Infrastructure Spotlight - Autumn/Winter 2024

As highlighted in our post-election Infrastructure Spotlight, the Labour Party's 2024 Manifesto contained some ambitious statements of intent in the infrastructure space.  These included accelerating the UK on its path to net zero, whilst overhauling and regenerating the UK's ageing infrastructure more widely, by using public investment "to crowd in private funding".

Did the Budget make good on the Manifesto commitments?

Whilst the recent Budget may have not set the pulse racing for the infrastructure world, it did deliver on (at least the next steps of) many of those Labour commitments.  Among other things, the Chancellor pledged to prioritise long-term funding for growth, with an increase of over £100 billion in capital investment over the next five years "across roads, rail, schools and hospitals".  

Crowding in more private investment: the National Wealth Fund

The UK Infrastructure Bank is being renamed the National Wealth Fund ("NWF") and has been re-purposed to support the Government's wider industrial strategy.  Although there is a danger that this could dilute the NWF's focus on infrastructure and lead to funding being diverted to other areas, it is clear from NWF statements that infrastructure and net zero remain key areas for targeted investment.  Ultimately, the whole point of investing in infrastructure is to support the wider economy and promote growth, so in that respect, an ability to take a more holistic approach to investment may be helpful (see also our discussion of the UK's draft industrial strategy below).  

The Government hopes that the NWF will help to catalyse over "£70 billion of private investment". During the International Investment Summit (which was held in October), it was confirmed that the NWF would be initially capitalised with £27.8 billion – with £5.8 billion of the NWF’s capital focusing on green hydrogen, carbon capture, ports, gigafactories and green steel.  It's also worth noting that the NWF is expected to implement the investment strategy of Great British Energy ("GBE"), for which the Government is providing capitalisation of £100 million.  

The NWF's strategy in deploying that capital and its role on infrastructure projects in particular are being considered by one of the many new taskforces being set-up by the new administration.  However, if properly structured and purposed, it does seem to have the potential to unlock large scale investment in infrastructure, in a genuine public-private partnership, in a way its predecessors have not quite managed.

Key tax measures for the infrastructure and energy sectors

As ever, the Budget introduced some changes to taxation with implications for the infrastructure and energy sectors – and, as is to be expected, there was a mixture of good and bad news.  Key tax increases included the following:

• Carried interest changes: The headline rate of capital gains tax for carry is increasing from 28% to 32% in April 2025.  However, this is just a 1 year stop gap, as the Government intends to introduce major structural reforms to the carry rules from 6 April 2026 onwards.  These developments will be of key interest for infrastructure funds and other private capital managers.  For more on this, see our Budget briefing.
• Energy Profits Levy: Labour confirmed that its proposal for a 3% increase to the existing Energy Profits Levy on oil and gas companies would be going ahead – see section 2 below.
• CGT: Capital Gains Tax (CGT) rates have been increased – but, as we explain here, these changes are relatively modest compared with what the Government might have introduced (and CGT rates remained the same for residential property gains – see section 3 of this briefing).
• SDLT: The Stamp Duty Land Tax (SDLT) surcharge (on top of standard residential rates) has been increased from 3% to 5% for any company acquiring any residential property and the ATED-related SDLT charge was increased from 15% to 17%.
• NICs: For businesses which employ significant numbers of staff, the increase in employer National Insurance Contributions (NICs)  are likely to have a material impact – see section 1 of this briefing more detail and note also the proposed changes to employment law, which may produce a further increase in the cost burden for employers.

Recent case law on capital allowances

The Government has acknowledged concerns raised by businesses in the renewable energy and infrastructure space following the Gunfleet Sands Ltd and others v HMRC (2023) decision which held that preliminary studies performed prior to installation would not qualify for capital allowances. The Government has committed, in the Roadmap (see above), to launching a consultation on the options for addressing these concerns.  The hope will be that this encourages further investment in renewable energy and major infrastructure projects. There is scant detail currently available, but the Roadmap indicates that the consultation process will take place in Spring 2025. For further information about the Budget more generally, please see our analysis available here.

