The ambition for new infrastructure investment in the UK continues to grow, while significant pressure on public finances persists despite economic recovery. A panel of experts discussed the different funding and financing approaches open to the government at 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.
Despite a financing surplus from the private sector in the UK infrastructure market, a public-sector funding deficit persists. In fact, public investment in infrastructure in the UK has fallen from 3.3% of GDP in 2009 to 2.8% in 2014, below the EU-28 average. Meanwhile, it is estimated that the UK infrastructure funding requirement currently stands at around GBP500 billion.
“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 at the start of the 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,” added 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 it is still early days for the NIC, the UK Guarantee Scheme – launched two years ago – 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,” reminded Adam. “Without which, there is a danger of deterring private investment.”
Certainly, appealing to the private sector is key in helping to reduce the current infrastructure deficit in the UK, 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,” commented 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.”
Looking further afield, the panellists’ closed their discussion on the importance of international investment in UK infrastructure.
Certainly, a state can very well service their country by accessing resources from around the world, particularly if projects can be financed for less elsewhere, they agreed.
Meanwhile, “the UK market has the skills, sophistication and liquidity to meet the project pipeline in place. UK funds are more than capable of standing on an international stage and winning their fair share,” concluded Adam.
For further analysis on the role public funding and private financing in infrastructure development in the EU please refer to Standard & Poor’s new report titled ‘EU infrastructure: Tackling The Funding Deficit To unlock The Financing Surplus’, written by Michael Wilkins, chair of the debate.
