Importance of Infrastructure Investment in the UK

Importance of infrastructure Investment in the UKAcknowledgementsIn 1999, I completed the initiatory year of the full-time Quantity Surveying course at Glasgow Caledonian University before moving to America in 2001. After a five-year stay, I returned to Glasgow in kinsfolk 2006 and re-enrolled in the Part-time Quantity Surveying course. Ten years on from the first experience of the QS course, it move overs me great pleasure and pride to be submitting unrivalled of the finale pieces of work in the honours year. It has been an amazing and unexpected voyage.I would non be in this position if it were not for the incredible directs of strengthener and hike shown by so m either and would like to take this opportunity to acknowledge some of these people.First, I would like to thank Raymond McCafferty Michael Heggarty of Cruden Building Re youngals for employing me and giving me this opportunity. Their continued support and encouragement through pop this process has given me the focus and drive to continually improve my work.My colleagues at Cruden also deserve a special mention for their support during the sermon and with let out the laughs during the day this process would nurse been so much more than laborious. Thanks guysI would also like to thank Halbert Mills at Glasgow Caledonian University for accepting me fanny into the course and believing that I had the potential to get to this stage.During the course of this dissertation, I had some challenging times when I felt like I did not know how to develop my elect topic. I would like to give my sincere thanks to my supervisor, Dr. John Lowe, for his inspirational input when I had these difficulties.Unfortunately, I great dealnot name e preciseone further I want to thank all my friends and family who without their support I would never have completed this piece of work. Mum, Dad, Gran, thank you so much for everything.Finally, the love and support shown by my Wife, Brooke, during this process has been a major source of inspiration. We get out both be glad when the late night studying and completing of projects is finally over. pricking McLellan1. Chapter 1 basis1.1 Rationale for the StudyInfrastructure spurts the sparing backbone of the UK. It is the fabric that defines us as a modern industrialised nation. The standard and resilience of nucleotide in the UK has a direct relationship to the addition and competitiveness of our economy. (Skinner, 2010)For the UK to retain its competitive edge, a longer-term view of enthronisation funds in al-Qaida essential lead insurance policy making. (Stewart, 2009)This dissertation offers an opportunity to explore and seek a high-pitchedly topical issue. The United Kingdom finds itself still in the midst of one of the worst economic downturns in re cent memory and in a period of pecuniary consolidation. As a result of this depressed economic situation, difficult decisions have had to be made by all sectors within the UK to w ork together to drive the country out of the recession.The recent edition of the Economic and financial St locategy Report and Financial Statement and budget by the Chancellor of the Exchequer, sidle ups the greatness of implementing measures that will promote sustainable growth. Despite modest growths to gross domestic product of 0.4 per cent in the final quarter in 2009 (NSO, 2010), the general consensus is that the United Kingdom is in the early stages of retrieval. The 2010 budget, called Securing the recovery, outlines ways in which it aims to support this vision. One of these policies, is to invest in infrastructure, including additional funding for transport and local roads and creating a Green Investment bank. (UK Budget, 2010)Also, the Eddington Report, published on 1 Dec 2006, was a study jointly commissioned by the Secretary of State for transferee and the Chancellor of the Exchequer. Its place was to analyse the long-term relationships, within the boundaries of th e Governments wider commitment to sustainable development, surrounded by transport and the UKs growth, stability and economic productivity. The findings of this study will be discussed and comp ard to the investiture required to meet the future(a) demands of the UK.Furthermore, in a recent study carried out by the British Chambers of Commerce (BCC), it revealed that inadequate energy, transport, and communications infrastructure continues to reduce the opportunity for UK businesses to grow. It also outlines that during this period when businesses play a merry role in the recovery of the economy, productivity is existence affected as a result of lack of depicted object, thus restricting the UKs economic potential. (BCC survey, 2010)In response to the survey carried out in 2010, David Frost, the Director general of the BCC stated the followingA countrys infrastructure is crucial to the success of its businesses. In the current environment of economic un proof and frequent e xpenditure constraints, our energy, digital, and transport ne tworks must be up to the job if business is to deliver growth and create employment.The intriguing situation that the UK Government now face is decision making the best way to stimulate economic growth