CBI/KPMG infrastructure survey 2012

Better connected, better business

CBI/KPMG infrastructure survey 2012

In partnership with

Jessica Leng

Sector senior business managerInfrastructure, building & constructionKPMG LLP

T: +44 (0)113 231 3948E: [email protected]

Tom Thackray

Senior policy adviserBusiness environment directorateCBI

T: +44 (0)20 7395 8152E: [email protected]

About KPMG:

KPMG is a global network of professional firms providing audit, tax and advisory services, with 145,000 outstanding professionals working together to deliver value in 153 countries worldwide. Working with private and public sector organisations across a wide range of business sectors, KPMG’s vision is simple - turn knowledge into value for the benefit of their clients, people and capital markets

September 2012

3Better connected, better business CBI/KPMG infrastructure survey 2012

Foreword by John Cridland, CBI

Foreword by Richard Threlfall, KPMG

Overview

The infrastructure landscape

The second CBI/KPMG infrastructure survey

1 Infrastructure impacts business investment decisions

2 Weak domestic networks risk holding back growth

3 Quality infrastructure can help exploit growth opportunities

4 Action is needed to boost private investment in infrastructure

5 Government policy is not yet addressing key infrastructure challenges

References

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Contents

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4 Better connected, better business CBI/KPMG infrastructure survey 2012

As the UK struggles to cement a lasting economic recovery, creating the right conditions for business investment must be at the heart of a strategy for growth. Once again, this survey has shown the importance of high-quality and affordable infrastructure in creating this environment.

Businesses rely on infrastructure to get closer to their customers and supply chains, and the strength of their networks influences their ability to export and innovate. Companies will only succeed in the global economy with reliable connections to growing markets.

I am confident that ministers are heeding these crucial messages. With the publication of a revised National Infrastructure Plan, the coalition has taken positive steps to identify a clear pipeline of priority projects of paramount importance to our future competitiveness. But with tightening fiscal conditions and equivocal leadership, the government faces a significant challenge in attracting private investment.

Business leaders need to see action being taken to upgrade our networks as a matter of urgency. We are losing out to our closest competitors – other developed economies are believed by businesses to offer a better standard of infrastructure than the UK. Increasing demand for domestic and global travel is putting pressure on transport networks and local, national and international routes are all feeling the strain. Rising energy costs and uncertainty about future water supplies also compound doubts over whether the UK’s current connections can adequately support business ambition.

While our transport infrastructure feels the squeeze, we should be optimistic about our digital networks. Businesses recognise the significant improvements that have been made in recent years and acknowledge the government’s commitment to delivery. As technology continues to improve, it is vital that we go further on broadband speed and coverage, providing faster and more reliable web access to companies that rely on it as their gateway to new markets.

In short, a mixed picture of progress emerges from this year’s results. Business leaders welcomed a number of the government’s recent policy initiatives, such as changes to the planning system and the move to incentivise pension fund investment in infrastructure. But a failure to translate positive ideas into action on the ground has left many business leaders sceptical about the overall impact of government policies.

To develop the networks that will keep us competitive, we need a relentless focus on delivery. Big decisions on the future of our infrastructure – on aviation capacity, electricity market reform and the future of road funding – must be taken and followed through with conviction. Through our Infrastructure Board, the CBI will continue to articulate the strong business case for action and develop the solutions to get these projects moving.

John CridlandDirector-GeneralCBI

Foreword John Cridland

5Better connected, better business CBI/KPMG infrastructure survey 2012 5

Foreword Richard Threlfall

Infrastructure is the backbone of our economy. Our roads, railways, ports, and airports connect people to jobs and our businesses to markets. Our power stations, gas, water and electricity networks keep homes, offices and industry working, day and night. Our communication networks drive efficiency and global reach. Yet we take it all for granted. Until, that is, we find our infrastructure in need of repair, absent or obsolete.

Increasingly there is widespread recognition of the investment needed in the resources and facilities that our communities and businesses depend upon. The National Infrastructure Plan 2011 highlighted over £300bn of priority infrastructure projects but it is widely acknowledged the total requirement is likely to be nearer £500bn.

Infrastructure has come a long way in the last few years. It is now at the forefront of the political debate. It is our antidote to austerity. It is a key pillar of the coalition’s growth programme. Everyone agrees it matters. But is it actually being delivered? Where is the impact on the ground? Will anyone look back and recognise that this generation has created anything close to our Victorian legacy of infrastructure improvements? Or indeed just properly maintained what we inherited?

KPMG are proud to be working once again with the CBI to bring to bear evidence of the views of business on the state of our infrastructure. As John says, it is a mixed picture. In some areas such as broadband provision there is a real sense of strategic vision and action. Huge investment has gone into our water infrastructure over many years, and more recently in waste recycling. But there is so much more to do. In other areas the deficit is more stark. In energy generation the way forward remains unclear. In aviation we are devoid of a solution. In both cases action is long overdue.

Despite the announcement and subsequent dialogue around the Pensions Infrastructure Platform, an immediate and workable solution to investment in infrastructure, particularly greenfield projects, remains conspicuous by its absence. However, the appointment of an Infrastructure Minister, the recently announced UK Guarantees Scheme and the Infrastructure Bill are all significant steps in the right direction. Strong, clear direction by government will undoubtedly build confidence with private sector funders that UK infrastructure is a worthwhile venture. Government as catalyst is more powerful than government as procurer.

Significant challenges lay ahead to make a tangible step change to the UK’s infrastructure investment and delivery. Economic and regulatory uncertainty have a compounding effect. Infrastructure is a heavyweight in political debate – get it right and it is a facilitator for growth, but do it badly and it hinders it. Better discipline is needed to ensure that less time is spent deliberating the route and more focus on reaching the destination. With further anticipated emphasis on infrastructure in the Autumn Statement as well as the long-awaited outcome of the PFI review there is real opportunity to make the journey as smooth and direct as possible.

Richard ThrelfallPartner, UK Head, Infrastructure, Building and ConstructionKPMG


Overview

The second CBI/KPMG infrastructure survey• The survey was conducted in June and July 2012• There were 568 respondents from businesses

of all sizes and sectors across the UK, including investors in, and providers and users of infrastructure

• The survey was distributed to senior executives of companies from all regions of the UK.

Infrastructure impacts business investment decisions• A large majority (over 80%) of firms see the quality and reliability

of transport and digital infrastructure as significant considerations in investment decisions. Businesses attach the greatest weight to transport infrastructure but digital networks are of growing importance and are a major consideration for the smallest firms

• When it comes to energy supply, the cost of infrastructure has even greater significance than quality. Energy costs have a particularly important bearing on investment for over 90% of companies in the manufacturing sector

• But the UK is losing ground on its closest competitors:over 60% of companies judge infrastructure elsewhere in the EU to be better than our own

• Almost two thirds (61%) of companies rate UK transport infrastructure as below average by international standards with just 14% deeming it to be above average. 95% of companies are concerned about rising energy costs.

Weak domestic networks risk holding back growth

• While 61% of companies are satisfied with their links to domestic markets, there is substantial variation between regions: four in five companies in London (77%) are satisfied with their domestic links, compared with just over half (56%) in the North West and North East

• Two thirds of companies (65%) report a decline in the standard of local road networks, with congestion and lack of investment cited as the main concerns

• Businesses are broadly positive about the proposed High Speed 2 rail link, with two thirds predicting it will benefit growth

• Less than one in five companies (19%) think that interconnectivity of different transport modes has improved over the last five years.


Quality infrastructure can help exploit growth opportunities• The quality of international transport connections hold sway on

investment decisions for 65% of companies• But the availability of direct flights to emerging economies is an

increasing concern: 54% of companies who deem direct flights to China crucial are dissatisfied with current availability

• Companies are positive about the current state of digital networks: four in five (82%) report that they have improved over the last five years and a similar proportion (79%) believe that they will continue to improve over the next five years

• But more businesses believe that mobile broadband networks in the UK are below average than above it for both speed and breadth of coverage.

Action is needed to boost private investment in infrastructure

• The UK is rated highly as a destination for infrastructure investment compared with other economies: 43% believe the UK compares favourably with other EU states

• But business leaders rate China and the US as better destinations for investment than the UK

• Almost all businesses (97%) see the planning system as a barrier to infrastructure delivery. While 45% of companies believe recent changes to the regime will have a positive impact, even more (48%) believe they will have no impact

• Attracting finance for projects from a broader range of private investors is a necessity in the eyes of business – a positive balance of +76% believe this would have a significant impact on overall investment levels.

Government policy is not yet addressing key infrastructure challenges

• Far more firms lack confidence in transport networks improving over the next five years than believe they will improve, giving a negative balance of -46%

• Two thirds of businesses also believe that energy (67%) and water (69%) infrastructure will not improve over the same period

• Just a third of companies (35%) believe that government policies on infrastructure will have a positive impact on investment, a proportion that is 10 percentage points lower than last year’s result

• But almost half of infrastructure providers (48%) believe the government’s policies will lead to increases in investment.

