Capital Investment Plan 2009 - Heathrow Airport

In order to publish CIP 2009 HAL has had to select an inflation index from the 2007/08
real price base in the Q5 regulatory decision.
Within the regulatory arrangements a construction inflation assumption of “RPI + 2%”
exists. Depending on the source data and method of calculation used RPI for the period
suggests a construction inflation rate in the order of 5 to 7%.
Following consideration of the various construction inflation indices, including the
RPI+2% methodology, HAL has selected an inflation rate for regulatory year 2007/08 to
2008/09 of 5.00%.
This has been used to create the real cost base for CIP 2009 described in Table 18.
5.4.5 Construction Inflation Outlook and Resultant Action
Comparison of the available forecast construction inflation rates for regulatory year
2009/10 and beyond is complicated by the uncertainty of the general economic climate.
A number of assessments reflect the general perception of reduced economic activity
impacting on inflation. The assessment of the magnitude of the possible impact varies
considerably.
Other reports suggest that the market in which HAL invests will not be impacted to such
an extent. One report 29
suggests that the “Olympic effect” on Greater London
construction will no longer be inflationary but will sustain a general level of demand and
mitigate against falls.
With HAL’s investment plans being of a general infrastructure nature (as distinct from
sectors such as schools, or house building), Cyril Sweett’s 30
commentary on the
construction market outlook broken down into sectors is of interest. The table below
shows a possible divergence between the outlook for the infrastructure sector and the
wider construction industry as a whole.
2007* 2008 2009 2010 2011
Infrastructure
Sector
Total New
Work
* 2007 is based on UK Statistics Authority information.
Table 19: Construction Market Outlook 31
For the reasons outlined above HAL has selected;
1. To fix inflation to nominal outturn prices on non-Capital Projects investments (I.e.
Thames Water, Rail, IT and PSDH) at 0% for years 2-4 of Q5, and
2. Not to amend the current inflation allowance for Capital Projects, of £231m, being
used in monthly outturn reporting.
3. To prevent any drawdown of the inflation allowance.
The decisions do not directly impact CIP 2009 data or schedules, as they relate to AFC,
but are recorded here for clarity of HAL’s management approach to inflation at the time
of publication.
29
Economic and Regional Inflation Report 4 th Quarter 2008, Gleeds.
30
A construction industry cost consultancy firm.
31
Extracted from Cyril Sweet’s Q4 2008 Quarterly Review
Internal File Name: 0903XX-CIP 2009 Main Document-V71-IG 41