What next for London's infrastructure?

Executive summary: London needs continual investment in infrastructure in order to keep pace with demand from its rapidly growing population. However, Britain’s vote to leave the EU and the replacement of the Prime Minister and a number of senior cabinet ministers leaves the future of infrastructure planning and funding unclear. Although projects that have already obtained EIB funding are likely to continue, future funding from the EIB is less secure. However, London’s new Mayor Sadiq Khan has expressed strong support for infrastructure investment and a number of parties have called for the government to boost infrastructure funding in order to stimulate the economy and create jobs. This article examines the future of London’s infrastructure, particularly in the key areas of transport, housing and energy.

London’s population is expected to grow from 8.6 million in 2015 to 11 million by 2050, which will put considerable strain on London’s energy, water, waste, transport and social infrastructure. According to a 2015 report (London Infrastructure Plan 2050), by 2050 London will need:

- 600 new schools and colleges;
- 40 new facilities for recycling and waste management;
- 9,000 additional hectares of public green space;
- 1.5 million new homes; and
- a 50% increase in public transport capacity (including Tube upgrades, Crossrail 2 and new road tunnels and river crossings).

The 23 June vote for Britain to leave the EU has created an atmosphere of uncertainty over the future of infrastructure investment. Those projects where construction has begun or funding has already been secured (such as Crossrail 1, Thames Tideway sewer expansion and London City airport expansion) are likely to continue, however the future of other projects (such as HS2 and Crossrail 2) is looking less certain.

Many parties have urged the government to invest in infrastructure as a way of stimulating Britain’s economy and creating jobs. Theresa May’s new government has issued statements supporting plans to invest in Britain’s infrastructure (including launching Treasury-backed project bonds), however the new Chancellor has declared that budget decisions will not be announced until the Autumn Statement in late November or early December.

Transport

London’s transport infrastructure will continue to require significant upgrades to keep up with population growth. In his manifesto and pre- and post-election statements, London’s new Mayor Sadiq Khan proposed a number of infrastructure initiatives related to transport, including:

• supporting the expansion of the Tube transport network, including: Crossrail 2 (running North-South), a potential Crossrail 3, the extension of the Bakerloo line to Lewisham (and beyond), and expansion of the DLR and tram networks;
• continuing the construction of Cycle Superhighways; and
• supporting new river crossings in East London (including the Silvertown Tunnel).

Khan’s flagship policy was a four-year freeze on transport fares. It is estimated that this will cost Transport for London (TfL) between £900m-£1.9bn (depending on inflation). This will reduce the money available in TfL’s budget for new projects, at a time when obtaining European Investment Bank (EIB) and other private funding is looking less certain. However, Sadiq Khan has stated that he will encourage TfL to make better use of its property portfolio to make up the shortfall in revenues.

London City airport recently gained approval for a £344m expansion (which previous Mayor Boris Johnson had blocked due to his support for an alternative airport in the Thames Estuary). However, the decision over whether to allow for expansion at Heathrow or Gatwick has been delayed until at least October 2016.

Housing

The UK, and London in particular, have failed to build sufficient homes to meet demand for decades. A 2012 report (New estimates of housing requirements in England, 2012 to 2037) suggests that in the years to 2020 England will need to build an average of 312,000 homes a year to meet demand, with 25% of those to be built in London. Housebuilding in recent years has not come close to meeting this target (with only 156,140 houses built in 2015, 25,994 of those in London).

The impact of Brexit on housebuilding is not yet clear. However, if it results in a sustained drop in house prices (which early figures appear to suggest), this is likely to have a significant impact on housebuilding. During the recession from 2007-2009, a 10% drop in house prices led to a 50% drop in houses being built .
In addition, Britain’s exit from the EU may cause further challenges for the construction industry, including a shortage of foreign labour, increased price of materials due to currency devaluation and reduced appetite from foreign investors for UK property. (Source: http://blog.shelter.org.uk/2016/07/will-brexit-hit-house-building/).

Planning regulations are one of the key challenges for housebuilders. While the new government’s attitude to planning is not yet clear, Sadiq Khan has pledged to make 50% of newly built housing ‘genuinely affordable’ to rent or buy and has floated a number of other restrictions, including the imposition of rent controls and a requirement for new-build homes to be advertised locally for at least 6 months before they are able to be sold to foreign investors. Some commentators have argued that the true impact of these policies would be to reduce the overall number of homes being built if a reduction in profit margins and restrictions on foreign pre-sales leads to developers becoming reluctant to build.

Energy and Environment

During his election campaign, Sadiq Khan expressed support for a number of ‘green’ policies, including:

• using London’s roofs, public buildings and land owned by TfL for solar energy;
• expanding the roadside electric charging infrastructure to allow for a major increase in the number of electric cars;
• furthering the roll out of smart meters;
• supporting programmes such as the district heating scheme in Bunhill, which uses waste heat from the Tube to heat buildings.

Although many Brexit campaigners had pledged to cut EU ‘red tape’, this seems unlikely to have an impact on the general trajectory of Britain becoming ‘greener’ and more reliant on renewable energy. The UK’s main piece of legislation on climate change (the Climate Change Act 2008) originated in Westminster rather than Brussels. This sets out an ambitious target for the UK to reduce emissions by 80% by 2050. In addition, the UK is committed at an international level to the UN Framework Convention on Climate Change and the recent Paris Agreement. It is unclear for the moment what path Theresa May’s government (and the newly-formed Department for Business, Energy and Industrial Strategy) will take to meet these goals and how this will affect London’s energy infrastructure.

Funding new infrastructure projects

To fund the new infrastructure that it needs, London will need to rely on a number of private and public sources. A number of London projects have previously received significant investment from the EIB, including the Thames Tideway sewer expansion which received an EIB loan of £700m in May 2016. When Britain exits the EU, it is likely to relinquish its 16% stake in the EIB. Although the EIB is able to invest in non-EU countries, the level of future funding is likely to decrease and it is unclear whether central government funding will step up to replace this.

London’s mayor currently has relatively little power over generating funding for new infrastructure. In particular, only 7% of all tax paid by London’s residents and businesses is retained by the city, compared with 50% in New York and 70% in Tokyo. In light of the additional uncertainties caused by Brexit, Sadiq Khan has pushed for additional powers to be devolved to London as early as possible in order to promote London’s growth. If (and it is a big if) London does get greater devolved powers, strategies such as tax increment financing could create opportunities for infrastructure financing which would help with the development of significant projects.

In order to remain competitive on a world stage and meet the demands of London’s growing population, investment in London’s infrastructure is essential. However, with a new government and uncertainty over how ‘Brexit’ will be achieved, it is unclear for now how and when this investment will be achieved. Watch this space.

Co-authored by Emily Andrews (trainee solicitor)