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Infrastructure plays a crucial role both as a driver and an enabler of economic growth. The building of new networks or the upgrading of existing assets creates growth and jobs during the construction phase before that infrastructure becomes operational, but the benefits of projects are far wider. For businesses, the right infrastructure can have a dramatic impact on their development, enabling them to gain access to new markets, take advantage of new technologies and get closer to their customers, supply chains and competitors.

As the UK battles to recover from the financial crisis and compete successfully for private sector investment in the global economy, the quality and affordability of its infrastructure are of major significance. Yet studies have consistently portrayed our networks as a cause of concern, with the OECD’s 2011 Going for growth report concluding that under-investment in the UK has led to more congested and less reliable infrastructure compared with other nations.1

The coalition government has rightly put the UK’s infrastructure development at the heart of its plan for economic growth (Exhibit 1). In a recent speech, the prime minister referred to it as “the magic ingredient” in modern life that “affects the competitiveness of every business in the country”, while acknowledging that the standard of UK networks has fallen behind that of its competitors. But with a pipeline of projects worth over £250bn to 2015 and beyond and less public money available to invest, the government faces a huge challenge in attracting sufficient private finance to deliver essential upgrades (Exhibit 2).

It is in this context that our survey gathered views from infrastructure investors, suppliers and users on where investment in UK infrastructure is most needed and how public policy can improve the standing of the UK as an attractive destination for private investment in infrastructure.

The infrastructure landscape

Exhibit 1 Major government initiatives announced since the first CBI/KPMG infrastructure survey

November 2011: Government announces priority infrastructure funding and intention to unlock £20bn of pension fund investment in infrastructure at the Autumn Statement

Update of the National Infrastructure Plan is published, setting out a pipeline of over 500 infrastructure projects across a range of infrastructure types

December 2011: Water white paper is launched, a vision for future water management in the UK

January 2012: Government announces it will press ahead with proposed High Speed 2 rail link

March 2012: Budget 2012 includes an additional £150m to support private sector roll-out of broadband infrastructure and a commitment to streamline the planning system for nationally significant infrastructure projects

Launch of pension infrastructure platform (PIP) is confirmed, a joint investment scheme to boost pension fund investment in UK infrastructure

National Planning Policy Framework is published, a new policy document setting out principles for the sub-national planning system

The Prime Minister makes a speech on private investment in the road network and announces a new feasibility study on funding and ownership

May 2012: Draft Energy Bill is published including measures aimed at reforming the electricity market

Plans for a 20-year strategy for the national road network are announced alongside terms of reference for the new feasibility study

July 2012: Consultation is launched on a draft aviation policy framework, but the key question of capacity is not addressed

Government announces HLOS, bringing £4.2bn of additional investment in new rail projects including the Northern Hub

UK guarantees scheme is announced, with the government committing to underwrite private investment in up to £40bn of infrastructure projects


Transport• 90% of passenger distance travelled

each year on roads• 46% increase in road traffic volumes by 2035• 20,000 miles – length of UK rail network• 36-46% increase in passenger demand for rail expected

by 2030• 20 times more trade done with countries with which the

UK has a direct air link• 380m passengers a year – expected demand for air

travel from UK airports by 2050

Water• 3,400 litres of water used per person per day• 9% decrease in level of replenishment of

groundwater by 2025• £98bn of private investment in water

networks since 1989

Digital• 68% take-up rate of broadband connections

across the UK• 58% of the population have access to

superfast fixed-line speeds• 1% of properties without access to mobile 3G

internet

Energy• 374 TWh total electricity supply in 2011• 9.4% of UK’s electricity delivered from

renewables• 20 gigawatts of additional generating

capacity needed by 2020• 40% increase in global energy demand over

the next decade

Waste• 525kg per capita of municipal waste generated each year• 1.5% of the UK electricity supply comes from waste• 50% of municipal waste sent to landfill each year• 52% of commercial and industrial waste recycled in 2009

Sources: DfT, DECC, Environment Agency, Defra, Ofwat, HM Treasury, Ofcom , Frontier Economics

Exhibit 2


The second CBI/KPMG infrastructure survey

The CBI/KPMG infrastructure survey is now in its second year, following the inaugural report in 20112 which coincided with the launch of the CBI’s Infrastructure Board. Since then, the UK’s weak and uneven recovery has brought the need for infrastructure renewal into sharp focus, as policymakers and other stakeholders search for ways to reinvigorate the economy.

The survey results provide an important business-wide perspective on the quality, reliability and affordability of the UK’s networks, and how these factors impact investment decisions and business growth. The findings highlight strengths and weaknesses in our economic infrastructure relative to other economies and identify priority areas for new investment. The survey also considers the attractiveness of UK infrastructure from investors’ perspective and assesses the key barriers to infrastructure delivery that need to be addressed.

Conducting the surveyThe online survey was conducted over an eight-week period in June-July 2012 and responses were received from 568 participants. The survey was distributed to senior executives from companies of all sizes, representing all major economic sectors and based in all regions of the UK. Infrastructure investors, providers and users all took part, enabling us to analyse the views and experiences of a diverse range of companies.

Questions focused on the five main classes of economic infrastructure: energy, transport, water, waste and digital. Participants were asked to rate the overall quality and reliability of each type and to assess their significance for investment decisions. In addition, companies were asked about the current conditions for investing in infrastructure and their views on the government’s policies for developing the UK’s networks.

Responses were received from all sectors of the economy…Companies across all sectors of the economy responded to the survey (Exhibit 3). Manufacturing and construction companies formed the two largest categories of participants, each accounting for almost one in five of the respondents (18% respectively). However, the services sector was also well-represented, with financial and professional services making up over 15% of participants. In the analysis of the results, responses were weighted according to the sectoral contribution to Gross Value Added based on the latest available Office of National Statistics estimates.3

Responses were also split by firms that classed themselves as infrastructure providers and those that were solely users. A quarter of all those surveyed said that their company was primarily a provider of infrastructure (Exhibit 4).


Exhibit 3 Respondents by sector (%) Exhibit 4 Infrastructure providers (%)

…and from all parts of the UKMost respondent companies have operations in more than one region of the UK, so the survey also asked them to identify their primary location (Exhibit 5). Just over 30% of respondents were primarily based in London with a further 15% in the South East. Respondents across other regions were more evenly spread, ranging from 3% each primarily located in Wales and in Northern Ireland to 9% in the West Midlands.

Exhibit 5 Primary location of respondents by region (%)

Agriculture 1

Manufacturing 18

Gas &electricity 5

Water & waste 4

Construction 18

Transpor t &storage 10

Wholes ale,retail & leisure 4

Information &communic ations 5

Finance & insurance 4

Real estate 4

Public sector 4

Other 9

Professional& suppo rtservices12

Mining & quarrying 2

Primarilyinfrastructureproviders 25

Primarilyinfrastructureusers 75

Northern Ireland 3

Scotland 6

North East 4

North West 7

Yorkshire an dthe Humber 5

East of England 8

East Midlands 5

West Midlands 9

Wales 3

South West 4

South East 15

London 31


There was a good response from companies of all sizes…Companies of all sizes, measured by number of employees, participated in the survey (Exhibit 6). SMEs (those employing up to 250 people) made up 30% of respondents, while medium-sized businesses (50-499 employees) accounted for over a quarter (28%) of the survey sample. Large companies employing over 500 people made up just over half (56%) of participants.

Exhibit 6 Respondents by UK workforce size (%)

…and with varying degrees of international reachThe survey asked participants about the number of countries in which their firms are active (Exhibit 7). Most respondents (61%) represented companies with operations in at least one country outside the UK, with 25% active in between one and five countries. At the top end of the international scale, 16% of respondents had operations in over 50 countries. The scale of the geographical footprint of participant companies means respondents were well-placed to assess how the UK’s infrastructure compares with that of other countries.

Exhibit 7 International presence of companies (%)

0-4916

50-24914

250-49914

500-4,99937

5000+19

UK only 39

1-5 countries 25

6-10 countries 7

11-20 countries 7

21-50 countries 6

Over 50 countries 16


1 Infrastructure impacts business investment decisions

The quality, reliability and cost of infrastructure are key considerations for companies when making decisions on where and when to invest. While each infrastructure class has an impact, transport, energy and digital networks are almost universally significant for business investment decisions across all sectors and business types. In the face of fierce international competition for mobile capital, the UK must create the conditions to encourage high levels of business investment. But weaknesses in some UK infrastructure classes pose the risk that companies may opt to invest elsewhere.

