Building our Industrial Strategy

This article first appeared on Inframation News.

The Government’s green paper, Building our Industrial Strategy, has major implications for UK infrastructure. Its central hypothesis is that we need to focus on newer emerging industries, rather than the old, and in some cases irrelevant industries.

The green paper was published in January and clearly a lot has happened since then. Three months were nonetheless spent consulting with industry on how to build a modern industrial strategy.

Accordingly, underpinning the UK’s new industrial strategy and approach is the significant disruption to traditional markets caused by technological advances. For example, we are beginning to witness quantum changes in power generation, storage and usage. This is likely to result in micro grids and decentralised storage, so challenging conventional wisdom for power and the position of big utilities. This represents a major opportunity to realise a fundamental increase in efficiency and productivity without necessarily having to involve massive capital investment, certainly not as much as may have been required in the past. It may also allow for a greater number of smaller businesses on a more local basis.

This goes hand in hand with carbon emissions commitments and the ever growing rhetoric around the infrastructure needed to achieve a reduction in reliance on fossil fuels and towards renewable sources of energy. The circular economy looks at how we bring about real efficiency in the way the energy is reused, thus creating sustainable cities for the future. In this vein we are seeing the burgeoning waste to energy market, which is only set to grow and continue in the UK. There is no doubt that innovation and technological advances present a wealth of potential to progress the industrial strategy, but what will be key is this government being able to translate the potential into a steady stream of opportunities.

Public vs private investment

It does seem remarkable that a country that was responsible for the industrial revolution and whose financial institutions funded significant infrastructure building around the world, should rank as having one of the poorest capital stocks in the developed world. While this has come about through a variety of factors, not least burdensome government regulation and inconsistent government policies over protracted periods of time, only the brave would advocate a more proactive role for government, which is reflected in the Green Paper.

For those of us who have been involved in infrastructure procurement over the last few decades it is difficult not to notice a general cycle whereby procurement was first decentralised through PPP to local government, followed by an abandonment of this and the readoption of a centralised approach with a focus on iconic projects and framework procurement. There may well be a good argument for the centralised procurement of major infrastructure but this needs to be carefully orchestrated if the fundamental objectives of the Green Paper, namely sharing growth more equally around the UK and raising overall productivity, are to be achieved.

Apart from ensuring competition there is probably less of a need for heavy central government investment and ownership, which does challenge the merits and economics of current major government commitments. To see significant development it’s probably more productive to focus on creating a better investor environment rather than engaging in major public sector procurement, which has often proved less successful in the long term.

In terms of social and transport infrastructure, there may be an exception where the role of government is different. Major transport infrastructure, such as roads, will continue to be publicly procured, even if privately provided. Clearly there is considerable scope to improve the procurement process and method.

Social infrastructure is a different challenge and one that lends itself to more decentralised procurement. Hopefully the present government, which has moved toward more central procurement, can embrace a reversion to decentralisation.

The green paper’s central hypothesis is that we need to break from the past and focus on newer emerging, not old industry is encouraging, as is the overarching theme of raising productivity.

There is no doubt that government can and should play a vital role in shaping and promoting its ten point plan in addition to using Brexit as a catalyst for change to make this happen. 

Unlocking investment

Clearly there is a disconnect between the ambitions of the proposed industrial strategy and access to the level of investment needed to make it a reality. Theoretically, there is no shortage of finance for sustainable infrastructure. Banks, funds, multilaterals, green bond providers and equity investors are queuing up to provide finance in exchange for stable returns, providing that the tenor, pricing and risks are acceptable. So what is the solution?

In so many respects less is more when it comes to government involvement in improving productivity, we have seen this time and again around the world. Hopefully this Green Paper and consultation will lead to a more subtle approach from government. There are many things that can be done that do not involve big public sector investment such as changing the tax regime to reward private investment and facilitating private capital raising off listed markets and away from the short-termism that public markets promote, none of which seem to be considered in the Green Paper.

We are taking steps in the right direction but as will likely emerge from the consultation phase, there needs to be a holistic and wide ranging overhaul of government’s role in supporting substantial productivity growth. We await government’s response to the consultation and how the strategy is progressed.