There’s plenty of private money seeking investment opportunities, so the infrastructure sector needs to step up to make projects more attractive, help build project certainty and promote the benefits of new networks and services to the public writes David Barwell.
It is widely acknowledged that the UK will face mounting economic, environmental, and social problems if the nation’s infrastructure fails to meet present and future demands. Government estimates propose that almost £500 billion is required to bridge the infrastructure funding gap.
As part of the response to this challenge, the UK’s National Infrastructure Commission (NIC) was established to provide expert advice to the government on the pressing infrastructure issues including ways to close the funding gap. The findings of its first National Infrastructure Assessment (NIA), issued in July, are being debated within the context of both London and at a national level.
The report gives a snapshot of some of our most important infrastructure needs. Its seven recommendations set out a pathway for the UK’s economic infrastructure:
- Nationwide full fibre broadband by 2033
- Half of the UK’s power provided by renewables by 2030
- Three-quarters of plastic packaging recycled by 2030
- Allocating £43 billion of stable, long-term transport funding for regional cities
- Preparing for 100% electric vehicle sales by 2030
- Ensuring resilience to extreme drought
- A national standard of flood resilience for all communities by 2050
These goals are ambitious, but they reflect the infrastructure challenges that are already evident every day. During this summer alone, there was a proliferation of headlines related to infrastructure strain and failures. Media stories included ‘recycling fraud’, where plastics recycled by citizens are sent to landfill. Extensive road congestion and unreliable rail networks frequently filled commuter bulletins. And the hottest period in the UK for decades, was accompanied by water restrictions imposed across the country.
Private capital is an essential part of the solution
The NIA recommendations to improve delivery are ambitious, and they’re expensive. But the report stresses that these things are not “an unaffordable wish list.” The goals are designed to fit within the government’s long-term funding guidelines for public investment in infrastructure. In August 2018, figures from the Office for National Statistics revealed the UK government spent £18.9bn on infrastructure projects in 2016, and more than 85% of that was on transport infrastructure.
That said, the state simply can’t finance all these changes and advancements alone. Developers are calling for greater access to private funding, and the government wants this, too. In the next few years, the government’s own National Infrastructure Plan states private capital should fund at least half of the cost of a £483 billion infrastructure pipeline to 2021.
At the same time, there are trillions of dollars of private capital, both foreign and domestic, searching for a home. There is $120 trillion under management in global pension funds alone. Yet despite infrastructure being critical to the growth and economic health of any country, the OECD estimates that only a tiny percentage of this cash, just 1.6%, is invested in global infrastructure.
The NIC agrees that “financing itself is not in short supply. However, state financing institutions can help to encourage private investment and catalyse activity.”
It seems that everybody wants the same thing. The government needs to drive more private cash into infrastructure projects and private investors wish to invest. So why isn’t it happening?
Plans, commissions, reviews and assessments are all critical to working out what needs to be done. But if the government is to attract private investment, it now needs to turn these visions into action.
In addition, following the Chancellor’s 2018 budget announcement that the government will no longer use PFI/PF2 contracts to fund the building of infrastructure, potential investors will be looking to the National Infrastructure Strategy — which the government has committed to publish in 2019 as its formal response to the NIA — and Spending Review to provide further detail on how private investment could be secured for capital projects that are not 100% publicly funding in the future.
Ahead of this, here are some ideas for moving forward.
Six steps to bridging the UK infrastructure investment gap
- Don’t just say you want private capital: vigorously promote UK infrastructure
Private investors are not necessarily infrastructure experts, nor connected and well-versed in the unique features of the UK infrastructure sector. For investors new to the UK, there is scant information available on the country’s infrastructure project pipeline: just 220 words in fact, on the government’s capital investment page. Although, the government has said it will set out its priorities for economic infrastructure in the comprehensive National Infrastructure Strategy.
New types of projects are emerging which will need financing in the near future. For example, one NIA recommendation is that government should encourage commercial investors to finance a nationwide electric vehicle charge point network. It’s an exciting investment opportunity which didn’t exist a few years ago.
Such infrastructure projects die, however, without government support and attention. Vocal government endorsement of infrastructure as a sector full of investment opportunities is vital. There are exceptions of course, the proposed Heathrow Southern Rail link for example, is an opportunity identified by the private sector that will be privately financed, including, investment in part from AECOM. This will be one of the first projects under government plans to invite third parties – such as local authorities and private-sector companies – to invest in the rail network, alongside the £47 billion the government is planning to spend over the next five years.
- Provide the data the private sector needs to invest with confidence
A common criticism of infrastructure investment is that it is risky and unpredictable. Toll roads don’t always perform as expected; construction timelines overrun; project costs can run far higher than what was forecast. Collecting and making readily available accurate, up-to-date data on the costs and performance of UK infrastructure projects makes for better decision making and builds trust in the sector as a place to house capital.
Providing private investors with data matters because they need to be presented with fully-formed, fleshed-out investment opportunities. Investors want to know that they’re committing to projects, programmes and assets with characteristics that are already well understood. ROI is king.
Investors will not be prepared to rely on estimates and old information when assessing the costs and benefits of projects. Providing data on the financial performance and costs of UK infrastructure assets gives private investors the ability to predict and project long-term revenue streams.
The government needs to improve communication between the public and private sector and ramp up data collection to access capital providers that previously wouldn’t have been knowledgeable and confident enough to invest.