Key findings

• A large majority (over 80%) of firms see the quality and reliability of transport and digital infrastructure as significant considerations in investment decisions. Businesses attach the greatest weight to transport infrastructure but digital networks are of growing importance and are a major consideration for the smallest firms

• When it comes to energy supply, the cost of infrastructure has even greater significance than quality. Energy costs have a particularly important bearing on investment for over 90% of companies in the manufacturing sector

• But the UK is losing ground on its closest competitors: over 60% of companies judge infrastructure elsewhere in the EU to be better than our own

• Almost two thirds (61%) of companies rate UK transport infrastructure as below average by international standards with just 14% deeming it to be above average. 95% of companies are concerned about rising energy costs.

The state and cost of UK networks have a significant bearing on investment decisionsSustained economic recovery depends on businesses already active in the UK having the confidence to invest and on attracting mobile capital from across the globe. The overall business environment must encourage this investment, with infrastructure one of the major elements. The findings of this survey highlight the crucial bearing that infrastructure provision has on firms’ investment choices.

Respondents were asked to rate the significance of the quality and cost of each of the five economic infrastructure classes on their investment decisions (Exhibit 8). The quality and reliability of transport and digital networks emerge as significant for the highest proportion of companies, with over four fifths of respondents stating that they have an impact on investment decisions (84% for transport and 81% for digital). Quality and reliability of energy infrastructure are also highlighted as important by 71% of respondents, but energy cost is even more significant (cited by 74%) – a result unique to this infrastructure class.


Exhibit 8 Significance of quality, reliability and cost for investment (%)

The quality and reliability of transport networks are the top infrastructure priority Transport infrastructure plays a key role in the day-to-day operations of most businesses and the survey highlights these networks as highly significant in investment decisions. More than four fifths (84%) of all respondents state that the quality and reliability of transport infrastructure are significant, with 43% deeming them ‘very significant’. The results are largely uniform across all sectors but perhaps predictably, respondents from the transport and storage sector give the highest rating to their importance, with 82% classing transport infrastructure as ‘very significant’ in their investment decisions.

While road, rail and air links are an important consideration for all firms, they have a greater significance in investment decisions the larger a company becomes, reflecting the need to link multiple operations across the UK and internationally (Exhibit 9). Almost half of respondents from large companies (48%) judge the quality and reliability of transport as ‘very significant’ in their investment decisions compared with just over a quarter of SMEs (26%).

30 41 23 6

33 41 21 5

12 30 43 14

11 25 48 16

10 29 46 15

12 27 47 14

43 38 14 5

29 40 24 7

43 41 412

35 42 518

Energy

Quality and reliability

Cost

Transport


Cost

Water


Cost

Waste


Cost

Digital


Cost

0 20 40 60 80 100

Very significant Significant

Not very significant Not at all significant


Exhibit 9 Significance of quality and reliability of transport infrastructure for investment (%)

Exhibit 10 Significance of quality and reliability and cost of energy infrastructure for investment (%)





0 20 40 60 80 100

All


Cost

Manufacturing


Cost

30 41 23 6

33 41 21 5

43 43 13 1

54 36 9 10 20 40 60 80 100

All firms

SMEs

Medium-sized*

Large

43 41 12 4

26 48 20 6

40 41 17 2

48 41 8 3

*This category covers businesses with 50 to 499 employees so there is some

overlap with SME figures

Businesses prioritise cost over quality on energy infrastructure Energy infrastructure also plays a significant part in businesses’ investment decisions. For this class of infrastructure the cost of supply is even more important than quality and reliability, with three quarters of respondents (74%) stating that it has a significant bearing on their investment decisions. This is in contrast to the results for the other infrastructure classes, where businesses tend to prioritise quality and reliability over cost.

Energy infrastructure is particularly important to the manufacturing sector, which contains a number of the energy-intensive industries under increasing pressure as a result of rising energy costs. More than four fifths (86%) of respondents from this part of the economy say the quality of energy supply is an important factor in their investment choices and for 90% the cost of energy is a key consideration (Exhibit 10).


Waste and water networks have a large bearing on construction and manufacturing firms’ investment…The quality of waste and water infrastructure and cost of supply are highlighted as a priorities for under half of businesses overall (Exhibit 8), reflecting that these are not central considerations for most companies in the services sector.

A majority of respondents in the manufacturing and construction sectors, however, identify the quality and reliability of waste and water infrastructure as significant factors in their investment decisions (57% and 51% respectively in manufacturing and 61% for both in construction). The costs of waste and water infrastructure are also important considerations for these sectors (cited as significant factors by 55% and 46% respectively of respondents in manufacturing and 65% and 56% of those in construction).

…while firms across the board demand high-quality digital infrastructureThe results of the survey show that having high-quality and reliable digital infrastructure is becoming more and more significant for UK firms. For more than four fifths (81%) of all respondents this is an important consideration in their investment decisions, a 7 percentage points higher proportion compared with the results of the 2011 survey (Exhibit 11). The number of respondents that deem the quality of digital networks as ‘very significant’ has also increased, from 32% in 2011 to 43% this year.

The quality of broadband infrastructure is particularly important for the smallest firms who rely on internet communications to reach their customers and suppliers in the absence of extensive operational networks and multiple business premises. Over half (53%) of respondents from companies employing fewer than 50 people state that it has a very significant impact on their investment decisions, compared with 30% of those from companies employing over 5,000 people.

Exhibit 11 Significance of quality and reliability of digital infrastructure for investment (%)

0 20 40 60 80 100

2011

2012



Companies that consider the quality and reliability of digital networks to have a significant bearing on their investment decisions

81% 32 42 18 8

43 38 14 5


But relative weaknesses in the UK’s infrastructure mean we risk losing out on investmentGiven the significance that most businesses attach to infrastructure, it is crucial that the UK’s networks match up well with those of other countries. As markets become more global, businesses have greater choice about where to base their operations. Those economies that can offer the most attractive business environment – including a high standard of infrastructure – will thrive.

But businesses believe the UK’s networks are falling behind those of some of our closest competitors, posing a threat to this country’s attractiveness as a place to invest. Relative weaknesses in transport and energy networks are a particular cause for concern.

The World Economic Forum ranks the UK 24th for the overall quality of its infrastructure behind 13 European countries, as well as a number of other advanced economies (Exhibit 12).4 To check the views from businesses, we asked companies to assess how the quality, reliability and value for money of the UK’s economic infrastructure compare with other specific locations. The results show that although our infrastructure compares favourably with that of emerging economies, it lags behind EU countries and other developed nations according to the majority of respondents (Exhibit 13).

Exhibit 12 The World Economic Forum rankings for overall quality of infrastructure

Rank Country

1 Switzerland

2 Singapore

3 Finland

4 Hong Kong SAR

5 France

6 United Arab Emirates

7 Iceland

8 Austria

9 Germany

10 Netherlands

24 United Kingdom


0 20 40 60 80 100

EU

2011

2012

2011

2012

Emerging economies

2011

2012

13 29 58

14 25 61

33 27 40

33 24 43

67 11 22

71 11 18

Exhibit 13 UK infrastructure compared with international destinations (%)

Nearly two thirds (61%) of companies feel our infrastructure compares unfavourably with other EU markets and just 14% believe it compares more favourably, leaving a balance of -47%. Our infrastructure also seems to be struggling when set against other advanced economies outside the EU – 43% of businesses believe the UK’s networks compare unfavourably with these destinations. However, respondents from the most international companies5 surveyed are slightly less critical, with 36% feeling the UK compares well with these destinations compared with 33% who took the opposite view.

For the great majority (71%) of companies, UK infrastructure still compares well with that of emerging economies, which are still looking to invest to bring their networks up to the standards of developed nations. However, there is no room for complacency here, as almost a third of infrastructure providers believe that the UK compares unfavourably with even these economies.

1 13 56 26 4

8 12 44 26 10

2 11 40 35 12

5 9 25 35 26

1 21 68 9

3 20 57 16 4

1 16 65 14 3

2 26 55 13 4

2 20 55 20 3

7 33 33 16 11

The UK’s transport and energy networks compare unfavourably with those of other countriesOne of the more concerning results from the survey is that for two of the most significant infrastructure classes for business investment – transport and energy – the UK’s networks are not up to scratch. For both these networks more respondents believe the UK is underperforming than outperforming relative to other international business destinations (Exhibit 14).

A startling 61% of companies feel the UK’s transport infrastructure is below average in an international context and only 14% consider it as above average (giving a negative balance of -47%). Tellingly, the results are fairly consistent for all sectors, but respondents from professional services firms are particularly concerned, with four in five (82%) judging this form of infrastructure to be below par. Furthermore, these results are much less positive than those from the 2011 survey: only 12% felt that the UK’s transport infrastructure was significantly below average last year, compared with the quarter (26%) that judged it as such this time.

95% Proportion of businesses that are concerned about energy costs

Non-EU developed countries


These results underline how highly companies prioritise continued investment in the UK’s transport system and the need to get projects off the ground quickly to upgrade our networks. The government has taken some positive steps in setting out a National Infrastructure Plan and announcing its commitment to a wide range of transport projects , but the results indicate that businesses need to see quicker progress to spark a change in their overall assessment.

