S&P Urges UK to Spend on Infrastructure

Increased infrastructure investment would drive UK economic growth and bolster the country’s competitiveness, said Standard & Poor’s (S&P) at the rating agency’s annual infrastructure finance conference in London.

S&P currently expects real UK gross domestic product (GDP) to grow by 2%-3% per year over the next several years. Yet it estimates that each additional £1 (US$1.56/€1.25) spent on infrastructure in one year (in real terms) would lift real GDP by £1.90 over a three-year period. It also projects a strong effect on job creation, with each extra 1% of GDP spent on infrastructure adding over 200,000 jobs in that year.

“The benefits of infrastructure investment do not stop at the short-term boost to output and employment,” said Jean-Michel Six, S&P’s chief economist for Europe, the Middle East and Africa (EMEA). “Over the longer term, improving infrastructure can enhance the private sector’s productivity, for instance, by reducing transport and communication costs. And the resulting economic gains can be significant.”

S&P’s analysis shows that the UK’s current infrastructure investment deficit is at least £60bn – and potentially as much as £200bn if countries with the best infrastructure, such as Switzerland, are used as a benchmark. However, as government debt is rising and the country’s fiscal position is constrained, the event’s panel discussion focused on how such investment could be financed.

“Fiscal pressure is likely to constrain the UK government’s ability to finance new infrastructure projects,” said Aurelie Hariton-Fardad, director of infrastructure finance ratings at S&P. “We therefore believe that a significant portion of funding for infrastructure investment will come from the private sector.”

John Llewellyn, partner at Llewelyn Consulting, confirmed: “The institutional investment community offers a huge potential source of funding, with pension and insurance companies in particular desirous of stable, long-term, inflation-proof returns.”

Investor demand strong

“Among European institutional investors, demand is strong and growing – data suggests that by the end of the third quarter this year, as much as US$27bn had been raised by infrastructure funds,” said Michael Wilkins, managing director and head of infrastructure at S&P. “Meanwhile, banks are returning to the asset class with the number of bank loans at its highest since the financial crisis. The issue therefore is the supply of projects – there is a strong pipeline, but projects are yet to be realised.”

Wilkins explained that the rating agency has redesigned its criteria for assessing project finance debt in an attempt to bridge the gap between demand and supply: “Solving this stalemate relies on detailed risk analysis in order to increase transparency on asset performance. We now isolate individual risk factors, which helps shine a light on potential issues and, in turn, should go some way to attracting investment in infrastructure.”

Llewellyn agreed that one of the constraints on investment is the limited number and sporadic nature of projects. He added: “This has been caused by a lack of political commitment to particular projects over the long-term, regulatory instability and fragmentation of the market across different levels of government.”

Angela Knight, chief executive (CEO) at the UK energy industry’s trade association, Energy UK, spoke separately on the importance of political and regulatory commitment with respect to UK energy projects: “The UK needs to attract investment from around the world and for that we need to have stability of policy,” she said. “Currently, there is uncertainty because the focus is not on investment; it’s on how much people have got to pay for their energy bill.

“This issue has not been properly addressed with policy makers, whether they are in the political arena or whether they are in the regulatory arena. Looking forward, we therefore need a resolution to the tensions between investment and affordability.”

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