A new dawn for infrastructure investing?
As the UK government wrestles with a persistently sluggish economic growth outlook, politicians from all parties are increasingly calling for greater investment in infrastructure as a means to create jobs and stimulate demand. At the same time, the public sector’s ability to finance this investment is constrained by the austerity agenda, with capital spending set to plummet from £40bn in 2010-11 to £24bn in 2013-14.
This confluence of circumstances has led to a material increase in the volume of policy seeking to identify areas of core focus for future investment and unlock private sector funds to finance it. ‘Infrastructure’ is the buzzword of the moment, but incremental investment in the UK’s infrastructure is arguably not the panacea for growth that is so desired. And, even if it were, the government’s heightened level of involvement is arguably adding little other than uncertainty to an already well established sphere for private investment.
The government updated its National Infrastructure Plan last year, identifying a need for more than £250bn of investment in over 500 projects designed to preserve and enhance the UK’s productive capacity. These encompass high-profile construction endeavours such as Crossrail, alongside renewals of existing energy and transportation infrastructure.
The plan has been supplemented with a panoply of white papers, reviews and statements covering strategic energy policy, the water industry, rail and roads. Newsflow has been constant in recent weeks, with details of £9.4bn in rail upgrades planned for 2014-19 and government guarantees of infrastructure projects announced in July.
The National Infrastructure Plan also identified a potential future shortfall in the private sector’s ability to finance the country’s investment needs, citing the effect of the financial crisis – and subsequent changes to capital adequacy rules – on banks’ ability to lend to long-term infrastructure projects. The government’s plan to bridge this perceived gap includes the proposed establishment of an investment platform sponsored by the National Association of Pension Funds (NAPF) and the government guarantee programme noted above, among others.
Is there a funding gap?
The essential role of economic infrastructure assets (energy networks, utilities and transportation systems) in forming the backbone of productive activity meant that until relatively recently they were almost exclusively developed, financed and managed by the public sector.
Since the 1980s, the involvement of private capital in infrastructure provision has expanded rapidly as governments have sought to realise proceeds from privatisations to finance the provision of public services to an ageing population. Private sector investors were quick to fill this gap, attracted by the long-term predictability of cashflows, inflation-linked returns and cash yield associated with infrastructure assets. There is no shortage of equity capital available: assets under management in infrastructure funds jumped from $9bn (£5.7bn) in 2003 to more than $179bn in 2011.