Although less extreme, the results for energy infrastructure are also fairly negative, with over a third of companies (36%) believing the UK compares unfavourably with other nations, and just one in five (20%) seeing us as ahead of the pack. Once again, it seems to be the cost of energy supply that is driving businesses concerns in this area. The overwhelming majority of respondents (95%) state that they are concerned about energy costs, with two thirds of companies (67%) in the manufacturing sector classing themselves as ‘very concerned’.

Historically, wholesale energy prices before taxes have been higher in the UK than in other EU countries7. The survey results indicate that businesses, particularly in the manufacturing and construction sectors, are concerned about the impact of rising energy costs on future investment in their UK operations. The government needs to develop a positive response as we face the prospect of prices rising further to meet the cost of infrastructure renewal and ambitious emissions reductions targets, particularly ensuring that the UK’s energy-intensive industries are not put at a disadvantage internationally.

Significantly above average Above average Average

Below average Significantly below average

0 20 40 60 80 100

Energy

2011

2012

Transport

2011

2012

Water

2011

2012

Waste

2011

2012

Digital

2011

2012

Exhibit 14 UK infrastructure compared internationally (%)

1 13 56 26 4

8 12 44 26 10

2 11 40 35 12

5 9 25 35 26

1 21 68 91

3 20 57 16 4

1 16 65 14 3

2 26 55 13 4

2 20 55 20 3

7 33 33 16 11


2 Weak domestic networks risk holding back growth

The survey reveals that the quality of domestic transport connections is viewed as critical for a large proportion of businesses. Well-functioning networks help to improve business productivity by reducing time lags and bringing firms closer to their customers and supply chains.8 Improving connectivity across the UK is therefore an important means of enabling the private sector to maximise its economic contribution in all regions.

While companies are generally satisfied with the overall standard of domestic connectivity, they see some real weaknesses – particularly in the road network – which threaten to undermine growth. The survey also shows that different regions have different transport network priorities and that projects can have contrasting impacts on businesses depending on where they are based.

Key findings• While 61% of companies are satisfied with their links

to domestic markets, there is substantial variation between regions: whereas almost four in five companies in London (77%) are satisfied with their domestic links, only just over half (56%) of those in the North West and North East are satisfied

• Two thirds of companies (65%) report a decline in the standard of local road networks, with congestion and lack of investment cited as the main concerns

• Businesses are broadly positive about the proposed High Speed 2 rail link, with two thirds predicting it will benefit growth

• Less than one in five companies (19%) think that interconnectivity of different transport modes has improved over the last five years.

Businesses are broadly satisfied with their links to other parts of the UK…Respondents to the survey were asked to provide an overall assessment of the standard of the infrastructure that connects their UK operations to domestic markets. On the whole, businesses seem to be satisfied. The majority – 58% – rate this domestic infrastructure as ‘OK’, showing that while there is significant room for improvement, companies do not believe it is substantially damaging their competitiveness. Of the remainder, twice as many rate the UK’s domestic infrastructure as good (29%) as rate it poor (13%).

As well as rating the quality of the UK’s domestic connections, respondents were also asked how satisfied they are with their links to other UK regions (Exhibit 15). A majority (61%) said they are satisfied, with 7% classing themselves as ‘very satisfied’. But while this result may seem positive, it is a lower proportion than the result from last year’s survey, and a larger proportion of respondents are satisfied with their company’s links to EU markets than they are to other markets in the UK.

Exhibit 15 Satisfaction with links to other UK regions (%)


In addition, almost one in five respondents (17%) from the transportation and storage sectors say that they are ‘not at all satisfied’ with their links to other UK regions and almost a quarter of them (23%) rate the standard of the UK’s domestic infrastructure as poor or very poor. It is perhaps particularly concerning that one of the sectors that relies most heavily on domestic infrastructure seems to be the least impressed with it.

…but the response varies greatly between regionsIt is important to stress that businesses’ assessment of domestic networks varies from place to place. Nationally significant infrastructure projects may often be planned and financed centrally, but they will impact regions and cities in different ways, creating perceived winners and losers. In addition, each area has different pressures on their networks and different ideas for projects that can help to boost business growth.

For example, respondents from businesses primarily based in London, which has benefited from relatively high levels of transport investment in recent years compared with other regions, are particularly positive about their businesses’ domestic links – 77% say they are satisfied with these connections, compared with an average of 61% for all regions (Exhibit 16). In addition, London respondents are the most confident that there will be improvements in the UK’s transport infrastructure over the next five years.

Respondents from the transportation and storage sector rating infrastructure connections to domestic markets as poor

23%

By contrast, a higher proportion of businesses in other parts of the country see weaknesses in the standard of domestic infrastructure links. For instance, 56% of respondents from companies primarily based in the North West and North East regions are not satisfied with their businesses’ current links to domestic locations. A relatively high proportion of companies primarily based in the East and West Midlands are similarly unimpressed with their links within the UK, with 59% of respondents from these regions stating that they are not satisfied.

The CBI believes improving connectivity in northern regions should be a priority for the government. A series of poorly linked hubs will not sufficiently exploit the potential of the private sector. Projects like the Northern Hub can make a difference here, improving rail connectivity in the North and supporting the movement of people, goods and materials between northern cities.

Dissatisfaction with domestic networks from respondents in the Midlands is also concerning – if the heart of the country is poorly connected there is little chance of the UK as a whole becoming sufficiently linked. The West Midlands’ strong manufacturing base relies on efficient transport logistics, which could be undermined if links are not fit for purpose. Similarly, East Midlands Airport is the UK’s second largest cargo airport9 and it is crucial that domestic links to the region support this important trade hub.


Exhibit 16 Satisfaction with domestic infrastructure links (%)

The standard of the road network remains a key concern for businessRespondents were asked to judge the extent to which various aspects of the domestic transport network have improved or deteriorated over the last five years. While there were some positive results – for example, 57% of respondents have seen improvements in tube and metro links – the state of the UK’s local roads and motorways is a real cause for concern (Exhibit 17).

Improved significantly Improved slightly Stayed the same

Deteriorated slightly Deteriorated significantly

0 20 40 60 80 100

Local roads

2011

2012

Motorways

2011

2012

5 30 43 22

4 31 49 16

18 31 34 15

2 18 33 37 10

Exhibit 17 UK roads: trends of last five years (%)

Almost two thirds (65%) of respondents feel the local road network has deteriorated over the last five years while less than one in 20 (4%) have seen slight improvement. Not one respondent held that local roads have ‘improved significantly’ during this time.

41

44

61All region s

LondonNW & NEWest Mids & East Mid s

77


Exhibit 18 CBI calls for action to relieve blockages on key routesThroughout the UK there are worked-up plans to improve some of our most important national routes and it is essential that these are carried forward as a priority.

A14: A key freight route to the port of Felixstowe and an important commuter road in the East of England. The government has announced that upgrades will be taken forward in a new scheme involving tolling on part of the route. However, work is not expected to start on improving the route until 2018.

A303: An important direct line route to the South West, several parts of the road require work but successive plans have been delayed or abandoned due to cost and local disagreement regarding the route.

A1 Western Bypass: A regionally strategic link road that provides vital access to Newcastle Airport. Newcastle’s City Deal includes an agreement to develop a new investment programme to bring forward improvements to the third-most congested link on the national strategic road network.

A160/180: An important link road to the port of Immingham, government has confirmed funding to get development work underway, but construction will depend on the outcome of the next spending review.

Respondents from the northern regions of England were particularly downbeat, with 82% saying that local roads have deteriorated, but 70% of companies in London hold the same view. The results for the motorway network are only marginally better, with almost half of all respondents (47%) reporting deterioration over the last five years against 20% who believe it has improved.

When looking at what lies behind businesses’ concerns about UK roads, congestion on the network is a standout problem. In all, 95% of respondents to the survey say they are concerned about the impact of congestion on their business. But investment in maintenance of the existing network and new capacity are also concerns for 94% and 84% of businesses respectively.

A failure to improve road networks is likely to damage the competitiveness of companies based in the UK, the majority of which rely on them on a daily basis. Road transport is the predominant mode of transport in Britain, accounting for over 90% of all passenger distance travelled each year as well as freight movement, so it is crucial that improvements both to local routes and major trunk roads are prioritised (Exhibit 18)10. The CBI is currently undertaking work looking at changes to the funding and governance of the road network that are needed to boost private investment and improve performance.


West Midlands

All regions

East Midlands

0 20 40 60 80 100

67

64

53

Balance of respondents that believe that High Speed 2 will benefit UK private sector growth

+64%

While passenger rail networks have improved, rail freight needs attentionRespondents were more positive about the performance of the rail network, particularly the areas that link economic hubs of activity. Nearly half of respondents (45%) have seen improvements to intercity rail connections over the last five years, versus just a quarter who feel they have deteriorated. Further investment has recently been committed to upgrade key rail routes, boosting the prospects that this assessment may improve further in the future (Exhibit 19).