£100 million for Great British Energy

The Budget saw the announcement that £100 million in funding would be provided for the proposed publicly owned investment platform GBE.  GBE was announced prior to the election and is intended to act alongside private partners, investing and managing green technologies and capital-intensive projects.  A Great British Energy Bill, which would establish the Government-owned company, has passed through the House of Commons and is currently at the Committee stage in the House of Lords.

Once GBE is fully established, its investment activity will be undertaken by the National Wealth Fund ("NWF") (formerly the UK Infrastructure Bank – see section 1 above).  This suggests that these two organisations will be working closely together in the energy sphere. This may allow GBE to draw on the NWF's resources, experience and pipeline of projects.  The NWF is also expected to invest about £5.8 billion in green hydrogen, carbon capture, ports, gigafactories and green steel.  

Notwithstanding this challenging backdrop, it's worth pointing out that the new Government has already acted swiftly in a number of key areas, notably by:

• approving almost 2GW in new solar projects;
• reversing the de facto ban on onshore wind; and
• increasing the budget for the latest round of contracts for energy from renewables by 50% (from £1 billion to £1.5 billion) and awarding contracts for 5GW of offshore wind, 1GW of onshore wind and 3GW of solar.

£25.6 billion for Carbon Capture, Usage and Storage and Hydrogen

The Government pledged to provide £3.9 billion of funding across 2025 and 2026 for Carbon Capture, Usage and Storage ("CCUS") 'Track-1 projects' (HyNet North West and the East Coast Cluster).  This follows an announcement earlier in October of up to £21.7 billion of "funding available, over 25 years, to make the UK an early leader in 2 growing global sectors, CCUS and hydrogen". Its inclusion in the Budget highlights that the sector will continue to receive support from the Government, even when some remain sceptical of the future importance of these technologies. This has the feel of a compromise between the more 'Net Zero' and 'Industrial' focused factions of the Labour administration – as CCUS provides an opportunity to enable heavier industrialisation to scale in the near term without as large a carbon cost.  

As an additional incentive, the Government plans to legislate in the Finance Bill 2024-25 to provide relief for payments made by oil and gas companies into decommissioning funds in relation to assets sold for use in CCUS. This maintains the tax treatment available had these assets had been fully decommissioned (rather than repurposed for CCUS).

Nuclear power

£2.7 billion of funding was also confirmed to continue Sizewell C’s development through 2025 and 2026. This funding is intended to keep the Government's options open until a final investment decision is taken on whether to proceed with Sizewell C as part of phase two of the spending review (alongside final decisions on other multi-year spending commitments).  According to some reports, the delay over a final decision has proved necessary because negotiations with other investors are taking longer than expected. While there was no specific additional funding allocated for Great British Nuclear's small modular reactor competition, the Budget did confirm this remained ongoing – with the final decision to be taken in spring 2025.

Increased Energy Profits Levy

Labour confirmed changes to the existing Energy Profits Levy ("EPL") payable by oil and gas companies would be going ahead, including a 3% rate increase and an extension to the end date. 

Major rail projects

The Government confirmed funding for three major rail projects:

• York to Manchester: the TransPennine Route Upgrade between York and Manchester, via Leeds and Huddersfield;
• East West Rail: connecting Oxford, Milton Keynes and Cambridge, with the first services beginning in 2025, between Oxford, Bletchley, and Milton Keynes; and
• HS2 to Euston: the tunnelling to ensure that Phase 1 of HS2 (between London and Birmingham) runs all the way to Euston (and does not terminate at Old Oak Common, as had been feared following the decision of the previous Government to cancel Phase 2 of HS2 in response to cost over-runs).  However, there was no commitment to resurrect Phase 2, which would have created additional capacity from the West Midlands to Crewe, Manchester and Leeds.

Other transport projects

The following Budget commitments are also of note:

• An additional £200 million for City Region Sustainable Transport Settlements, bringing local transport spending for Metro Mayors in 2025-26 to £1.3 billion.  This supports projects such as Liverpool’s Baltic Railway Station, the renewal of Sheffield’s Supertram system and the continued development of West Yorkshire Mass Transit.
• Progressing key strategic road schemes, such as the A47, to improve connectivity between East Anglia and the North, and the A57, to improve journey times between Sheffield and Greater Manchester.