without change magnitude the deficit. One of the issues with increasing deficits is the Government will have to borrow to service the debt. As a result of the world-banking crisis over the last few years, there is reluctance to growing the UK debt further and therefore this might have an collision on infrastructure investment in this country.This dissertation go aways an opportunity to research the level of infrastructure required in the UK and review the part it plays to the long-term sustainable growth of the UK economy. Furthermore, in doing so, the precedent intends to see if further investment in Infrastructure works is viable in the current economic climate.1.2 AimThe aim of this dissertation is to assess the im portance of infrastructure investment in the United Kingdom and how this shocks on the long-term sustainable growth of the UK Economy given the current economic constraints.1.3 ObjectivesTo review fiscal and Monetary policy theories for sale to the UK Government.To review the current and future demands for infrastructure works in the UK.To understand the level of importance of infrastructure work investment to the UK economy.To understand the roles, responsibilities and options available to public and hush-hush bodies in raising dandy to invest in infrastructure works in the UK.To highlight the economic and closely-disposed benefits gained as a result of increased investment in chosen infrastructure sectors by utilising hypothetical cost model projections.1.4 Outline Methodology of the look into1.5 Dissertation ContentsChapter 2Provides an extensive Literature review on the topic area. The author will provide a general overview of economic theory, mental home to infrastruc ture, and a review of the relevant studies published worldwide that reveal intellectual thoughts on infrastructure investment conflict on the economy. This will be carried out in the way of both descriptive and an analytical approach to all the appropriate literature sourced to aid in this dissertation. Naoum (2007) states It is descriptive in that it describes the work of anterior writers and it is analytical in that it critically analyses the contribution of others with a view of identifying similarities and contradictions made by previous writers.According to Naoum (2007), the literature review will serve two purposes.First, it allows for gathering of information to allow development of issues and themes within the chosen topic that ultimately shape the research design.Second, the literature review will help form the basis of the research design by analysing previous research designs.Chapter 3Chapter 3 introduces the reader to the numerous research techniques available to the a uthor and will highlight the strengths and weaknesses of each and merits of each approach, before indicating the chosen methods of quantitative analysis techniqueChapter 3 examines the various research techniques that were available to the author and describes the strengths and weaknesses of each of the approaches in appraise to the available data. In particular this chapter presents the reasoning behind the authors decision to adopt the quantitative analysis technique and explains how this approach was applied. This chapter also describes the source of the data and highlights any potential bias or limitations that the author experienced within the analysis. Furthermore this chapter explicitly explains the process for selecting and categorising the appropriate data prior to analysis in a consistent manner. John Hannah paragraphChapter 4Chapter 4 builds upon the process described in the previous chapter and examines the primary source of data to assess what trends are discernable w ith each of the particular categories. This section goes on to expand upon the original quantitative analysis and examine a series of quantitative case studies to assess the accomplishment of early warning events and compensation events that occurred on completed projects. John Hannah paragraphChapter 5In conclusion, chapter 5 summarises the findings of this research and consider if the original aim and objectives have been achieved. Finally, this chapter discusses the authors findings and proposes a list of recommendations for future studies. John Hannah paragraph2. Chapter Literature Review2.1 IntroductionThe purpose of research is to make a contribution, however small, towards understanding the phenomenon creation studied and ultimately towards the total body of knowledge (Parahoo, 2006)The intended purpose of the following literature review is to provide a general background to the chosen topic that will aid in the understanding of the following areasHow the UK Economy functi ons and what agentive roles drive it.Description analysis of previous research on the impact of infrastructure investment on the economy.The role the twisting manufacturing plays in the UK Economy.The information presented within the literature review will enhance the readers knowledge of the topic with a view of providing clarity and understanding on the findings presented in chapter 4.Economic TheoriesThere are conflicts of opinion on economic theory. For instance, monetarists argue that rises in the money come forth cause inflation whereas