Exhibit 19 Additional funding for key rail projects a boost for businessSubsequent to the CBI/KPMG Infrastructure Survey going live for responses, the government announced an additional £4.2bn of funding for new rail projects. These include Northern Hub projects aimed at improving rail connectivity in the North, upgrades to the East Coast Main Line and a series of electrification works. Businesses welcomed this announcement which demonstrates a real commitment to providing additional capacity to both passenger and freight networks.

Most respondents also see the proposed High Speed 2 (HS2) rail link as having a positive impact on business performance, with very few seeing any negative impacts. A positive balance of +64% feel that HS2 would benefit UK private sector growth. However, this is an example of how the benefits of an infrastructure project can be felt unevenly in different regions. For example, while a positive balance of +67% of respondents with operations in the West Midlands region think there will be a positive impact, only +53% of companies in the East Midlands believe there will be an impact on growth (Exhibit 20).

But while passenger networks are seen to be improving, companies have greater concerns about the ability of the UK’s rail freight connections to meet business need. Almost two thirds (61%) of respondents that say rail freight is important to their business express dissatisfaction with the UK’s domestic links (Exhibit 21). This is the only form of freight transportation for which more respondents are dissatisfied with the current situation than are satisfied.

Exhibit 20 Positive impact of High Speed 2 on private sector growth (%)


Interconnectivity between different transport modes must be improvedNearly a third (30%) of those surveyed feel that the standard of interconnectivity in the UK has deteriorated over the last five years, with only one in five (19%) reporting improvements. While ambitious major infrastructure projects are welcome, they must connect to existing local networks if they are to generate the best returns on investment.

Frustration with weaknesses in interconnectivity seems to be highest among small and medium-sized businesses and those that are exclusively based in the UK, as efficient access to domestic markets is arguably more critical to their day-to-day operations (Exhibit 22). For them, the government’s upcoming transport strategy will be particularly significant as it will look at how policies across different transport modes are delivering national priorities. It is essential that business concerns about interconnectivity are reflected in this work.

Exhibit 22 Interconnectivity of UK transport: trends in last five years (%)

*This category covers businesses with 50 to 499 employees so there is some overlap with SME figures

**No firms stated that interconnectivity had improved significantly

0 20 40 60 80 100

All firms

SMEs

Medium-sized*

Large

Improved significantly Improved slightly Stayed the same

Deteriorated slightly Deteriorated significantly

19 51 27 3

16 47 32 5

16 47 32 5

24 55 20 1

Increasing capacity of rail infrastructure for freight and modernising signalling and electrification could help improve the efficiency with which goods and materials are transported to and from our logistical hubs at air and sea ports. For example, rail freight capacity from the Humber estuary is currently insufficient to transport containers from one of our largest port complexes to our towns and cities, and there is significant potential to develop East-West trade via rail as road transport costs increase.

Exhibit 21 Satisfaction with domestic rail freight connections (%)

Note: Responses from companies that consider rail freight connections to be significant to their business

Exhibit 20 Positive impact of High Speed 2 on private sector growth (%)

Satisfied 39 Non-satisfied 61


3 Quality infrastructure can help exploit growth opportunities

Accessing high-growth markets across the world and taking advantage of new opportunities provided by internet technology will be two of the most important routes to growth for UK businesses over the next decade. Infrastructure has a crucial role in facilitating UK exports and supporting the development of a new generation of web-based companies.

Businesses across the country recognise the importance of both international and digital connectivity. Companies are broadly satisfied with their links to established international markets but they have concerns about those to emerging economies. And while they judge the UK to be a world leader on digital infrastructure, there is still a need to invest in these networks to maintain a competitive edge.

Key findings• International transport connections are crucial or very

important for 65% of companies in the context of their investment decisions

• But the availability of direct flights to emerging economies is an increasing concern: 54% of companies who deem direct flights to China as crucial are dissatisfied with their current availability

• Companies are positive about the current state of digital networks: four in five (82%) report that they have improved over the last five years and a similar proportion (79%) believe that they will continue to improve over the next five years

• But more businesses believe that mobile broadband networks in the UK are below average than above it for both speed and breadth of coverage.

Businesses recognise the importance of international connectivityAs the global economy becomes more interlinked and traditional barriers to trade are dismantled, it is increasingly important that UK companies are well-equipped to take advantage of international opportunities for growth. Exporting companies are responsible for 60% of national productivity growth and more than 70% of business research and development.11 Last year the CBI highlighted how re-orienting UK exports towards growing markets could lift GDP by £20bn by 2020.12 We need to encourage more UK firms to export and we need high-quality international connections to support this ambition.

Businesses recognise the crucial role that infrastructure can play in unlocking new international markets. Two thirds (65%) of respondents to this survey say that the UK’s international transport connections are crucial or significant for their future investment decisions (Exhibit 23).

Companies that have already established themselves in markets outside of the UK are even more convinced of the significance of high-quality international connections – 93% of those active in over 50 countries see international transport connections as an important consideration in their investment decisions. These businesses rely on efficient global travel to link their international operations and reach a wide customer base, so it is crucial that the UK’s networks can underpin this activity.

International transport links are also highly significant for companies in specific sectors for which access to international markets is a prerequisite for success. Despite an increasing proportion of services within UK exports, goods still account for the majority of UK exports with the largest category of these being classed under manufacturing.13 Indeed, nearly a third (30%) of respondents to our survey from the manufacturing sector view international connections as crucial to their business, with 87% of them attaching at least some significance to these transport links.


A significant proportion of services activity is in those services required to support goods trade, such as transport and travel services, and respondents from this sector are among the most convinced of the need for good international travel connections. Nine in ten businesses (93%) in the transport and storage sector class international transport links as significant in their investment choices.

Businesses see scope to improve infrastructure links with emerging marketsRespondents to the survey gave a mixed report of their satisfaction with current links to key export markets (Exhibit 24). Over three quarters of respondents (77%) report that they are satisfied with their companies’ connections with the EU, including 80% of those in the professional and financial services sectors. This is an important result given that the EU accounts for around half of the UK’s total global trade.

However, companies’ satisfaction with their connections to other global markets is not as high. Two thirds (68%) of respondents are satisfied with their UK operations’ links to established markets outside of the EU. While this result is still positive, it is perhaps concerning that almost half of all medium-sized businesses (46%) are less than satisfied with their connections to these markets.

Manufacturing firms seeing international transport connections as crucial for their investment decisions

30%

Exhibit 23 Significance of international transport connections for investment (%)

Business leaders feel there is substantial scope to improve transport links with high-growth emerging markets. Almost half of all respondents (47%) are not satisfied with their UK operational links to these economies. This view is consistent for all sizes of firms, and crucially, is held by companies with operations in over 20 countries as well as those with no business activity outside the UK. These results also represent a drop in satisfaction levels since the 2011 survey.

The low proportion of UK firms breaking into and succeeding in the high-growth markets of emerging economies is one of the key reasons behind the decline in the UK’s share of world trade over the past decade, which dropped from 5.3% in 2000 to 4.1% in 2010.14 The survey reveals that connectivity to these markets is seen as a problem by a significant proportion of businesses and therefore a potential barrier to boosting exports in high-growth economies (Exhibit 25).

Crucial 17


Businesses are concerned about the future of domestic and international air links…Aviation links are one of the primary means by which businesses access international markets so frequent flights to important trade destinations are crucial in supporting export growth. The UK does 20 times more trade with countries with which it has a direct air link and trade flows have increased more quickly with emerging markets served by daily flight connections than those without.16

Respondents to the survey were asked how important direct flights to specific destinations are to their business on a scale ranging from ‘crucial’ to ‘not important at all’ (Exhibit 26). Unsurprisingly, direct flights to the UK’s largest trading partners, the EU and the US, are valued by the highest proportion of companies, with around half of respondents (54% for EU and 43% for North America) judging these to be crucial or very important to their business.

But connections to emerging economies are also a priority for a substantial proportion of companies – a quarter of companies (25%) value direct flights to Brazil highly and around a third see benefit in flights to each of China (35%), India (30%) and the Middle East (33%). And these flights are particularly important for individual sectors of the economy. For example, 54% of manufacturers say it is crucial or very important that they have access to direct flights to China, while 53% of professional services firms need direct flights to the Middle East.

But there was a mixed response from respondents when asked about their level of satisfaction with the availability of direct flights to these destinations. Companies that attach the greatest significance to direct flights are highly satisfied with their availability to EU destinations (82%) and also to those in North America (71%) and the Middle East (74%). However, a much lower proportion of companies state that they are satisfied with the availability of flights to emerging economies. For instance, only 46% of companies who deem direct flights to China as crucial are satisfied with their current availability.

