The UK is facing an infrastructure spending shortfall of £700bn by 2040, according to a report from EY.

With inflation pushing project costs higher, the professional services company’s report has identified £1.6trn of UK infrastructure and capital projects that are currently unfunded.

The EY report, Mind the (Investment) Gap, says closing this deficit without government spending would require private sector investment to more than double from current levels by 2040.

The report attributes the funding shortfall to a combination of economic headwinds driving up the cost of capital projects and the extensive investment required to meet the UK’s long-term economic, social, strategic, environmental and defence priorities.

EY analysis suggests if the UK maintains historical levels of capital spending up to 2040, adhering to current fiscal rules capping borrowing and debt, then it would be in line to commit £1.8trn in cumulative capital spending over the next 15 years.

However, the report identifies an additional £1.6trn of projects and programmes that are currently unfunded by 2040.

It says the UK government may allocate future spending over the next 15 years to cover this shortfall.

However, by using historic patterns of government spending on existing versus new projects, EY analysis estimates that only around half of the £1.6trn could be covered by government investment by 2040, leaving a potential funding shortfall of at least £700bn.

Based on the projections, meeting the remaining shortfall without government spending would require private sector investment in UK infrastructure to more than double from the £568bn currently projected to be required by 2040. 

The report assesses the UK’s existing and forecast capital spending commitments identified by the National Infrastructure Commission, the Department for Health and Social Care, and the Ministry of Defence.

This includes a wide range of projects, from new road and rail projects to decarbonising public buildings and funding social infrastructure like hospitals and schools. It also includes increased defence commitments including the UK seeking to meet a target of spending 2.5% of GDP on defence.

Future risks could also see the £700bn deficit increase. If the same level of infrastructure project cost overruns of the last decade recur in the coming 15 years, almost £1trn could be added to the shortfall, with a further £390bn if further geopolitical tensions escalate to economic strains like inflation and more defence spending.

Mats Persson, partner at EY Parthenon, said: “Almost every Western country is facing a growing gap between the capital investment needed to meet green, economic and strategic priorities, and the amount governments can afford to spend.

“Plugging this gap will require the entire value chain, from policymakers through to developers and investors, to urgently come together to find alternative sources of capital and utilise new technologies to bring down the cost of these projects.”

Sayeh Ghanbari, business consulting leader at EY, added: “Infrastructure projects have traditionally been slow to incorporate new technologies, even in areas where it’s widely accepted as best practice.

“Unless the infrastructure sector significantly accelerates its adoption of productivity-enhancing tech, the eventual spending shortfall could delay or even prevent the completion of critical, national priority capital projects.

“The acceleration of AI presents an opportunity for the sector to reverse this trend.”

The report identifies three key measures that, if deployed at a project level in the UK, have the potential to plug the investment gap. 

These include leveraging a range of alternative investment models that have worked successfully on individual projects worldwide, from value capture models in Japan to charging models in Austria.

The report also recommends that infrastructure projects incorporate a series of efficiency improvements, with particular focus on the design phase, which could reduce the average cost of a capital project by 20-25%

Finally, it highlights the benefits of deploying AI and other technology to produce accurate cost analysis and highlight savings opportunities.

Click here to read the full report.