Keynesians argue that it is changes in inflation which cause changes in the money supply (Stanlake Grant, 1995)Keynesian EconomicsJohn Maynard Keynes was a British economic expert whose ideas have been a central knead on modern macroeconomics, both in theory and practice. He advocated interventionist government policy, by which governments would use fiscal and monetary measures to mitigate the adverse effects of business cycles, economic recessions, and depressions. His ideas are the basis for the school of thought known as Keynesian economics.Keynes solution to poor economic state is to introduce impetus disbursal or as the US President Franklin Roosevelt described, prime the pump. Keynes argues that the government should step in to increase spending, either by increasing the money supply or by actually buying things on the marketplace itself.A supporter of Keynesian economics believes it is the governments job to sedate out the bumps in business cycles. Intervention would come in the form of government spending and tax breaks in order to stimulate the economy, and government spending cuts and tax hikes in good times, in order to curb inflation.Alternative Economic TheoriesSince Keynesian economics advocates for the public sector to step in to assist the economy generally, it is a significant departure from popular economic thought, which preceded it laissez-fair crownworkism. Laissez-fair capitalism supporte d the exclusion of the public sector in the market. A look of laissez faire consequences are drawn from Says law. Say also advocated public works to remedy unemployment.Say argued against claims that business was suffering because people did not have enough money and more money should be printed. Say argued that the power to purchase could be increased only by more production and is also best known for coining the articulate supply creates its own demand (Curwen, 1997)James Mill used Says Law against those who sought to give economy a boost via unproductive economic consumption. Consumption destroys wealth, in contrast to production which is the source of economic growth. The demand for the product places the price of the product, but not if it will be consumed. Alternatively, Keynes is an advocate of trying to stimulate consumption by government intervention.Views on Economic thoeriesCutting support now, as some are demanding, would run the real risk of choking off the recovery even before it started, and prolonging the global downturn. (Darling, 2009)If consumers, markets and businesses get the message that government wants to carry on spending and isnt serious about dealing with the deficit, they will start to finish that the UK is no longer a safe place to invest in, spend in or build a business in, (Cameron, 2009)Importance of turn industry to UK EconomyA recent survey commissed by the UK Contractors Group and carried out by LEK Consulting to demonstrate the impacts of the Construction industry on the UK Economy was distributed September 2009. The briny aim of this report was to specifically highlight the benefits of investing in construction. The report covered 3 main areasContribution of the construction industry at bailiwick and regional level.Key contribution that construction makes to national employent levels.The role that the construction industry plays in the broader economic and social objectives.The reports contention is that the construc tion industry is vital to the overall UK economy while still being in a recession as it provides the followingConstruction is a major contributor to the UK DGP.Construction sector employs circa 3m people throughout 300,000 firms.Construction is also an important driver for other sectors, without which there would be a loss of domestic production capacity and skills.The report, Construction in the UK economy The Benefits of Investment, shows that construction is the best sector for stimulating employment.It also shows that every 1 spent on construction leads to an increase in GDP of 2.84, as the spending not only creates construction output deserving 1, but also stimulates growth elsewhere in the economy worth 1.84.With the Chancellors Pre-Budget Report looming, the CBI is continuing to press the case for protecting capital spending by government. (John Cridland, CBI Deputy-Director General, 2009)A strong economy needs fit-for-purpose schools and hospitals, and it will be the constr uction industry that builds the new transport and energy infrastructure needed to shift to a low-carbon economy. (John Cridland, CBI Deputy-Director General, 2009)Introduction to Infrastructure WorksInfrastructure investment impact prior ResearchOver the last 30 years there have been various economic models developed to help in the research of the impact of infrastructure investment on the economy. The in-depth empirical studies have mainly utilised macro-economic level data, which accepts cross-state and cross-country data. (Straub, 2007) edinburgh paperAccording to the studies carried out by Aschauer (1989) he states that when analysing the importance of public investment to the productivity improvement and economic growth, added weight must be attributed to the public investment decisions made by the Government. Furthermore, the