The Infrastructure Footrace: Why is Europe Stuck in Neutral?
As Europe now begins to recover from the decade old effects of the global financial crisis, investment in new and updated infrastructure has been shrinking.
The region’s sovereign debt crisis, such as in Ireland and Spain, led to deep cuts to infrastructure investment as governments sought to balance the books.
According to Statista, the percentage of GDP spent on infrastructure for UK, France and Germany ranged between 2% and 2.2% in 2013 marginally below USA who has been spending 2.4%. This is very much in the shadows of the growing economies of China (8.8%) and India (5.2%). Australia (4.7%) also outshone other developed nations.
However, while there may be signs of recovery as spending on infrastructure for the region as a whole is no longer falling, with overall investment growing by an annual average of 3.2% since 2013, well above the 1995–2005 average of 2.8% t it is worth looking at the reasons for the slowdown and where resurgence may be coming from.
During the crisis European economies faced a prolonged period of austerity especially in places such as Spain, Portugal and Ireland and many other European Nations have had to make spending cuts. As a succession of European national governments struggled to cut spending and reduce budget deficits, infrastructure spending has often been an area that they have been forced to cut.
Lack of Political “Capital”
As a result of the focus on bringing budget overspends under control, combined with an absence of long-term planning and political “capital” to push through costly, drawn out projects, European politicians have shied away from initiating large scale infrastructure projects.
With hung parliaments and coalitions together with short political cycles, politicians have “kicked the can” on decisions on major infrastructure projects into the next political cycle.
Projects, like the third runway at Heathrow Airport and the expansion of the Paris Metro system, have faced numerous delays (with objections from minority parties) and increases in proposed budgets and timelines as they have been passed from government to government with consequently major delays.
Increase in Red-Tape/Bereaucracy
To get new assets and infrastructure improvements approved has become increasing complex from a regulatory standpoint and has contributed to the slowdown.
One of the visible examples of these delays can be seen on the proposed Stonehenge tunnel bypass in the UK which has been in development since 1995. This project is designed to improve traffic flow on this important route to the West and road safety, as well as the landscape around this World Heritage Site. Over time multiple bodies such as government agencies, charities, associations and the general public have been consulted. Objections have resulted in over 50 designs for this single corridor route. The latest “public consultation” has just ended and this will aim to progress the scheme to planning consent i.e. over 20 years since the original proposal.
Aside from these key factors slowing down new projects, and unlike pre- financial crisis, there has also been significantly less reliance on PFI/PPP deals as European Governments had little budget to commit to the long term availability payments.
Significant Private Capital Seeking Investments
That’s not to say there has been a decline in interest in infrastructure projects. Instead we have seen a significant increase in capital allocated to infrastructure and the lack of new assets has lead to an increase in M&A activity in Europe. Given this growth in infrastructure capital which has needed to find a home there has been an increase in non-traditional infrastructure assets, such as motorway services and broadband connectivity.
Also, following the financial crisis there has been active equity investors seeking to make existing assets work harder by improving operational efficiencies and/or undertaking incremental expansions.
The massive development of the renewable market has also been notable and has led to the evolution of the energy mix. While this was driven by environmental concerns and would not have developed without the use of Government incentives, this continues to grow rapidly, albeit from a small base.
What Does the Future Hold?
The European Commission’s Investment Plan for Europe (EC IPE) also known as the “Juncker Plan” or the “EU Infrastructure Investment Plan” is probably the closest European equivalent to President Trump’s infrastructure plan.
The Juncker plan, first announced in 2014, aims to boost levels of investment in the EU which as discussed has been low since the crisis. The original plan was for EUR315bn of investment and as of February 2018 the plan is expected to have “triggered” EUR264.3bn in investments although it has yet to achieve much of what the plan set out to do.
While many of the challenges identified could remain in place for the foreseeable future, there could be a turnaround in new infrastructure investment as EU economies continue to improve and investment in crucial projects is seen as an important boost for the economy both in the short-term and further down the line.
Additionally, like the US, there has been a lack of maintenance spend on publicly owned and operated assets since the financial crisis and this will lead to investment needed to be spent (on roads, hospital etc.) and likely designed to attract private sector capital which is available. So the EU could come out of neutral and find at least first gear but is unlikely to break any speed limits shortly.