a degree of confidence.

Today the UK banks are generally better capitalised than in 2008 and perhaps better able to ride through an economic downturn. The UK economy has also enjoyed a period of buoyant growth, which means that the government should be better equipped to weather an economic downturn.

In this new environment, the need to invest in infrastructure does not diminish. The sector requires sustained funding from government to be balanced against the fiscal challenge, deficit reduction plan and the wider impacts of any downturn on government revenues.

The transport secretary’s recent confirmation of the government’s commitment to its investment plans is, therefore, encouraging news.

There may be significant challenges ahead and uncertainty over how this situation unfolds. However, the UK is the global leader in this sector and we have learned that continuity of investment in transport and infrastructure is critical to enabling economic growth and to helping build Britain’s future.

Manish Gupta is a partner and head of infrastructure corporate finance at EY

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