• UK Infrastructure Event Masthead


    Investment in infrastructure is without doubt one of the hottest economic topics today. High hopes are being pinned on infrastructure projects to lift the UK economy out of stagnate growth. But is the weight of expectation too much? This was just one of the questions debated by infrastructure finance experts (under the Chatham House Rule) at a London-based FT Executive Breakfast Forum, supported by Lloyds Bank, on 28th November 2012. 

    For its part, the UK government is proactively supporting investment in infrastructure through initiatives including the National Infrastructure Plan, the Green Investment Bank and the £40bn UK Guarantees Scheme. There is support from the broader EU too, in the form of a €4.5bn project bond, which is currently in its pilot phase.


    And as the banks inevitably shore up their capital in preparation for Basel III, the private sector – which currently provides approximately 70% of the UK’s infrastructure finance – is starting to get creative with a handful of new debt capital solutions. Despite this apparent willingness to enable infrastructure projects, few of them are yet coming to fruition.


    Flushing out the pipeline 

    “One of the main reasons for the lack of deal flow right now is the time horizon attached to infrastructure projects,” it was noted. “There is a long drawn out process of approvals in the UK and big projects take time.  It is a mistake therefore to think of infrastructure investment as a short-term stimulus for the UK economy. Although it may provide a modest boost for the construction industry, infrastructure spending is more of a medium- to long-term economic stimulus.”  


    So, while good quality infrastructure is critical to any economy, it is important to remain grounded about infrastructure investment’s ability to singlehandedly propel the UK back to growth, at least in the short-term. Nevertheless, there are barriers and obstacles within the UK’s infrastructure ‘system’ that, if removed, could make a significant difference to the promises that the project pipeline holds.


    Big projects, big challenges? 

    “The UK desperately needs to up its game to become more globally competitive,” it was suggested. “Our European neighbours have a far more efficient turnaround on infrastructure projects. And very often, it is simply our mind-set that holds us back. In the UK, we tend to ‘over professionalise’ everything. Take the M6 build for example – it was 18 years in the planning stage, but took just three years to build. It’s no wonder that investors get bored. They want projects that are happening now, not six months, or six years, down the line.”


    While the UK has impressive intellectual property and engineering capabilities, the consensus was that this fully functional “hardware” is not enough to compensate for “software” defects (such as the long planning stage) in its infrastructure ecosystem. “Additional ‘software’ issues include a disconnect between the UK public and private sectors; high-cost supply chains; a lack of early engagement in projects – including public opinion; and no real benchmarking of project costs.”


    An interesting analogy was drawn here between the UK’s approach to infrastructure projects and the National Youth Orchestra. “All the talent is there, but to become as good as the London Philharmonic Orchestra, the players need to practice together. That is the secret of good timing and dynamism.”


    An emerging asset class 

    Despite the obvious challenges facing UK infrastructure, the good news is that there are evolving pools of capital to help finance and drive projects. In fact, infrastructure is emerging as a new asset class for investors such as pension funds, private wealth management groups, sovereign wealth funds, insurance companies and asset managers. “Make no mistake though – similar projects are happening on a global scale too,” warned one speaker. “So the key question is not whether financing is available for infrastructure investment, but how to keep the focus on the UK.”


    “But there is also a risk in the tendency to compare the UK too heavily to other markets,” countered another expert. “We have different challenges. The UK is an old, well-established country. It is a crowded island. Other countries do not have this to contend with. Yes, there are improvements that need to be made, but we should be more confident in our ability to succeed.” The fact that the coalition government is actively backing infrastructure investment was cited as another reason for optimism.


    Moving forward 

    So what does all this mean for the future of infrastructure finance and how it is supported? “Inevitably, we will see projects financed differently. The banks have been very transparent around the fact that, because of Basel III, they are moving away from long-term debt to a shorter-term focus. As such, projects will increasingly turn to the capital markets for funding.”


    This will not mean that the banks become disintermediated, however. “While their role is likely to shift, they can add significant value from a risk and advisory standpoint. For example, the banks have teams of people who understand – and can help to accurately assess – the risk around infrastructure projects. They will also remain instrumental players in underpinning the future of infrastructure investment in the UK.”


    From a deal point of view, it is hoped that this shorter-term focus could also set the precedent for a more dynamic approach to approving and financing infrastructure projects in the UK. “The very nature of short-term deals means that they can be approved more quickly and are more attractive to a wider range of investors. As soon as they start to trickle through the pipeline, the market will become increasingly receptive and inventive.”


    In turn, this more nimble attitude could be just what the UK needs to assist a return to growth sooner rather than later. And while we should not put all of our metaphorical eggs in the infrastructure basket, it is important to remember that “infrastructure remains vital to the competitiveness of the UK economy, regardless of where we are in the current cycle.”


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12/3/2020 6:46:30 AM