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
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.