Funding the UK’s £500bn infrastructure bill

The bill for maintaining the UK’s infrastructure so that it meets 21st century demands was the focus of an event hosted by the International Project Finance Association (IPFA), Standard & Poor’s Ratings Services (S&P) and the National Audit Office (NAO) last week.

A panel of experts noted that the ambition for new UK infrastructure investment continues to grow, while significant pressure on public finances persists despite economic recovery. They discussed the different funding and financing approaches open to the government

Despite a financing surplus from the private sector in the UK infrastructure market, a public sector funding deficit persists. Indeed, UK public investment in infrastructure fell from 3.3% of gross domestic product (GDP) in 2009 to 2.8% in 2014 – below the average of the European Union’s (EU) 28 members. Estimates of the country’s infrastructure funding requirement put it at around £500bn.

“We’ve found that heavy debt loads and budgetary constraints are forcing the government to shy away from funding infrastructure, with affordability and austerity identified as the key obstacles,” said event host, Michael Wilkins, managing director and head of infrastructure finance research at S&P. “The government is at risk of missing out on the opportunity to tap a surplus of private sector financing if it doesn’t act soon.”

The panel agreed that the state’s implementation of Chancellor George Osborne’s National Infrastructure Commission (NIC), announced earlier this month, shows a desire to address the country’s infrastructure needs.

“The potential scope of the Commission’s remit is huge, and could grow rapidly,” said Philip Adam, managing director and head of project bonds at HSBC. “But this could lead to difficult decisions for the Commission in the future as they are held accountable to multiple sectors and stakeholders.”

While the NIC is in its infancy, the UK Guarantee Scheme launched in 2013 already has a proven track record of encouraging infrastructure investment from the private sector.

“The key to success when considering any project and the prospective use of government guarantees is outlining a clear objective for the underlying risk transfer,” added Adam. “Without which, there is a danger of deterring private investment.”

Tapping the private sector

Appealing to the private sector is key in helping to reduce the UK’s infrastructure deficit, particularly by increasing transparency surrounding energy projects – the majority of infrastructure projects in the current pipeline – and, by connection, the decision-making processes behind new energy policies.

“The UK has a well-earned reputation for its relatively stable regulatory energy policies and the recent legislative changes have been forward looking,” said Wilkins. “But you can see situations in other countries where policies have been retrospective in nature and, ultimately, this could shake investor confidence, which is hard to regain once lost.”

“It is also important to take a holistic view,” said Adam. “Factors that are temporary by nature, such as wind forecasts or the price of oil and gas, currently appear to be impacting long-term energy policies and should therefore be carefully considered.”

The panellists also considered the importance of international investment in UK infrastructure. They agreed that a state can very well service their country by accessing resources from around the world, particularly if projects can be financed for less elsewhere.

Meanwhile, “the UK market has the skills, sophistication and liquidity to meet the project pipeline in place,” said Adam. “UK funds are more than capable of standing on an international stage and winning their fair share.”

Further analysis on the role public funding and private financing in infrastructure development in the EU can be found within Standard & Poor’s new report titled ‘EU infrastructure: Tackling The Funding Deficit To unlock The Financing Surplus’, written by Michael Wilkins.

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