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27 January 2012
By Kimberley Trewhitt, Researcher. Reform roundtable seminar introduced by Geoffrey Spence, Chief Executive, Infrastructure UK, on 25 January 2012.
Infrastructure is now high on the Government’s agenda. With the UK’s current infrastructure seen by many as a hindrance, rather than a help, to economic growth, the Government has published two National Infrastructure Plans to pave the way for world class infrastructure in this country. Yet funding infrastructure in the current economic environment is a challenge. This week, Reform held a roundtable lunch to discuss the best ways to fund the UK’s future infrastructure needs, under the Chatham House rule.
Two key factors which have led to a contraction in finance for infrastructure projects were identified. First, the debt market has failed, with bonds often unable to achieve the highest investment-grade ratings, and secondly, an increase in regulation, such as BASEL III and Solvency II, has damaged liquidity as banks have shored up balance sheets and insurance companies have reduced their exposure to risk. Political risk and uncertainty in the investment environment damage the confidence of investors. This is true across all infrastructure sectors.
The Private Finance Initiative (PFI) has been a key model for financing infrastructure projects. The Treasury is currently consulting on PFI reform and the future role of this model has become a hotly debated topic. Questions raised at the roundtable included what should a successful PFI project should look like? What is ideal procurement length? Should a project appear on or off balance sheet? What should be done about any profits? Discussion at the roundtable highlighted that the debate has become too focused on the balance sheet, at the expense of ideas such as better procurement.
Procurement does matter, and the UK can do better. In Canada, for example, projects often come on-stream faster than in the UK. To some extent this reflects a trade off as Canadian projects are decided at a central level, with less involvement of local view points.
The discussion highlighted the need to be creative regarding funding solutions. Potential instruments could include user charging for road infrastructure, reducing risks for construction in energy by offering Contracts for Difference and de-risking projects through Treasury support, as with the Thames Tideway project. A greater role could also be played by institutional investors, for example pension funds, and foreign investment. But to secure these new sources of funds the question of political risk must be addressed as, in the final analysis, either taxpayers or users will pay for investments.