Top 3 Emerging Costs for Infrastructure Projects

The world is unravelling and changing by the minute, and so are the infrastructure projects being delivered globally. This month, we examine the effects of emerging costs like Covid19, Brexit and Carbon on infrastructure projects and how businesses must act now to prepare for these challenges.

Infrastructure can be defined as the fundamental physical systems that a business, territory, or country and its members require for daily operations. Examples are transportation, communication, sewage, water, electricity and technology infrastructure.

These systems are capital intensive and require larger investments that are vital to a country’s economic development, prosperity, and safety. Infrastructure is perceived as the world’s most substantial business at the macro level. Investments in infrastructure in Great Britain and in many other countries can be quite substantial and are considered essential for boosting the economy.

These projects range from railway projects to highway maintenance or building of new roads, waterways, wireless infrastructure, aviation, manufacturing, supply chain infrastructure and buildings e.g. hospitals and schools. Crossrail is one example of a major infrastructure project in the UK and is considered to be one of the largest projects ever in Europe.

Crossrail’s construction began in 2009 and today there have been over 15,000 employees who have worked on the project with almost 120 million hours of construction work completed. Crossrail has benefited the economy socially with over 1,000 apprenticeships that have been offered in delivering the programme.

Source: Crossrail Ltd

The project currently serves as the Elizabeth line. A new railway line for London, which stretches more than 60 miles from Reading and Heathrow in the west, through central tunnels to Shenfield and Abbey Wood in the east. The new railway being built by Crossrail Ltd will stop at 41 accessible stations, 10 newly built, 30 newly upgraded stations, and is expected to serve around 200 million people each year.

The infrastructure industry of the UK has been on the increase since the year 2019 (ONS) when its new projects reached their highest record ever of £118,977 million. The value was has been driven by both public and private sector investments in projects. The current scenario is that the infrastructure industry is experiencing challenges from financial, Brexit and environmental challenges. According to the RICS, building tender prices are expected to soar by 27% and an increase in construction cost is expected by the year 2024 as shown in the graph below.

Source: RICS

We recognise three emerging cost risks in the construction and infrastructure industry that need to be managed carefully and examine the current scenario in the UK.

  1. Covid Costs
  2. Brexit Costs
  3. Carbon Costs

1. Covid Costs

The pandemic has severely shifted consumer views towards life and the factors affecting our daily routine, work-life balance and the environment. Some people have successfully managed to change and have adopted remote work practices while many others have ended up losing jobs or businesses. Similarly, the pandemic has challenged the future of infrastructure projects in the UK. The transport sector faced the backlash of Covid 19 as public transport usage and footfall dropped down by 95% since the announcement of the first lockdown in March 2020 to April 2021, claim the National infrastructure commission and this has been directly linked to consumer behavioural changes that many people experienced as a result of the pandemic.

Source: NIC

The United Kingdom has been criticised for spending and delays on projects for roads and railways as travel patterns have changed swiftly as a direct response to COVID-19, as project involve multibillion-pound costs (BBC). The prime minister committed a further investment of £100 billion on HS2 rail which plans to relieve congestion between the London Euston and Birmingham route but some of the plans have faced the axe and the investments remain under scrutiny for revision by the treasury. The pandemic has transformed remote working practices in Britain questioning whether the government’s investment in travel and transport versus better wireless infrastructure for internet and broadband connectivity is more of a priority now. Going forward, the industry needs to reinvent how it builds up cost-benefit models and estimates for works.

Similarly, in 2020, airlines faced a loss of $84.3 billion. Further analysis revealed that airline passenger revenues could fall by as much as $419 billion (WTW). The financial impact of COVID-19 has been devastating to the aviation industry. The aviation industry needs to pivot and fundamentally transform to navigate recovery, and this will require heavy investment in infrastructure for cleaner fuel alternatives, the strategic thinking of new operating models that robustly manage financial, environmental risks like carbon costs to have a chance at bouncing back.

Key Facts and Effects

● There has been an increase in contract-related claims and lawsuits

● Inability to keep to contractual terms due to exceptional change

● Changes to clauses for extraordinary conditions

● Changes in the viability of existing contracts

● Health & Safety restrictions have caused project workload to deteriorate

● Lower site productivity from the reduction in the people who can work together

● Increased site costs from implementing pandemic health & safety protocols

The above are merely a handful and the full impact of Covid 19 is yet to be felt. Covid 19 and other emerging costs can be managed with a clear cost strategy, by undertaking cost assurance audits as part of risk management and by implementing protocols. To tackle these effectively, businesses must have robust controls, protocols, and expertise in place.

“Pandemic has challenged the future of infrastructure projects in the UK”.

2. Brexit Costs

The United Kingdom has approximately 9% of EU nationals who work and fill in positions in the infrastructure sector and the construction industry. Brexit has resulted in the changing and revoking of several policies between Britain and the European Union. The effect of Brexit, the separation between the United Kingdom and the European Union will dissuade investors from investing their money on infrastructure projects in Britain. As per Cliffordchance, infrastructure projects in the UK benefited from the European Investment Bank in terms of funding, and in the year 2015 alone, the total amount invested was EUR 7.8 billion.