study indicates increased productivity and growth in the economy by investing in areas such as highways, sewers, streets, and water systems.To ascertai n these findings, Aschauer took the bonnie annual growth rates of total factor productivity and the non-military public capital stock in America over the period 1950-1985 Aschauers data indicated a close relationship between level of investment in non-military infrastructure and productivity. Put in Tables from studyFurther research in the United States carried out by Munnell (1990) analysed the impact of the stock of public capital on economic activity at the regional and state levels. In conclusion, Munnell found that the US states that had invested in infrastructure had greater output, increased levels of cloistered investment, and high levels of employment growth.The study highlighted above, Aschuer (1989) estimated an elasticity of output with respect to public infrastructure capital in the United States during 1950-1985 of between 0.38 and 0.56. These results have been shown to be econometrically suspect and later(prenominal) work suggests the elasticity is much smaller. Th e average elasticity across OECD countries for the period 1960-2001 has recently been estimated to be 0.2 (Kanps, 2004). Aschauers paper has, however, proved very fruitful in equipment casualty of subsequent research, which it stimulated. (Crafts Leunig, 2005)A number of empirical studies have looked at the relationship between all public infrastructure investment and GDP growth. On average these studies seem to indicate a positive elasticity of output to public capital of around 0.20. Put another way, a ten per cent increase in public capital stock increases GDP by around 2 per cent. (Eddington report 2006)The eddington report suggest that there are limitations to these empirical studies and the results should be viewed with caution. OECD (2003) argues that early empirical work on the link between infrastructure investment and economic performance overstated the magnitude of the impact on GDP and productivity growth (The sources of economic growth in OECD countries, OECD, 2003) I n particular, studies that focus on public investment in capital and infrastructure in a broad sense, rather than on transport specifically, do not really distinguish between types of investment in terms of new build, upgrade, maintenance etc although some do make specific conclusions about the value of transport infrastructure investment.Later studies using more complex modelling suggest a positive, albeit weaker relationships between infrastructure and GDP. These let in Kocherlakota and Yi (1997), Demetiades and mamuneas (2002), OFallon (2003), and Nijkamp and Poot (2004). (see figure 1.5 eddington report 2006)In 1993, Easterly and Robero carried out further research to expand on the work in this field. Called Fiscal form _or_ system of government and Economic Growth An Empirical Investigation, it details several conclusions that support the findings expressed by Aschauers research in 1989. It tackled areas such as the rate of growth and the level of development by employing hist orical data and recent cross-section data.The main findings outlined that there is a strong relationship between a countries fiscal structure and the development level and that investment levels in communication and transport is consistently correlated with growth. This therefore indicates that infrastructures are important in the economic successfulness of a nation (Easterly, Robelo 1993). Put in referenceEisner (1991) highlighted that public infrastructures not only serve as an intermediate good in physical goods production, they can also be final consumption goods. For example, water and sewage systems benefit environment, better transportation saves time spent on travelling, public parks give people pleasure, etc. Canning, Fay, and Perotti (1994) found substantial effects of physical infrastructure on economic growth based on the international data set.The dodging for national infrastructure also states, The majority of empirical research indicates that there is positive relati onship between infrastructure and economic growth (strategy for national infrastructure, 2010).Introduction to InfrastructureWhat is Infrastructure?Set-up in December 2009 to help meet the infrastructure requirements in the UK for the next 10-20 years, Infrastructure UK defines Infrastructure as key economic sectors which include Water, Waste, Energy, hug drug and communications (strategy for national infrastructure, 2010).Infrastructure networks enable people, goods, energy, information, water, and waste to move economically around the UK and, in some cases, across its borders. The extent, capacity and quality of these networks has a direct bearing on the economy of the UK, the environment and the quality of life of everyone who lives in or visits the UK.Infrastructure Studies in the United KingdomExtensive research carried out in the United Kingdom has indicated the level of infrastructure required for each sector and this can be cross-referenced with studies highlighted in the previous section.For example, the findings from the research carried out by Eisner, 1991 and Easterly, Robero 