Time to recalibrate
The cancellation of a significant part of the UK’s flagship infrastructure scheme was always going to send ripples across the construction sector.
But as the headlines recede, the suspension of HS2’s northern leg could provide opportunity, for those investing in built assets, if they are to be smart about the way they make full use of the redirected capacity.
Nevertheless, the UK’s weak economic backdrop means that clients seeking to benefit from the industry’s rapid recalibration must be agile – and for many, this may mean updating the way they procure and finance capital expenditure.
When one door closes, others open
The decision to suspend HS2 at Birmingham doesn’t alter the fact that overall investment in infrastructure remains robust. ONS data shows the value of new infrastructure orders placed in Q3 2023 rose by £204m (14.3 percent) compared to Q2, and in October the second National Infrastructure Assessment (NIA) recommended a 30-year programme of transformation for the country’s energy, transport and other key networks.
For its part, the Government has pledged that every pound that had been earmarked for the northern leg of HS2 will be redirected into a £36bn investment in other transport infrastructure.
Reiterated in the Chancellor’s recent Autumn statement, nearly £20bn of this is destined for a reinvigorated Network North programme, which will deliver the Northern Powerhouse Rail programme as planned while providing £8.3bn for road resurfacing across England, a mass transit system in West Yorkshire; and £8.55bn of additional funding for the second round of City Region Sustainable Transport Settlements (CRSTS2).
A further £9.6bn is to be spent on transport improvements in the Midlands, including a raft of major road upgrades and a new Midlands Rail Hub.
Separately, the Government is pressing ahead with its New Hospital Programme, which is due to deliver dozens of new hospitals across the UK by 2030. With so many major programmes due to run concurrently, planning must be joined up to ensure that investments dovetail with each other rather than competing for finite public finance. The construction sector will need to collaborate closely with ministers to assess the available resources and achieve a realistic sequencing of investment and development.
Meanwhile, Network Rail is set to invest £43.1bn on upgrading core railway infrastructure between 2024 and 2029, and water companies in England and Wales have submitted plans for £98bn of upgrades between 2025 and 2030.
The proposed investment in water infrastructure, which is 63 percent greater than that approved for the 2020-2025 cycle, will boost the resilience of the network to long-term challenges such as population growth and climate change, reduce water loss and build Britain’s first new major reservoirs since 1992.
Supply shift
The fact that HS2’s northern leg was in pre-construction when it was cancelled means the immediate impact has been felt most keenly by consultancies and ground engineers, rather than main contractors.
Some have managed to redeploy teams to other projects, while the tier-one contractors who had been eyeing the bigger prize are rapidly switching their focus to other tenders.
Those intent on working on high-speed rail may now look for similar programmes overseas, which could mean a temporary export of skills.
But contractors of this scale will invariably have the depth of skills and experience needed to deliver projects not just in other infrastructure sectors but also in real estate, meaning the alteration of HS2’s second phase may end up boosting supply chain capacity across UK construction as a whole.
This shift could provide a silver lining for clients in the form of increased competition for tenders and a cooling of tender price inflation – which we forecast will ease to 2.7 percent in 2024, down from 3.7 percent in 2023.
We’re also likely to see an evolution in the way some projects are designed, procured and managed. The key trends to watch for are:
1. A rowing back from design and build
The uncertain economic backdrop may prompt some clients to revert to a more traditional model of built asset investment, in which a highly detailed design is commissioned and completed before the construction work is put out to tender.
By extending this front end of the project, clients retain control of the design for longer and can use this time to monitor market developments and adapt elements of the build phase accordingly before committing.
2. Modularisation at scale
Modern Methods of Construction (MMC) will be central to the New Hospital Programme (NHP), which is due to build new hospitals across the UK from a templated design dubbed Hospital 2.0.
Meanwhile the Platform Design for Manufacture and Assembly (P-DfMA) approach, in which ‘pop up’ on-site factories source repeatable, 2D components from a diverse range of suppliers and assemble them into 3D units that can be easily lifted into place, is set to increase in popularity.
With its production line-inspired efficiency and consistency, Platform is especially effective in civil real estate projects where standardisation and repeatability of design are critical, such as education, residential and healthcare.
For example, the Department for Education has teamed up with Innovate UK to develop GenZERO, a prototype timber school based on a proven template design in which contractors will assemble a ‘kit of parts’ at an on-site hub.
3. Outcome-focused incentivisation
The water sector’s next five-year Asset Management Period won’t just be its most ambitious yet. A quarter of England and Wales’ ‘12 biggest’ water and wastewater companies are changing the way they manage their contractor relationships from alliance and traditional models to enterprise model.
This shift will encourage the entire supply chain to give greater primacy to client outcomes. So rather than narrowly focusing on their own part of the programme, suppliers will be incentivised to work together to deliver against the client’s chosen outcomes, from sustainability to schedule and value.
4. Bridging the infrastructure funding gap
To achieve the goals set out in its latest NIA, the National Infrastructure Commission calculates that private sector investment will need to increase from around £30-40 billion over the last decade to £40-50bn in the 2030s and 2040s.
Attracting this funding will require a strategic approach from the Government to remove barriers and incentivise private investments, including identifying and defining opportunities through clear risk categorisation.
In his Autumn Statement, Chancellor Jeremy Hunt announced several measures designed to encourage private sector investment, including a streamlining of the planning system, a ‘concierge service’ to smooth the path for large foreign investors and reforms to make it easier for UK pension funds to invest in infrastructure.
But the construction industry too has a role to play in making UK infrastructure more attractive to private finance. Digitalisation is key here, with both public and private stakeholders looking to digital tools and new technologies to drive productivity and social outcomes through better programme performance.
The rail industry is blazing a trail, with artificial intelligence already being used to run railway systems to improve reliability, safety, customer satisfaction and costs.
Pivoting past the totemic
The scale and symbolism of HS2 – which for years has been viewed as an engine for northern and national growth – means the repercussions from the cancellation of its second phase may be long-lasting, particularly for the residential and commercial real estate schemes which had been planned along the northern leg’s route.
However, the Government has insisted that public funds which had been destined for HS2’s northern leg will not be lost and will instead be invested into other much-needed transport programmes across Northern England and elsewhere.
With England and Wales’ 12 largest’ water and wastewater companies planning a record £98bn investment programme from 2025 and Network Rail aiming to spend £43.1bn over the next control period, the infrastructure pipeline appears to remain healthy, even if it’s clear that significant private investment will be required to supplement public funding if the goals set out in the NIA are to be met.
Meanwhile, some strategically minded clients are adapting to the prospect of cooling tender price inflation, ongoing economic fragility and an expected reduction in interest rates, by reverting to more traditional ways of buying capital assets and away from the design and build model.
The efficiency and consistency offered by MMC will accelerate its uptake, especially on flagship real estate programmes like the Department of Health’s NHP, and once industry-standard ways of managing the supply chain like the water sector’s alliance model are evolving into a more outcome-focused enterprise approach.
The alteration of HS2’s northern leg is ushering in an era of change, challenge and opportunity – not just in infrastructure but across UK construction. Clients who anticipate and adapt could turn this moment of uncertainty to their programme’s advantage.
© 2023 Turner & Townsend