EU

2011

2012

Non-EU developed economies

2011

2012

Emerging Markets

2011

2012

Exhibit 24 Satisfaction with links to markets (%)

0 20 40 60 80 100

Very satisfied Somewhat satisfied

Not particularly satisfied Not satisfied at all

5 74 20

10 67 19 4

4 69 25 2

5 63 26 6

3 56 34 7

3 49 37 11

Exhibit 25 High-growth export opportunities

Projected GDP growth rates for 201315

Euro area 0.7%

Brazil 4.2%

India 6.9%

China 8.6%

2011

2011

2011

2012

2012

2012


Exhibit 26 Significance of direct flights to markets (% crucial or very important)

… with lack of capacity becoming more acuteThe survey reveals concern from businesses about how the UK’s aviation links have fared in recent years. More respondents believe that international air links have deteriorated over the last five years than consider they have improved and similar proportions feel that links are likely to continue to get worse over the next five years (Exhibit 27).

The lack of capacity at UK airports is potentially a contributing factor to these results, as companies realise that there is very little scope for new routes to be added without new airport infrastructure being built. In London, where the lack of capacity is particularly acute, almost half of companies expect the standard of international air links to decline. But there is also a knock-on effect to other regions as domestic routes get squeezed out, particularly from London Heathrow. Indeed, almost four in ten respondents (38%) expect deterioration in domestic air links over the next five years, four times the proportion that expect to see improvements over this period (9%).

Russia

Brazil

India

Middle East

China

North America

EU

Companies that see direct flights to China as crucial satisfied with their availability

46%

The CBI has called for the government to show leadership and take immediate decisions to deal with the UK’s aviation capacity crunch. The government’s decision to set up an independent commission to look at the issues is a step in the right direction but business must see a lasting solution. In the short term, improvements need to be made to surface access to airports and existing capacity needs to be maximised through the use of more flexible ‘mixed-mode’17 operations at Heathrow. In the medium term a new runway is needed to serve the south of the UK. And in the longer term, all options to improve capacity should be explored, including the development of a new hub airport for London.

Exhibit 27 Trends in aviation links

Significant improvement Slight improvement Stay the same

Slight deterioration Significant deterioration

0 20 40 60 80 100

Last five years

International air links

Domestic air links

Next five years

International air links

Domestic air links

1 22 44 27 6

19 41 33 7

1 19 45 25 10

9 53 31 7

0 20 40 60 80 100

20

25

30

33

35

43

54


The UK is ahead of the game on digital infrastructureImproving digital connectivity will be crucial for UK companies to be competitive in the future. Faster and more reliable digital communications bring firms closer to their suppliers and customers, enable them to take advantage of growth opportunities offered by new technologies and boost entrepreneurialism by reducing the cost of setting up new ventures online. Four out of the top five brands of 2012 are from the technology sector according to the Brandz annual study.18

Businesses are well aware of the critical importance of this infrastructure: over 80% of those surveyed acknowledge that its quality and reliability has a significant impact on their investment decisions (Exhibit 8, Chapter 1). In addition, respondents see faster, broader and more reliable web access as critical to their future business success. Four fifths of respondents (78%) say that improved web access through fixed-line broadband infrastructure is crucial or very important to their businesses’ growth, with a similar proportion (76%) pointing to the importance of mobile networks (Exhibit 28).

While services sectors may be expected to attach high importance to this form of infrastructure – and 87% of ICT, financial and professional services firms deem it crucial or very important – around three quarters of manufacturing and construction companies also see improved web access as central to their business development. In addition, SMEs are the most likely to prioritise improvements to web access, with 84% saying improvements to fixed-line connectivity are a priority and 80% saying the same for mobile broadband (Exhibit 29).

Exhibit 28 Importance of faster and more reliable web access to business growth (%)

Not at all important 2

Crucial 39

39

Somewhat important 20

Not at all important 3

Crucial 35

41

Somewhat important 21

Fixed-line broadband

Mobile brodband

Very important

Important


Exhibit 29 Importance of faster and more reliable web access to business growth (% crucial or very important)

Exhibit 30 UK digital networks: trends in last and next five years (%)

Companies reporting improvements in digital infrastructure over the last five years

82%

Assessing the UK’s digital infrastructure against that of other countries, the results are similarly positive (Exhibit 31). Four in ten respondents (40%) feel that the UK’s networks outshine those in other parts of the world, with only around a quarter (27%) believing they compare unfavourably. While this is by no means a landslide, it is encouraging that more companies generally believe the UK is on the right track. In addition, over half of companies (54%) with operations in over 50 countries feel that the UK’s digital infrastructure is ahead of international benchmarks, versus just 11% who believe it compares poorly.

Note: This category covers businesses with 50 to 499 employees so there is some overlap with SME figures

Survey respondents were also very positive about improvements that have been made to digital networks in recent years and are confident that this trend is set to continue in the near future(Exhibit 30). Over 80% of companies feel that networks are in a better state than five years ago and a similar proportion (79%) are confident that this trend will continue over the next five.

This is a positive result, indicating that the UK delivery strategy for digital infrastructure is working well. On broadband in particular, CBI members have emphasised their support for the government’s strategy which sees the private sector delivering new infrastructure where the returns on investment are apparent, with joint investment funding projects in places where the business case is less strong.

Significant improvement Slight improvement Stay the same

Slight deterioration Significant deterioration

Last five years

0 20 40 60 80 100

0 20 40 60 80 100

Next five years (confidence in improvements)

Very confident Somewhat confident

Not particularly confident Not at all confident

22 60 15 3

20 59 17 4

SMEs

Medium-sized*

Large

0 20 40 60 80 100

84

80

77


Exhibit 31 UK digital infrastructure compared internationally (%)

But investment is needed to maintain our competitive positionBusinesses have high ambitions for the continued development of digital networks to ensure that the UK retains its competitive position and believe that continued investment is needed to ensure this is achieved. While the survey paints a positive picture of the state of digital infrastructure in general, it also suggests key areas in which it could be improved (Exhibit 32).

For example, respondents were asked to assess the UK’s fixed-line and mobile broadband networks on both breadth and reliability of coverage and speed of access. A third (34%) of companies feel that the UK’s fixed line networks are above average in terms of breadth and reliability, with only 17% feeling they are below, but for speed, almost as many respondents feel that UK networks are below average (24%) as above it (26%).

Exhibit 32 Assessment of breadth and reliability and speed of UK broadband networks (%)

Furthermore, respondents are far less positive about the state of mobile networks than they are for fixed-line connectivity. For both coverage and speed, more respondents feel that mobile broadband in the UK is below average than above it, by balances of -8% and -16% respectively.

There is also evidence to suggest that specific sectors that rely heavily on digital infrastructure feel there is scope to improve these networks to enhance their business prospects. For instance, 41% of companies in the ICT and retail sectors feel that the UK’s mobile networks are below average on breadth and reliability of coverage and over half feel they are below average on speed of access.

Improvements to mobile networks could make a huge difference to these firms and the proposed 4G spectrum auction is a key development that will help to put 98% of the UK population within range of 4G signal.19 Bidding is set to begin early in 2013 and having been delayed twice, it is essential that Ofcom sticks to this timetable.

Significantly above average Slightly above average Average

Slightly below average Significantly below average

0 20 40 60 80 100

Breadth and reliability

Fixed-line

Mobile

Speed

Fixed-line

Mobile

3 31 49 14 3

1 20 50 20 9

2 24 50 21 3

1 17 48 25 9

Above average 40

Average 33

Below average 27


4 Action is needed to boost private investment in infrastructure

With less public money available to spend on infrastructure it is essential that new projects can attract finance from a wide range of private sector sources. Of the £250bn of infrastructure investment that is needed by 2015 and beyond, two thirds will have to come from the private sector20 and government must ensure that the conditions are right to encourage this to happen.

The UK has historically led the way in attracting private finance and is still regarded as an attractive destination for investment. However, other countries are now rising in prominence and it is essential that barriers to infrastructure delivery in the UK, such as the planning system, are tackled.

Key findings• The UK is rated highly as a destination for infrastructure

investment compared with other economies: 43% believe the UK compares favourably with other EU states

• But companies rate China and the US as better destinations for investment than the UK

• Almost all businesses (97%) see the planning system as a barrier to infrastructure delivery. While 45% of companies believe recent policies to improve it will have a positive impact, even more (48%) believe they will have no impact

• Attracting funding for projects from a broader range of private investors is a necessity in the eyes of business – a positive balance of +76% believe this would have a significant impact on overall investment levels.

