A capital idea? by Mark Hellowell

1 Apr 10
MARK HELLOWELL l The creation of Infrastructure UK last summer barely scratched the surface of popular attention, but was arguably one of the more significant policy moves of recent years. IUK's National Infrastructure Strategy, published alongside last week's Budget,

The creation of Infrastructure UK last summer barely scratched the 
surface of popular attention, but  was arguably one of the more 
significant policy moves of recent years. IUK's National 
Infrastructure Strategy, published alongside last week's Budget, 
signals a much more interventionist approach by government to the 
financing and delivery of Britain's economic assets than ministers 
have been prepared to endorse for at least two decades.
Although government has remained a powerful actor through its 
co-ordination of regulators, most infrastructure assets in Britain are 
investor-owned, following the great divestitures of the 1980s and 
1990s. In this context, the fact that IUK - a government body - has 
been tasked with providing, at each Spending Review, an account of the 
country's infrastructure needs and a list of projects that will 
deliver them, has clear political and economic importance.
Coming just a few weeks before an election that the incumbent 
government is expected to lose, the significance of the document and 
of IUK itself may of course be questioned. But whichever party is in 
power by the middle of May will be heavily dependent on IUK for its 
expertise, experience and contacts with industry. The Strategy cannot 
be discarded easily.
IUK has been election-proofed - its expansion has made it 
indispensable. Originally conceived as a mere advisory body for energy 
and telecoms, its writ now includes the full gamut of economic and 
social infrastructure. It brings together most of the bodies in 
central government that have expertise in managing large-scale 
investment programmes, and is led by individuals from the powerful 
PFI-PPP agency, Partnerships UK.
Underpinning IUK's report is the prediction that demand for investment 
in so-called 'economic infrastructure' - water, waste, transport, 
energy and telecoms - will be £40-50 billion a year until 2030. This 
is significantly above historic investment levels, and, more 
pertinently, is much higher than could be secured now from public or 
private sources without major institutional and regulatory change.
The economic context is hardly conducive to major increases in 
investment. Public sector net investment is set to be reduced in real 
terms over the next three years (halved, in fact, from the level set 
out in 2008 Budget projections). Meanwhile, there is a shortfall of 
liquidity among banks and the capital markets remain in the midst of 
risk aversion. The result is that, in important areas of mandatory 
spending such as waste management (where EU targets require a major 
move away from landfill use), private finance is not always available 
- and where it can be secured, the price is usually high and the terms 
are often harsh.
IUK's top priority, however, is the energy sector, which requires 
major investment in low-carbon power stations to meet EU targets, as 
well as replacing ageing facilities and replacing indigenous gas 
resources that are fast diminishing. Nobody really knows what kind of 
technical risks are involved in providing such schemes, and the 
financing challenge is likely to be considerable.
So it is no surprise that it is the renewables sector where the 
government's new-found interventionist approach finds its clearest 
expression. A new state-coordinated Green Investment Bank (GIB), with 
£1 billion of government money funded by assets sales and £1 billion 
of further funding sourced from private investors, will provide much 
needed risk capital.
The hope is that, by shouldering the bulk of project risks, 
particularly those associated with the construction of new facilities, 
the capital markets will finally engage with the infrastructure sector 
on the basis of low cost debt finance. Perhaps IUK's most challenging 
task, complementary to its role in setting up the GIB and getting £1 
billion of private sector risk capital, is to persuade institutional 
investors that infrastructure is a good place to put their money.
Sovereign wealth funds, insurance companies, pension funds: these are 
the parts of the economy that have the funds required for the 
investment programme that IUK is envisaging. And the long-term and 
potentially low-risk nature of infrastructure investment should suit 
them. But there is also a need for institutions that can understand 
project risks, mitigate and allocate them.
This suggests a continuing role for the banking sector in financing 
construction and development, before exiting projects through sales in 
secondary equity and debt markets to more risk-averse institutions.
Such interventions as these are likely to be widely welcomed. But 
there is at least the potential for the solemn technocrats of IUK to 
attract controversy - if the media and public cares to take notice. 
The form that IUK takes, and the approach it wants to use in 
formulating policy, sometimes blurs the divide between public and 
private sectors in a way that some - the House of Commons Treasury 
Committee for example - may regard as problematic.
Many of IUK's senior staff, being on secondment from Partnerships UK 
(which is majority owned by eight corporate investors, most of them 
major players in the PFI-PPP industry), are corporate or project 
finance experts, with careers in banking behind them - and very likely 
ahead of them. In addition, many of the members of IUK's advisory 
council are drawn from the industries that will finance and deliver 
the intended infrastructure, such as private equity groups and 
construction firms.
IUK's stated commitment to play 'a key role' in the wider 
policy-making arena - ostensibly to ensure that the impact of policy 
change on investors is considered - indicates that the body may spread 
its tentacles into areas of Whitehall that have little to do with 
infrastructure. Whether it does so as a guardian of the public 
interest, or as an advocate for industry, remains to be seen, but not 
everyone will welcome the increasing influence of this body.
To its credit, IUK is to examine evidence that it thinks indicates 
excess prices in large construction projects. James Stewart, IUK chief 
executive has suggested that civil engineering for major 
infrastructure projects in the UK may cost up to double what 
equivalent works cost in the rest of Europe. It will publish 
conclusions and recommendations on the issue by the end of this year.
The body has no intention, however, of looking at the existence of 
excess pricing in the financial sector itself, from which its most 
senior staff have been drawn. This is a genuine missed opportunity, 
since project finance banks are currently charging a margin above 
their cost of funds that is up to six times greater than was normal 
before the financial crisis. IUK's focus on getting the regulatory 
context right, and de-risking projects for new investors through 
co-investment, is surely sensible.

But the opportunism of the financial markets - facilitated by the 
current absence of competitive tension between institutions - suggests 
that even more state intervention may be required if taxes and user 
charges are to be kept as low as possible in the coming decades.


CIPFA latest

Related jobs

PF jobs