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Infrastructure work to lead wider recovery

Construction Products Association forecasts are positive for roads and rail as infrastructure replaces housing as the driver of recovery, but questions linger over nuclear and HS2.

The future is bright for firms in the construction industry.

Workloads and tender prices are both rising. In addition, once historic contracts signed at low prices a few years ago have been worked through, most contractors should enjoy an increase in margins.

The latest Construction Products Association forecasts show that overall construction output is set to grow by 4.9 per cent in 2015 and by a further 4.2 per cent in 2016. In the four years through to 2019, output is expected to rise by a total of 21.7 per cent.

Over the past couple of years, industry growth has mainly been as a result of a recovery across the housing market, but over the next few years we expect to see infrastructure as the most significant driver of growth.

Last month, Infrastructure UK published its latest National Infrastructure Plan, which has a pipeline of £411bn of projects.

As a result of this, we forecast that infrastructure activity will rise 10.3 per cent in 2015, 10.8 per cent in 2016, and by a total of 72.4 per cent in the four years to 2019. This growth will be primarily due to major projects in the roads, rail and energy sectors.

The road ahead

The austerity programme of the previous coalition government hit the roads construction sector particularly hard.

Sadly, the roads sector is one of the easiest for government to cut, as it can simply pull projects in the pipeline with relatively few complaints from voters when compared with cancelling schools or hospitals.

One such example was the A14 upgrade, which was worth £1.4bn but was cancelled in October 2010.

A combination of funding cuts to the Highways Agency (now Highways England) and financially constrained local authorities meant that roads construction output fell by 49 per cent between 2010 and 2012.

However, the previous government realised that cutting investment in construction hinders UK economic growth.

As a result, capital investment in the roads sector has been increasing since the low point of 2012 and future prospects are bright in this area of the industry.

The creation of Highways England, a government-owned company with five-year fixed funding and a Roads Investment Strategy listing the projects
that will be completed to 2021, should take politics out of roads construction and prevent stop-start funding hindering the sector.

Therefore, despite the fact that government is continuing to implement austerity measures, roads construction should continue to increase. Work on the revived A14 project, for example, is expected to finally begin at the end of 2016.

Furthermore, Highways England states that highways and major roads investment in 2019/20 will be three times higher than its level in 2014/15.

It’s not all good news, however. The move towards rolling out smart motorways means that although roads investment will rise significantly, an increasing proportion of this spending will go towards technology, signage and electrics rather than standard roads construction work.

“Highways England should take politics out of roads work and prevent stop-start funding”

In addition, austerity measures will hit local authorities, which will continue to be financially constrained through to 2020 and this will hurt local roads construction and repairs work.

While local roads don’t have the high profile of motorways and A roads, they do account for around 97 per cent of the UK’s road network, so these cuts will be cause for concern.

Nevertheless, roads construction is still forecast to grow by 20 per cent in 2015, by a further 15 per cent in 2016, and by a total of 83.2 per cent by 2019.

Rail reality

Theoretically, rail construction should be enjoying a golden era. In addition to Network Rail’s general spending, you can easily reel off a list of major projects in the sector: Crossrail, Thameslink, High Speed 2, High Speed 3, Crossrail 2.

The reality is more sobering. The Construction Products Association is forecasting growth through to 2019, but this growth is relatively subdued.

In terms of the major projects, activity has peaked on the Crossrail and Thameslink programmes. Both are expected to finish in 2018 but provide significant activity until then. HS3 and Crossrail 2 are unlikely to start until the 2020s.

In addition, there are significant concerns over when main work will get under way on HS2.

Based on the latest estimates, the total construction cost of the project is expected to be £42.6bn, with the capital cost of the first phase between London and Birmingham estimated to cost £21.4bn.

The transport minister insists that civils work will start on HS2 in 2018, but the association anticipates main works not starting until the end of the decade due to planning and cost issues, a claim HS2 denies.

Network Rail’s capital funding is fixed over a five-year period and investment for maintenance, renewal and enhancement between 2014/15 and 2018/19 is estimated to total £37.9bn - higher than the previous five-year period.

However, it is difficult to see how this will be achieved given that the public subsidy will fall from £3.9bn in 2011/12 to only £2.6bn- £2.9bn by March 2019.

To help deal with these cuts, Network Rail has said it is aiming to reduce rail network running costs by 18 per cent, but further detail is needed to ascertain whether this is deliverable.

“There are significant concerns over when main work will get under way on HS2”

In addition, due to overspends on existing projects, Network Rail has had to postpone two major electrification projects totalling more than £500m, between London and Sheffield and the TransPennine route between Leeds and Manchester. So much for the ‘Northern powerhouse’.

Overall, due to work on Crossrail, Thameslink and Network Rail funding, output is forecast to rise 18 per cent in the four years through to 2019. But if HS2 does get started on time, workloads could rocket.

Growing energy

Energy construction activity has risen in the last five years and we’re expecting it to continue increasing in the next five.

However, before you get too excited, whether you benefit or not depends upon which part of the sector you’re in.

Decommissioning work continues apace, with 18 power stations scheduled to close and all except one of the UK’s nuclear reactors shutting down by 2023.

This area of work, along with demand for energy from an ever increasing number of households, reflects a growing need for new investment in power generation.

The Department of Energy and Climate Change estimates that £110bn of investment in electricity will be needed to meet future demand over the next decade. This need is becoming increasingly urgent.

National Grid reported in July that the spare capacity for energy generation this winter will be 1.2 per cent, which means unseasonably bad weather will make the UK entirely reliant upon imports.

Yet despite the need for investment, near-term prospects for the new nuclear programme are poor. Main works at Hinkley Point C were expected to start
this year but have been delayed again; the association now expects main works to start no earlier than 2018.

Indeed, it looks increasingly likely that work at the second new nuclear power station at Wylfa will get under way first.

When main works on both these programmes do finally begin, they will be large enough to provide double-digit growth.

Near-term growth in the energy sector will be boosted by offshore wind activity. Funding for the Round 3 offshore wind programme started in 2014.

Two projects got under way in the second quarter of 2015 and capacity is estimated to rise from 3 GW in 2012 to 18 GW by 2020.

Meanwhile the £1bn Swansea Bay Tidal Lagoon scheme received planning permission in June and has the potential to boost workloads in the medium term.

However, the government and investors must first agree a ‘strike price’, and uncertainty around this crucial ingredient means the project has not been included in the association’s latest forecast.

Overall output growth in the energy sector is expected to average 14 per cent a year through to 2017 before main works on the new nuclear programme drive growth of 25 per cent in 2018 and 20 per cent in 2019.

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