The UK Government's target is to build 1.5 million new homes by 2029 – with the vast majority of that investment coming from the private sector.  Compared with say, the level of funding that the Government is allocating to energy transition and net zero, the funding announcements relating to housing in the Budget were relatively modest.  The commitments most relevant to the private sector were as follows (but see below for discussion of various measures relating to social housing, where private investors also play a part):

• Housing guarantees: £3 billion of additional support for SMEs and the Build to Rent sector, in the form of housing guarantee schemes (but little in the way of detail has been made public and this support will need to be deployed promptly if it is to help with delivery of the 2029 target);
• Nutrient neutrality mitigation: £47 million of funding to support the delivery of up to 28,000 homes that would otherwise be stalled due to nutrient neutrality in affected catchments;
• Liverpool Central Docks: £56 million to support the delivery of 2,000 new homes at Liverpool Central Docks; and
• Cambridge: £10 million to enable the Cambridge Growth Company to develop an ambitious plan for the housing, transport, water, and wider infrastructure Cambridge needs to realise its full potential.

There were also some significant Budget announcements relating to the social housing sector, where the Government committed to provide a further £500 million for the Affordable Homes Programme, increasing it to £3.1 billion.  Although welcome, this in itself will only fund around 30,000 affordable homes – which is a drop in the ocean against the overall 1.5 million target.  There were also welcome commitments to provide greater certainty over future Government support for the sector – for example, details will be published of future grant investment under the Affordable Homes Programme to 2029. 

Finally, although the Budget confirmed that – despite changes elsewhere – Capital Gains Tax rates for residential property would remain at current levels (i.e. 18% and 24%), changes were made to Stamp Duty Land Tax (SDLT).

An SDLT surcharge (on top of the standard residential rates) applies, broadly, to (i) any individual purchasing an "additional dwelling" (i.e. any property other than their main residence) and (ii) any company that acquires any residential property. From 31 October 2024, this surcharge was increased from 3% to 5%.  It was also announced that the single rate of SDLT payable by companies and non-natural persons acquiring dwellings for more than £500,000 (often known as the ATED-related SDLT charge) would be increased from 15% to 17%, again with effect from 31 October 2024.

In welcome news for some, Labour did not fulfil their manifesto pledge to raise the SDLT surcharge paid by non-UK residents: this remains at 2%. This 2% surcharge for non-residents can apply in addition to the new 5% surcharge on residential property, which means that the top band of the consideration for some transactions could attract an SDLT charge of a sizeable 19%.

Many of the specific major projects mentioned in the Budget have already been covered in previous sections dealing with energy/net zero, transport, telecoms and housing – so this section focusses on general measures aimed at streamlining the implementation of major infrastructure.

The big question here is whether the new Labour Government has grasped the problems highlighted in a recent report from the National Infrastructure Commission ("NIC"), which found that the development of new infrastructure in the UK is too slow and too expensive.  Evidence from the Budget is encouraging in the sense that it suggests that the Government at least recognises the NIC's diagnosis and is trying to do something about it.

The NIC report also identified the need for more efficient planning and consenting regimes. As we outline in our briefing Planning ahead for the new Labour Government, this is an area where the current Government had already developed significant proposals for reform, including:

• Forcing local authorities to update their local plans (many of which have not been updated for five years);
• Amending national policy guidance to make it easier to build laboratories, digital infrastructure and gigafactories; and
• Reforming compulsory purchase compensation rules to improve and expedite site delivery and housing and transport benefits in the public interest (with landowners to be awarded "fair compensation" rather that inflated prices based on the prospect of planning permission).

In particular, the Government has made it clear that it wants to "unblock" infrastructure development in order to support economic growth and sees planning reform as key to this aim.

The Budget confirmed that the Government continues to expect that the bulk of investment in EV charging infrastructure will come from the private sector – although it did include a commitment to provide £200 million in 2025-26 to accelerate the rollout of public EV charge points.  