The UK remains an attractive place to invest in infrastructure…UK infrastructure has a solid base on which to build when it comes to attracting investment from the private sector. Public-private partnership models have been used to deliver a large amount of economic and social infrastructure, particularly before the financial crisis, and the UK is still a world leader in this form of investment.21 In addition, the UK has a stable political and institutional environment which fosters confidence from global investors. Through its National Infrastructure Plan, the government has started to set out a pipeline of activity around which investors can base their strategies – a high priority for companies responding to our 2011 survey.22

The survey results show that the UK remains an attractive place for infrastructure investment, more so than many of our international competitors (Exhibit 33). Respondents were generally positive when asked whether they thought the UK compared favourably or unfavourably to a range of other countries. For example, 43% of respondents state that the UK compares favourably with other EU states as a destination for investment versus 36% who think it is less attractive. The results also show that for the majority of businesses, the UK is a more attractive destination for investment than Russia, India and the Middle East.


…but certain international destinations are seen as more attractive to investorsBut the survey also helps to pinpoint parts of the world that businesses deem to be more conducive to private investment in infrastructure. For example, marginally more respondents felt that both North America and China represented a more attractive investment proposition than the UK (by a balance of -4% in both cases).

Like the UK, the US and Canada have a strong tradition of private investment in infrastructure and have developed a large and diverse investor base including a number of large pension funds. And China’s attraction for investors is almost certainly connected to the sheer volume of opportunities that have been created in a country that has planned to invest over $1 trillion in urban infrastructure between 2010 and 2015.23

However, the results serve as a warning that other countries are creating conditions for infrastructure investment that could rival or surpass the UK’s and there is a danger that the competitive advantage we have held in this area may slip away unless a concerted effort is made to reduce barriers to investment.

Exhibit 33 How the UK compares as a place to invest in infrastructure (%)

Russia

India

China

Brazil

Middle East

Other Asia

EU

North America

0 20 40 60 80 100

Much more favourably

Slightly more favourably

No difference

Slightly less favourably

Much less favourably

The planning system is a consistent barrier to infrastructure deliveryThe planning system is a key part of infrastructure delivery, essential in determining where infrastructure is located and ensuring the impacts of it are taken into account. Businesses recognise the need for clear planning rules, which help to ensure that infrastructure is of sufficient quality to improve efficiency and boost growth. However, too often the planning system is seen as a barrier to development rather than an enabler of it (Exhibit 34).

A startling 97% of respondents to this survey believe the planning system to be an obstacle to infrastructure delivery, a proportion that has barely changed from the 2011 results. This verdict is consistent across all sectors, but construction companies are particularly forceful in their views, with 99% of respondents from this sector believing planning is getting in the way of efficient infrastructure delivery.

3 40 21 27 9

37 41 9 11 2

2 36 20 32 10

11 44 10 22 13

21 30 8 26 15

16 29 6 24 25

10 40 17 19 14

8 40 10 31 11


0 20 40 60 80 100

A significant barrier A slight barrier Not a barrier

2011

2012

Exhibit 34 Planning as a barrier to infrastructure delivery (%)

While this business assessment of the planning system is damning, it is a view that the government acknowledges and has tried to rectify. Successive administrations have moved to make changes to the planning regime for both nationally significant and local projects, with the Planning Act bringing in the fast track system for the former and the National Planning Policy Framework setting out new principles for the latter.

Respondents were asked what impact they thought these changes might have on the planning system (Exhibit 35). Although 45% of companies believe there will be a positive impact, a similar proportion believe there will be no effect. Although the CBI has previously welcomed many of the reforms it is clear that their impact will only be substantial if they are implemented well. It is therefore essential that government takes a lead role in driving culture change in all parts of the planning system to ensure it is capable of delivering the projects set out in the National Infrastructure Plan.

Positive impact 45

No impact 48

Negative imp act 7 69 29 2

76 21 3

Exhibit 35 Impact of recent policy reforms on the planning system (%)

Government must take action to attract more private investmentAs outlined in the CBI’s recent report, An offer they shouldn’t refuse, pension funds are attracted to the long-term stable returns of infrastructure assets, which closely match their liabilities.25 However, the risk profile of infrastructure projects can often make them unfeasible as an investment proposition. It is therefore incumbent on government to mitigate some of this risk to draw in investment from these funds and other private sector sources (Exhibit 36).


Exhibit 36: Government guarantees seek to boost private investment in infrastructureThrough its new UK Guarantees Scheme, the government has taken action to try and boost private investment in infrastructure. The initiative will see government underwrite up to £40bn of infrastructure investment for projects that have been put on hold following financing difficulties. As such, it will use its own balance sheet to boost the credit rating of projects and bring in new private money.

This policy announcement came after the survey closed for responses and its effectiveness is yet to be tested, but businesses will be encouraged that government has recognised the need to stimulate investment and is willing to use strong balance sheet to good effect.

With this in mind, we asked respondents to this survey to assess how significant certain broad changes could be in boosting private sector investment in infrastructure (Exhibit 37). After tackling delays and costs in the planning system (82%), businesses feel that attracting a broader range of investors to infrastructure is the key change that needs to take place. A positive balance of +76% feel that this would have a significant impact in boosting overall investment.The results also show support for action to mitigate construction risk, which is often cited as a key reason why some private investors – particularly UK pension funds – have not invested in greenfield infrastructure substantially to date. A positive balance of +37% of respondents overall feel that mitigating construction risk would have an impact, with a much higher proportion of companies in the construction sector itself seeing the benefit of this action.

Improving private sector contract management

Mitigating construction risk

Reducing the cost of debt

Improving public sector contract management

Reducing regulatory burden

Attracting a broader range of investors

Tackling delays and costs in the planning system

0 20 40 60 80 100

25

37

38

59

67

76

82

In addition, reducing the regulatory burden on companies delivering infrastructure could have a meaningful impact on investment (demonstrated in a balance of +67%) as financiers become more convinced that projects will not be sidelined by delays and complexity. This is a particular priority for infrastructure providers – over half of whom (54%) believe this would have a very significant impact.

Exhibit 37 Actions to boost infrastructure investment (%)

Note: Figures based on balance of ‘significant’rating responses minus ‘not significant’


Road tolls 25

Congestioncharging 14

The positive result on finding new sources of investment can also be seen in respondents’ views about improvements to the road networks, which have almost exclusively been paid for through Government capital expenditure in the UK up until now (Exhibit 38). While 46% of companies think this should continue to be the case, a similar proportion feel that road tolls, congestion charging or distance charging should be used primarily to fund improvements over the next five years.

In addition, businesses in parts of the country that have taken steps to implement user-pays models tend to be more positive about using these approaches in the future. For instance, 57% of London-based companies believe that they should be used primarily to pay for road improvements over the next five years.

These results suggest that companies are open to funding a greater proportion of road improvements through user-charging than has historically been the case. Given the current fiscal conditions, and the pressing need to deliver improvements to road networks it is essential that government explores these options in greater detail, while ensuring that heavy users of the network are not put at a competitive disadvantage.

Exhibit 38 Primary means of paying for road improvements over the next five years (%)

Government capital expenditure 46

Increases in fuel/road tax 6

Distance| charging 9


5 Government policy is not yet addressing key infrastructure challenges

Businesses are concerned that key infrastructure assets will deteriorate over the coming years as difficult economic conditions make it harder to draw public and private investment towards important new projects. At the same time, UK infrastructure sectors face some key challenges that must be addressed to ensure that networks are supporting businesses and communities effectively. But companies are not convinced that government policies will make much impact on investment.While CBI members have seen merit in a number of recent announcements, a lack of action on the ground is undermining business confidence.

Key findings• Far more firms lack confidence in transport networks

improving over the next five years than believe they will improve, giving a negative balance of -46%

• Two thirds of businesses also believe that energy (67%) and water (69%) infrastructure will not improve over the same period

• Just a third of companies (35%) believe that government policies on infrastructure will have a positive impact on investment, a proportion that is 10 percentage points lower than last year’s result

• But almost half of infrastructure providers (48%) believe the government’s policies will lead to increases in investment.

Businesses expect key areas of infrastructure to deteriorate over the next five yearsThe UK faces some major challenges in the coming years as its population grows at the fourth fastest rate in Europe, it continues the transition towards a low carbon economy and businesses look to adapt to a fast-changing commercial and technological environment. It is essential that we have modern and efficient infrastructure networks that can help companies and communities meet these challenges.

We asked survey respondents to set out how confident they are that the overall quality and affordability of infrastructure assets will improve over the next five years. While businesses are confident that digital infrastructure networks will continue to be improved, they are less convinced that there will be sufficient investment in other infrastructure areas to prevent their relative decline.


Note: Figures based on balance of ‘confident’rating responses minus ‘not confident’

Businesses predict further decline in transport infrastructureOf all the infrastructure classes, transport is the area of greatest concern to business. Only 27% of respondents feel confident that transport infrastructure overall will improve in the next five years while 73% are not confident, giving a negative balance of -46% (Exhibit 39). This highlights anxiety about the level of investment and lack of political leadership that is currently affecting our roads, rail and aviation links and the impact that this might have on business operations in the near future.

