BMI View: The reported awarding of the Mersey Gateway Bridge is one of the few positive developments in the UK's road sub-sector, in a transport sector being spurred on by major investment in both railways and airports. Having witnessed robust growth over the past few years - largely sustained by a relatively booming railway sector - we anticipate more modest growth than previously experienced for the UK's transport sector over the coming years after a poor 2012, given the constraints on public spending and economic pressures weighing on the wider construction industry. As a result, we are forecasting transport infrastructure industry value to average a still reasonable 6.5% real growth a year between 2013 and 2017, with HS2 and the development of further airport capacity for London providing upside potential to our long-term forecast.
Infrastructure in the UK, whilst accounting for only around 20% of the construction industry's value, will be the driving force behind growth in the construction industry over the coming years. The transport sector accounts for an estimated 63% of infrastructure and therefore will be a major contributor to that growth story.
The reported victory of the Merseylink consortium, comprising equity members Macquarie Capital Group Limited, Bilfinger Project Investments Europe Limited, Vialia Sociedad Gestora de Concesiones de Infraestructuras S.L. and FCC Construcción, Kier Infrastructure and Samsung C and T Corporation, is an example of the major projects on offer within the transport industry. The GBP600mn (US$905.8mn) project is expected to begin construction in late 2013/early 2014.
|Airports And Railways Drive Sector Growth|
|Transport Infrastructure Industry Sub-Sector Values (GBPbn)|
Road Investment Lacking
Despite the Mersey Bridge PPP however, we are bearish on the growth of the road sub-sector where we have revised down our forecasts over the medium term. With the government's attention focussed on the development of major rail and airport projects, the road sector has somewhat been left off the government's agenda. Plans to boost investment in the sub-sector seem to have failed, with David Cameron's plan, announced in March 2012, to lease out Britain's trunk road and motorway network to the private sector yet to stimulate notable growth. The condition of the UK's roads has been an increasing source of public annoyance, yet the 2012 Autumn Statement only included GBP1bn for the road sector over the next three years out of a total of GBP5bn promised for infrastructure.
We therefore forecast that there will be a contraction in the roads and bridges sector over the medium term, as central funding for projects goes to other sectors and tight local council budgets cuts their investment in road maintenance and smaller road builds. Over the 2013-17 period we forecast an average 3% year-on-year reduction in the road building industry.
That said, number of projects over the last quarter have progressed giving upside potential for our bleak roads outlook. In addition to the award of the Mersey Gateway bridge, the UK's second toll road has been approved in South Wales. With a cost of GBP830mn, the major works will relieve pressure on the M4 motorway. The project was initially floated in 2004, but after costs rose to over GBP1bn, it was scrapped. The treasury will now guarantee loans for the project. However, we still believe that the project is a high risk one without private sector budgetary strictness and questionable demand in light of road users in South Wales already being charged to cross the Severn Bridge.
Smaller projects announced over the last quarter include the GBP130mn refurbishment of the tunnel leading to Heathrow airport and the GBP42mn Beadale bypass which is now in tender after being on hold since 2011, thanks to the Department for Transport contributing GBP35.9mn of the cost in an attempt to keep the road building sector afloat.
|Bullish Rail Growth Forecast|
|Railways Infrastructure Industry Value (GBPbn) And Real Growth (% year-on-year)|
Rail Investment Shunts Sector Growth
We have previously noted the ambitious rail investment plan, CP5, being undertaken by Network Rail, which will cause the rail sub-sector will outperform and drive growth in the UK transport sector ( see 'Rail Sector Outperformance Will Continue With New Network Rail Plan', January 10). We maintain this view, and forecast that the sub-sector will achieve impressive 13.6% growth in 2013, going on to average year-on-year growth of 11.9% up to 2017.
Over the last quarter we have seen a number of projects to come out of this ambitious rail investment programme. In May the government announced that it would be building four new stations; Ilkeston (GBP4.5mn), Lea Bridge (GBP1mn), Newcourt (GBP720k) and Pye Corner (GBP2.5mn). In April as part of the upgrade to the Scottish rail network, NR and BAM Nuttal began construction on a GBP294mn contract to refurbish 48km of track and build seven new stations between Tweedbank and Edinburgh, which will be completed in 2015. Similarly, Newcastle Central station will be refurbished in a GBP8.6mn project.
Outside of NR work, which includes upgrades the mainline services, and flagship schemes such as the GBP6bn Thameslink project which is running until 2018, (the first phase was completed 2012, and the final phase starting early 2013), there are other high value projects which in progress. This includes the GBP15bn Crossrail project, on which work started over 2012, and which is due to be completed in 2018. Whilst many contracts have already been awarded for Crossrail, it continues to bear fruit. In April, Alstom, Costain and TSO were awarded a GBP300mn (US$459) contract to build 21km of track and overheads with work to begin in 2014. In March, Balfour Beatty won a GBP130mn to build a two mile section of track and new station in South East London. Transport for London (Tfl) work is also up for tender, with the extension of the Northern Line gaining GBP1bn in cheap government credit.
HS2 Potential - But Not Yet
Finally, the GBP33bn High Speed 2 project holds substantial potential for new investors. In May the formal public consultation on the proposed route for the project began. We note the likelihood of widespread opposition, from those with environmental concerns, to those who are in the orbit of disruption but do not stand to benefit from the line, and those who oppose the scheme's immense cost. The project then, is far from guaranteed, and is still some way from making tangible process. Lengthy regulatory issues are likely to plague the project given the opposition, and the route could be altered. Consequently, we have only partly incorporated the HS2 project into our forecasts, with the project providing upside to our long-term outlook.
|Heathrow Lifts Growth|
|Airports Infrastructure Industry Value (GBPbn) And Real Growth (% y-o-y)|
Heathrow Investment Boosts Airports Outlook
The announcement by Heathrow Airport that it will invest GBP3bn (US$5bn) through to 2019 encouraged us to upgrade our outlook for the UK's airport infrastructure industry value real growth last quarter ( see 'Heathrow Investment Drives Upward Revision To Airport Forecast', February 14). We had seen industry growth slowing sharply from 2015, when previously planned projects at the UK's airports were expected to draw to a close. The announcement of investment beyond this period has led us to revise this outlook. There is further upside potential over the longer term, once a decision is made on the various runway expansion proposals and Thames Estuary Airport.
In response to Heathrow's announcement of GBP3bn investment over the 2014-2019 period we have upgraded our outlook for growth in airports infrastructure industry value over the same period. We currently anticipate annual average real growth of 8.9% between 2013 and 2017.
The UK's airport sector remains one of the few bright spots in an otherwise bleak construction sector. Investments are not only planned at Heathrow, but also billions of pounds are being ploughed into Edinburgh, Gatwick, Leeds and Stansted. This has been added to this quarter with the announcement that Argent, Carillion and Greater Manchester Property Venture Fund are to invest GBP650mn in the development of Manchester Airport's logistics facilities, along with construction of new office and advanced manufacturing space.
The industry value growth upgrade positively contributes to our overall outlook for transport infrastructure industry value real growth in the UK, which is also boosted by an anticipated continuation of strong growth in the railways sector, one of the few other areas where we see strong investment. Both airports and railways hold longer term upside potential, in the former, once a resolution to the extra runways versus new London airport is decided, and in the latter from HS2. Both are far from clear presently, and therefore we hold them as presenting further upside potential to our positive forecast for transport infrastructure.