As in other areas (such as energy transition and housing), the Government's target of 300,000 public charge points by 2030 is challenging.  The total number of public EV charge points as at October 2024 was 70,000 (source: ZapMap) – although, if recent growth rates continue, this target could be met.

For a more in-depth discussion of the EV charging sector, including a number of suggestions as to what else the Government could do in order to meet its roll-out targets, see section 7  of the last issue of Infrastructure Spotlight.

In her Mansion House speech on 14 November, Chancellor of the Exchequer Rachel Reeves announced that the 86 funds which make up the Local Government Pension Scheme ("LGPS") in England and Wales will be required to pool their assets in new 'megafunds'.  This is intended to increase investment in infrastructure and other productive asset classes including private equity, as well as generating economies of scale and reducing investment costs.  A consultation runs until 16 January 2025.  The timescale for implementing this is not clear.

This initiative has been strongly influenced by models in Canada and Australia, where they see far greater pension fund investment in infrastructure than is seen in the UK.  To date, in response to earlier Government initiatives, only around 39% of the funds' nearly £400 billion of assets have been pooled (into eight current pools).  Each fund's administering authority will be required to specify a target for investment in their local economy, with 5% given as an example.

What kind of infrastructure investment does the Government hope to see?

In its consultation paper, the Government cites examples such as the Border to Coast pension partnership, which was set up to pool the assets of 11 Local Government Pension Schemes.  Under its UK Opportunities private markets programme, Border to Coast has recently committed £48.5 million to build onshore solar and wind farms as well as battery storage. The investment will develop four wind farms in Scotland with further sites in the pipeline.  

Workplace pension providers

Separately, but with similar aims, there is a concurrent consultation on proposals to reduce the number of workplace pension providers available to employers for compliance with their automatic enrolment duties. The reduction would be brought about by imposing a minimum asset value requirement for each master trust's and group personal pension provider's default arrangement, and a limit on the number of different default arrangements they may offer.  This would be in place not before 2030 and there may be a transitional period.  Employers' own trust-based occupational pension schemes are not in scope.

The Water (Special Measures) Bill (the "Bill") was introduced into Parliament on 4 September 2024 and is currently in the final stages of its passage through the House of Lords ("HoL"). As part of its announcement introducing the Bill, the Department for Environment Food & Rural Affairs ("DEFRA") emphasised that the Bill is intended to significantly strengthen the power of water industry regulators in the UK – holding water companies to account "where they have failed to deliver for the environment and customers and begin to restore trust in the industry".

These are significant ambitions for a sector which has come under intense criticism in recent years. It certainly appears that the new Government is intent on taking a more interventionist approach than its predecessor by, in this case, encouraging greater scrutiny over remuneration packages and the imposition of more fines and other penalties. And it also seems to be in a hurry to do so.

For more detail, see our briefing: Water (Special Measures) Bill: what's next for the water industry in the UK? which includes discussion of the implications for:

• Remuneration and governance
• Criminal charges and increasing enforcement
• Sewerage monitoring and pollution incident reduction plans
• Changes to the special administration regime (which is relevant where, for example, a water company becomes insolvent)

It also looks at the Government's wider plans for the sector, in particular the implications of its independent review into the water sector and how it is regulated.

We have recently published the first two instalments in our Energy & Infrastructure video series, where we will be looking at ten different forms of sustainable infrastructure that we will see more of in the coming years.

• Heat Networks and District Energy: In this episode, Richard Brown, Partner in our Technology & Commercial Transactions team, provides an overview on recent developments in the world of Heat Networks – what are they, and why do they matter?
• Smart Meters: In this second video of our Energy & Infrastructure video series, Glen Evans, Senior Associate in our Technology & Commercial Transactions team, discusses the The UK government's plan to roll out smart meters and the legal complexities that must be navigated to achieve success.
• Solar Energy: In the third instalment of our Energy & Infrastructure bitesize video series, Michael Ross, Senior Counsel in our Technology & Commercial Transactions team, discusses UK solar energy. Where do we stand comparative to our target, and what are the key legal considerations to keep in mind?

Watch out for more episodes, which will include videos on the following topics:

• Ground source heat pumps; and
• Electric vehicle charging.
  
  

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