Overall transpor t infrastruc ture -46

+35

+20

+6

+2

Tube/metro networks

Intercity rail

Interc onnectivity of transpo rt

networks

Commuter rail

International air links -14

Motorway network -23

Domestic air links -29

Local road net works -4 2

There are also signs that some regions are concerned that they might be losing out relative to other parts of the country. For example, fewer than 15% of companies from the South West and the North East regions are confident that transport infrastructure will improve over the next five years, compared with 38% of companies based in London.

As has already been highlighted, deterioration of local and major roads and the standard of domestic and international aviation links are at the forefront of businesses concerns; yet a substantial proportion of companies believe that these transport modes will deteriorate over the next five years. Investment is needed to reduce bottlenecks in the road network and boost aviation capacity, and this puts an onus on government to set out a direction of travel in both cases.

Exhibit 39 Confidence UK passenger transport will improve in next five years

-50 -40 -30 -20 -10 0 +10 +20 +30 +40


The majority of companies expect energy networks to deteriorateWith a target of cutting carbon emissions to 34% below 1990 levels by 2020 and £200bn of investment in energy infrastructure needed over the same period, urgent action is required to deliver improvements to our energy networks. But two thirds of companies surveyed (67%) are not confident that energy infrastructure will improve over the next five years (Exhibit 40), and a quarter (25%) of manufacturing firms are not at all confident that improvements will materialise.

Gas and electricity companies themselves are evenly split as to whether networks will improve or deteriorate in the near future. This is a blow given that the government is currently undertaking ambitious reforms to the UK’s electricity market with the aim of driving greater investment in low-carbon technologies. While key specific details of these changes have yet to be decided (Exhibit 41), it is clear that government has work to do to convince businesses it can deliver the clear market signals that can help them to channel their investment.25

Exhibit 40 Confidence UK energy infrastructure will improve in next five years (%)

Exhibit 41 Still work to do on Electricity Market Reform (EMR)The government is in the midst of making substantial policy changes to the electricity market aiming to support a secure, low-carbon and affordable energy supply for the future. A new Energy Bill will put in place measures aiming to attract investment to replace current generating capacity and update the grid to cope with rising demand for electricity.

The Energy Bill is expected to come before Parliament in November, with the primary measure being a feed-in tariff with contracts for difference (CfD). The CfDs should enable investors to forecast their returns more readily by guaranteeing a set price for electricity generated from low carbon sources. The CBI supports the introduction of CfDs and has been calling for some of the technical details to be resolved to ensure companies will invest on the back of them. The Bill will also introduce a capacity mechanism to provide security of electricity supply by ensuring sufficient reliable capacity is available. The details of this are still to be confirmed, with the CBI calling for it to minimise costs, maximise existing assets and avoid creating stranded assets. The Energy Bill must create an environment where businesses have the confidence to invest.


Businesses are concerned about the future water supplyTwo unusually dry winters brought water usage into sharp focus for both businesses and consumers as the UK entered a drought in early 2012. A wet spring relieved the immediate pressure of water scarcity, but groundwater levels remain below normal, and businesses are well aware that there are potential knock-on effects to their operations.

This context may help to explain why a clear majority of businesses are not confident that water infrastructure will improve over the next five years (Exhibit 42). More than two thirds of all respondents (69%) feel that these networks are likely to deteriorate, and over 80% of firms in the gas and electricity sector expect the same outcome.Of companies surveyed from the water and waste sector, over two thirds (68%) are confident that water infrastructure will improve. While this is too small a sample to draw a clear-cut conclusion, it is positive that a majority of those responsible for providing water to companies and households are sure that they can cope with unpredictability in the water supply. However, they face a challenge to convince the wider business community of this.

Exhibit 42 Confidence UK water infrastructure will improve in next five years (%)

0 20 40 60 80 100

Positive No impact Negative

2011

2012

43 24 33

35 23 42

Business users of infrastructure are yet to be convinced by government investment policies Almost two and a half years into the current parliament, companies are unconvinced that policies aimed at boosting investment in infrastructure will have a positive effect (Exhibit 43). Our survey asked respondents to assess what impact they expected coalition policies on infrastructure to have over the next five years. While a third of companies (35%) believe there will be a positive impact, over two fifths (42%) think the effect of policies will be negative and almost a quarter (23%) believe there will be no impact.

Exhibit 43 Expected impact of coalition policies on infrastructure investment (%)


Analysing these results against those from the 2011 survey shows that a lower proportion of companies are convinced that policies will have a positive impact compared with 12 months ago. This decline in confidence may well be linked to a lack of action on the ground seen by businesses over recent years and the overall struggle for growth in the UK economy. CBI members have been positive about the principles behind many of the initiatives that the government has launched, but are frustrated that more projects are not being taking forward. The latest GDP growth figures – showing that construction output dropped by 5.2% between the first and second quarters of 2012 – reinforce this point.

In addition, there is a sense from businesses that the government is ducking key decisions on the future of our infrastructure networks and is yet to set out sufficient detail in some policy areas.26 Similarly, although a Draft Energy Bill was brought forward in the latest Queen’s Speech, we are still some way from having a detailed picture of how the electricity market will look in the future.27

But infrastructure providers are slightly more positive about the policy landscapeIt is worth noting that infrastructure providers are more positive about the prospects for infrastructure investment stemming from government policy (Exhibit 44). Almost half of these respondents (48%) feel that coalition policies will have a positive impact on investment, with almost one in ten believing that the impact would be very positive.

But while it is somewhat heartening that companies that are closest to projects have greater confidence than the average, it is concerning that the proportion of infrastructure providers that thought the effect of government policies would be negative is at the same level as the broader business assessment (42%).

In addition, the fact that only a third of construction firms believe that government policies are likely to have a positive effect is a blow considering this sector’s growth and jobs potential. The CBI has recently set out the substantial growth boost construction companies could create if there were a steady pipeline of work available.28 This does not always have to be big-ticket infrastructure projects; essential repair and maintenance work to existing networks can help boost economic activity across all regions. However, our survey results suggest that current government policies are not sufficiently focused on bringing forward investment in any of these schemes.

Exhibit 44 Infrastructure provider views on expected impact of coalition policies on infrastructure investment(%)

0 20 40 60 80 100

Positive No impact Negative

2011

2012

54 25 21

48 10 42


References

1 Going for growth 2010: Country notes: UK, OECD, 2011.2 Making the right connections: CBI/KPMG Infrastructure Survey 2011, CBI, September 20113 United Kingdom National Accounts: The Blue Book, Office of National Statistics, July 20114 Global Competitiveness Report 2011-2012, World Economic Forum, 20115 Referring to those active in over 20 countries outside the UK6 National Infrastructure Plan 2011, HM Treasury, November 20117 Protecting the UK’s foundations: a blueprint for energy-intensive industries, CBI, August 20118 The Eddington Transport Study, Sir Rod Eddington for HM Treasury, December 20069 UK Airport Statistics 2011, UK Civil Aviation Authority, 2012, http://www.caa.co.uk/default.aspx?catid=80&pagetype=88&pageid=3&sglid=3. 10 Creating successful local economies, The LEP Network, 201211 Your export opportunity: Our insight, UK Trade and Investment, 201112 Winning overseas: boosting business export performance, CBI, 201113 UK trade performance across markets and sectors, Department for Business Innovation and Skills, February 201214 Winning overseas: boosting business export performance, CBI, 201115 The global outlook in summary, World Bank, 2012 http://web.worldbank.org/external/default/main?theSitePK=659149&pagePK=2470434&contentMDK=20370107&menuPK=659160&piPK=2470429 16 Connecting for growth: the role of the UK’s hub airport in economic recovery, Frontier Economics, September 201117 ‘Mixed-mode’ involves more flexible use of runways, with operation of both runways for take-off and landing at the same time18 Top 100 most valuable global brands 2012, Brandz, May 201219 Proposals to extend 4G mobile coverage, Ofcom press release, July 201220 National Infrastructure Plan 2011, HM Treasury, November 201121 Review of the European PPP market in 2011, European

PPP Expertise Centre, March 2012.22 Making the right connections: CBI/KPMG Infrastructure Survey 2011, CBI, September 2011 – Firms were asked to list their priority actions needed to boost investment. Setting a clear overall strategy was the action highlighted as important by the greatest number of companies23 Increasing trends towards PPPs in emerging markets, M Juhel at the IFC Global Airport PPP Seminar, February 201124 An offer they shouldn’t refuse, CBI, May 201225 The colour of growth, CBI, July 201226 Foundations laid for future growth of aviation as government unveils long-term strategy, Department for Transport press release, July 201227 ‘Clock is ticking’ – CBI responds to Draft Energy Bill, CBI press release, May 201228 Bridging the Gap: Backing the construction sector to generate jobs, CBI, 2012

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