This is about taking a pragmatic, data-and-results-led approach to offering investment opportunities to the private sector. The opportunity is for government and the private sector to engage at the design stage, so that investors have the opportunity for early input into a project and that both parties can share data.
- Be open to creating and attracting new financing structures and institutions
The government can further attract private investment by establishing programmes and institutions dedicated to infrastructure finance. One such example is the Asian Infrastructure Investment Bank established to support the building of infrastructure in the Asia-Pacific region. Another vehicle is value capture. Often used around new transportation hubs, this is where infrastructure investment enhances land values so that transportation and city landowners can draw benefit from their investment for future spending including on schools, housing and public space.
The need for new ways to mobilise private capital is even more pressing as Britain prepares to leave the European Union. The EU’s European Investment Bank has worked for decades to bring private capital into infrastructure projects – but the UK’s membership of the bank could end post-Brexit. The NIA suggests a dedicated UK infrastructure finance institution needs to be created if this happens.
We already have evidence that government is capable of this kind of work. In the renewable energy sector, the Green Investment Group was originated by the state in 2012. It is now owned by private bank Macquarie, the world’s largest infrastructure asset manager, and has invested £3.4 billion into UK clean energy projects. It’s an example of how the government has the ability to create infrastructure-supporting schemes and institutions which can ultimately be handed over to and financed by the private sector.
The private sector can also provide the ideas. Indeed, it is well placed to innovate and leverage lessons from elsewhere as we have indicated with the Heathrow Southern Rail link mentioned in point 1 above. One recent positive step in encouraging private sector ideas is the UK Government’s introduction of a ‘market-led proposals’ (MLPs) initiative. Essentially, this is a mechanism that provides a route for the private sector to propose infrastructure enhancement projects. The first submissions for rail projects were made this summer. Industry needs those ideas to be rapidly appraised by government, and shortlisted for suitability to proceed. The MLP process is a first test of how attractive the government can make investment in the railways, making it clear that it is open for business and collaboration with the private sector.
- Matchmake investors with the most suitable stage of an infrastructure project for them
When developing projects, the government needs to investigate which private investors could potentially lend to a project, and crucially, at what stage.
From banks to funds, pension providers to individual businesses, private sources of capital come in many forms. Each will have a different risk appetite and investment timeline. Market appropriate projects to private investors at the right time and at the right stage for their requirements, and the chances of them deciding to invest should increase. This requires the government and private sector to agree on a common aim that will satisfy governmental need and private sector aspiration on return from investments.
For example, the risk appetite of an international pension fund new to investing in UK infrastructure will be very different from that of a dedicated infrastructure fund listed on the London Stock Exchange. A pension fund will want steady, predictable, long-dated returns to match its liabilities – the kind of returns that can be generated by infrastructure which is already operational and performing well. Meanwhile, a listed fund, already familiar with the market, will likely have a far higher tolerance for uncertainty – they may be willing to invest at the riskier construction phase of a project, in exchange for higher returns.
- Uncouple infrastructure from party politics
Political bias is an issue which has stunted the growth of the sector for decades. The National Infrastructure Commission was set up, in its own words, ‘to address the lack of a long-term infrastructure strategy, soiled decision making in infrastructure sectors, fragile political consensus and short termism.’
There is clearly a need to foster communication between the public and private sectors, beyond party politics. Each has something to offer the other: the government can present state-backed infrastructure projects in which to invest, and the private sector can find a home for the capital it needs to deploy. A win-win situation where much-needed infrastructure gets delivered free from huge expense to the tax payer.
If the private investment community is being asked to make long-term, multi-billion dollar or pound investments, the government needs to offer long-term guarantees and protection to these potential investors in return.
Positive change is underway: the government is already attempting to move rail enhancement investment out of its standard five-year cycle, and similar approaches can be applied to other types of infrastructure too. The process for assessing rail enhancement investment is the same whether publicly or privately funded: the Rail Network Enhancements Pipeline (RNEP). This is a strong statement that both forms of funding will be assessed equally.
- Speak louder about the public benefits of infrastructure investment
We’ve already touched on the lack of information available to the private investment community on the benefits of infrastructure spending, and the same issue exists for the public. Getting citizens to support infrastructure investment is essential to getting projects off the ground, particularly in the UK, where projects are frequently blocked or slowed by local opposition. Public consultation on infrastructure schemes is complex and detailed. It takes time for members of the public to assess a project. That tends to mean retired people look more closely. A typical project timeline means they see no benefit – only impact. That generates opposition. The real beneficiaries of infrastructure – the young generation – are often less engaged in the consultations. There is a challenge to improve the engagement of the citizens who will see little impact, and yet will realise all the benefits.
The government could do more to promote the positives of new and improved infrastructure as a path to economic growth, community cohesion and a better standard of living for large numbers of people. Time and again we have seen that infrastructure investment unlocks other investment, particularly housing. Developers cannot deliver large-scale community projects (whole new towns for example) without strategic investment in transport, utilities and community infrastructure.
The government should also include and recognise citizens as vital contributors to the solutions. One of the NIA’s key recommendations is to ramp up materials and food waste recycling: it will be essential for the public as well as industry to drive this.
Essentially, any major public and private spending on infrastructure needs to be explained in terms of the way it will help people live better, and drive economic and social growth.
While there’s plenty of private money seeking investment opportunities, the infrastructure sector will need to step up to make projects more attractive, help build project certainty and promote the benefits of new networks and services to investors and the public.