1993 indicated a relationship between transportation and its impact on the growth of the economy.The Eddington report was published on the 1st December 2006 and was carried out by Sir Rod Eddington under the instruction of the UK Government. The report is an examination of the impact transportation decisions will have on the UK environment and economy.The report analyses the current global economic demands and how our current transportation infrastructure must meet the demands of the 21st century. It states that with rising population and resultant greater demands on the country, higher levels of congestion and issue with dependability will have adverse effects on the economy if the correct infrastructure is not in place. It contends that by not having the required infrastructure in place it costs businesses more money while also effecting peoples social environment (Edding ton Report, 2006).As well as utilising the Eisner, Easterly and Robero findings, the Eddington Report drew on research carried out in more recent times. The studies used in the development of the Eddington Report comprised The historical significance of Transport for Economic growth and productiveness (Crafts Leunig, 2005), Step change transport improvements (Mann, 2006), and transport and task market strategies (Gibbons Machin, 2006)Assessing transports contribution to the economyTransport can impact on the performance of the economy in a number of different waysTransports impact on GDP Transport can impact on the economy and will ultimately impact on overall output. Gross domestic product (GDP) is currently the best measure of the size of the economy as it measures the total value of goods and services provided. Transport can have an impact on economic output (GDP) thorugh two channelsFirstly, transport can affect GDP though a number of inputs that are used, for example transp ort may increase employment either by allowing greater access to labour or stimulating the creation of new firms, which can increase the number of goods and services produced and lead to an increase in GDP.Secondly, transport can improve the efficiency with which firms use inputs, in other delivery transport can have an impact on productivity. For instance, a well functioning transport network can raise productivity by redusing journey times. Transport investment can impact on the drivers of productivity by encouraging prictae investment through raising its profitability facilitating labour mobility and thereby increasing the returns in investment skills and enabling effective argument even when economic activity is geographically dispersed. Identifying the impact of transport on productivity is important because modify productivity is a key to determinant of long-term growth and living standards.These effects can either have a one -off effect on the level of productivity or a su stained impact on the growth rate of productivity. Transport can impact on the growth rate of productivity by stimulating innovation through its impact on agglomeration economies, trade and foreign direct investment. In practice these dynamics are very difficult to measure, but are nevertheless extremely valuable, as they determine how quickly the economy grows and therefore the rate of growth in GDP.Transports role in supporting quality of lifeCritically though, GDP measures alone fail to capture the impacts of transport on the environment or its contribution to the wider well being of society. Transports impact on the environment, for example through carbon and other emissions, can increasingly lead to unsustainable growth, as well as impacting on peoples quality of life. Transport improvements that free up wasted travel time allow people to spend more time with friends and family, and enjoy more leisure activities. An economic public assistance measurement would seek to measure such broader impacts of transport on society and the environment rather than just a pure GDP measure. These benefits to general well being are known as economic welfare, or welfare.The use of existing transport networks What benefits do provideErenburg (1994) finds that policy measures that make more efficient use of existing transport infrastructure through pricing mechanisms or other traffic management solutions can have a significant impact on growth (linking public capital to economic performance, Erenburg, 1994)Hulten and Schwab (1996) estimate that a 1 per cent increase in infrastructure effectiveness would have an impact on growth seven times larger than a 1 per cent increase in the rate of public infrastructure investment. (the public capital hypothesis The case of Germany, Hulten and Schwab, 1996)OECD/ECMT (2001) paper on the benefits of transport concludes that wider economic benefits may be achieved more efficiently by introducing prices which correspond more closely to c osts, or by reallocating existing infrastructure more efficiently between users, or by adopting other transport policies. (Assessing the benefits of transport, European Conference of Ministers of transport, OECD, 2001)Victoria transport policy institute (2003) argues that investment in alternative modes of transport and in management strategies to encourage more efficient use