Most economists agree that the productivity rate of Britain will dip and the economy will become poorer due to Brexit. Recent studies state that the cost of construction is more expensive in the UK when calculated in Euros. Suddenly Brexit has made the Pound sterling weaker compared to Euros and making it more costly per pound per project. The economic consequence of Brexit votes was that the British economy experienced a loss of £50 billion i.e., 2.1% of GDP in the first quarter of 2019 which further jumped to a loss of 4% of GDP by the end of 2020 (Voxeu.org). Brexit has also banned free movement leading to skilled workers of the EU union needing to apply for UK immigration permission to enter the UK with the Right to Work. From this, the focus for the UK now is on getting with filling the position of highly skilled workers post-Brexit and making it easier to do business with other countries globally. These are merely the tip of the iceberg of emerging costs and risks that will emerge due to Brexit which businesses must actively manage.

Key facts

● 9% of the UK workforce are engaged in construction/engineering

● 8% per of that workforce alone come from the EU

● A large number of EU migrant workers work in the sector

● EU nationals account for professional roles and on building sites

● EU restrictions will impact the construction sector

● There will be a reduction in the import of skilled workers for the foreseeable future

● There will be a gap in the supply of quality materials and services from the EU

● Rising cost for the UK labour market – the supply effect

● Inability to fill the gaps efficiently with options from outside the EU

● Inability to find and mobilise labour quickly to work sites

● Brexit related reduction in foreign direct investment

● Real estate and built environment investment impacted

Emerging costs like Covid, Brexit and Carbon will affect UK businesses and impact revenue and profitability risks and there is a need for businesses to act now.

“Economists agree that the productivity rate of Britain will take a lower dip after Brexit”.

3. Carbon Costs

Reducing carbon is one of the biggest challenges that the UK infrastructure industry and other sectors and countries are facing today, and it is vital for governments and businesses to endorse a healthy, social, and sustainable environment. The infrastructure industry in the UK is one of the biggest contributors of CO2e emissions, which releases approximately 53% (516MtCO2e/yr.) of total UK emissions (CRTR, 2013). This is a threat to climate change as it is estimated to grow further by 80% (362 MtCO2e/yr.) by the year 2035 and rising to 90% (165 MtCO2e/yr.) by the year 2050 as shown in the chart below.

The government’s Infrastructure Carbon Review report of 2013 stated that the infrastructure industry needs to reduce its carbon emission from a total of 157 MtCO2e/year in 2010 to 34 MtCO2e/year by 2050. There is huge pressure and demand for governance from the industry for transparency in reporting carbon emissions and better supply chain collaboration to improve climate change. To address the issue, the government recently set up the most ambitious plan in the budget on 20th April to reduce carbon emission by 78% by the year 2035. UK’s green building council stated that Britain should meet its commitment from the signed the “Paris agreement” in the year 2016 with the goal of decreasing the global average temperature below 2°C above pre-industrial levels for achieving ‘net-zero’ carbon economy by the second half of this century

Source: Infrastructure carbon review report 2013

Key Themes from the UK budget green measures

  • 2050 net-zero emissions target 10 year strategy to tackle climate change crucial
  • Need for a rise in fuel duty after several years of freezes
  • VAT reductions for the circular economy, recycle energy efficient low emission cars
  • Green job creation, infrastructure spending, funding, response to climate issues
  • Environment to form part of Bank of England’s monetary policy assessments
  • Economic success to include wellbeing and stewardship of the environment
  • £40bn of investment in private and public sector infrastructure projects
  • National Infrastructure Bank given initial £12bn capital
  • £15bn green bonds for retail investors to fund the net-zero transition
  • £1bn into a net-zero innovation fund
  • Carbon Market Working Group a clear strategy/pathway for carbon pricing
  • New carbon tax shelved to avoid an increase in food prices during COVID-19
  • Support for offshore wind and investment in a hydrogen hub in Holyhead
  • A hydrogen strategy – clean hydrogen as a longer-term goal, needs a strategic plan
  • National Infrastructure Bank and Bank of England’s green remit are promising moves.

Key facts

  • Move towards a ‘Greener” future means regulations and governance will be stricter
  • Compliance with these regulations will make some projects unviable
  • Restrictions to increase infrastructure investment in environmentally friendly materials
  • Increased investment and training for implementing environmentally friendly options
  • Climate change increase in the risk of flood, hurricanes, present risk & opportunities
  • The contractor needs to price in environmental risk in cost estimates to assure clients
  • There is a need to have collaborative plans to address the uncertainties in those risks
  • Future projects with social/environmental impact will be set back

“Reducing carbon is one of the biggest challenges that businesses and the UK infrastructure industry faces”.

How CFBL can help you?

Cecelia Fadipe, director CFBL Consulting has held senior positions at Network Rail, Deloitte Consulting, Westminster and Ealing Councils, and Mott MacDonald and led or worked on projects of up to £1.6bn undertaken on behalf of or by Crossrail, HS2, Costain, Balfour Beatty, Vinci, Bechtel, Siemens, HSBC, Dept for Works & Pensions, Lloyds Banking Group & Willis. She has successfully helped in delivering up to £15m of cost efficiencies and in minimising risks within organisations and on these projects. CFBL offers cost assurance protocols and contract reviews to ensure alignment on the contract costs by the parties and in mitigating risks in the project lifecycle. We identify contract requirements, risks, opportunities, implementation roadmap, cost advisory recommendations and much more!

References

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