of existing road capacity tends to provide greater economic benefit than expanding existing highways to reduce congestion. The study also argues that the benefits of transport improvements are heavily dependant on local circumstances, in that they will only increase economic development where inadequate transport is a significant constraint on economic activity.EVIDENCE OF CONDITIONS NECESSARY FOR TRANSPORT TO impact ON THE PERFORMANCE OF THE ECONOMYCaning and Fay (1993) assert that infrastructure should not be seen as a factor of production but as a condition for high growth. Kessides (1993) notes that infras tructure does not create economic potential it only develops such potential where appropriate conditions exist, i.e. other inputs such as labour and capital are available to drive output growth.Indeed, lynde and Richmond (1993), Trinder (2002), and OFallon (2003) assert that public and private capital are complements that physical infrastructure requires the existence of available productive private capital in order to realise economic growth potential, and that infrastructure investment can boost the productivity of such private capital. Infrastructure investment may also feed through to increased labour productivity.Canning and pedroni (1999), banister and berechman (2000), Trinder (2002) and OFallon (2003) highlight other important underlying conditions that will influence the impact of transport investment on the economy (SEE REFERENCES FIGURE 1.7 EDDINGTON REPORT)In summary, these includeEconomic conditions, a stable macroeconomic policy climate, local market circumstances, agg lomeration, and labour market conditionsInvestment conditions available funds, timing and structure of investment, type of infrastructure investment, location of investment in terms of network structure and semipolitical and institutional conditions, decision making, planning, sources, and methods of finance, level of investment, supporting legal and organisational policies and processes, and method and governance of infrastructure delivery and provision.Funding and delivery mechanisms for UK national infrastructureThe National Infrastructure is funded and delivered in a number of waysCommercially driven, user-paid infrastructure e.g. unregulated airport and ports where it is for the developer to decide what and when infrastructure is built. Any developments is then paid for by consumers (but prices are not regulated because competition exists)Commercially driven, user paid but price-regulated infrastructure with a stronger role for Government. Regulated airports are an example. Go vernment supports investment in additional capacity but this is a commercial decision for airport operator (and where prices are regulated to protect from monopoly power). The energy sector also largely follows this model but prices are set by the market or thorough Government intervention. wrong regulated businesses where independent regulators play a stronger role in determining the level and nature of investment. For example, water, where the regulator has an input into the nature of the investment programme but infrastructure investment in funded by users.Price regulated business that is funded by the taxpayer and users e.g. Network Rail. This is a model where the business is funded both by users and taxpayers where the DfT have a central role in panorama out the outputs it wants from the railways and the level of funding to achieve that. The regulator sets the efficiency targets and prices for the company.Publicly decided and publicly funded infrastructure e.g. roads. Governm ent decides where they should go, when they should be built and pays for them. This may include some provate finance but ultimately government rather than users pay. Clearly Government enjoys much greater control over infrastructure, but only a small part of the overall picture.Infrastructure essential for supporting economic activity and growthMany key investment projects rely on private finance either as direct investment or through mechanisms such as PPPs. In the current economic climate the Uk faces stiff competition in securing investment from private investors and from within Government budgets. In this environment, there needs to be a clear vision from Government about the future and needs for infrastructure. This will be essential to persuade the provate sector to invest in the national infrastructure and, in particular, provaste sector investors need long-term certainty in order to judge whether to commit major funds.Chapter 3This chapter gives a brief description of the m ethods used for collecting independent data and why they are relevant to the research objectives.Research StrategyQuantitativeQuantitative research is objective in nature. It is defined as an inquiry into a social or human problem, based on testing a hypothesis or a theory composed of variables, measured with numbers, and analysed with statistical procedures, in order to determine whether the hypothesis or the theory hold true (Cresswell, 1994). This statement is expanded on further by Bouma and Atkinson (1995), who state Quantitative data is, therefore, not abstract, they are hard and reliable they are measurements of tangible, countable,