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Better risk-reward balance needed to drive up UK infrastructure investment, says report

A variety of financing models, allowing for a better balance of risk and reward between the public and private sectors, is needed to restore UK infrastructure investment to OECD recommended levels, according to a new report.28 Nov 2017

There is no one model appropriate to every project according to the report (37-page / 2.4MB PDF), by UK cross-industry group The Infrastructure Forum. However, it urged the government to do more to attract "low-cost, long term pension fund money", which it said could "bring many of the benefits of private sector ownership without too high a premium on the cost of finance".

The UK has made "great progress" towards investing in infrastructure, according to the report. However, investment is not as high as it should be due to a "lack of political trust" in particular private sector funding models; too great a focus on moving capital projects off the government's balance sheet; short term austerity measures; and a failure the private sector to focus sufficiently on "outcomes and customer benefits". The UK currently invests around 2.8% of GDP in infrastructure, lower than the 3.5% recommended by the OECD.

The report outlines the various existing public and private models, as well as their respective benefits and challenges. It also makes a number of recommendations to both the public and private sector to attract new investment and overcome what it sees as the "historic distrust" of private ownership of public infrastructure assets.

The Infrastructure Forum said that it was willing to engage with the government and industry on the "significant development work" required to deliver on some of its recommendations – in particular those around possible new projects, the wider use of pension fund investments and the introduction of 'TrustCo' project governance models, where a project is set up with a social purpose and other goals as part of its governance model.

"It is clear that infrastructure investment will be critical to the future success of the UK economy and an important assessment is getting the risk and reward balance right – there are many examples of huge losses and huge profits, which suggests that the risk/reward structure isn't right and needs to be reconsidered," said project finance expert Stephen Tobin of Pinsent Masons, the law firm behind Out-Law.com, who contributed to the report.

"As new procurement methods for the construction sector are developed as part of the wider Industrial Strategy, the work of The Infrastructure Forum is addressing the important aspect of financing new investment and suggesting alternative methods of approaching that investment. The issues are complex, and the solutions might not be perfect, but there is no getting away from the need for private sector commitment to infrastructure development. If that also means a greater degree of scrutiny to match a better balance of risk-taking, then many contractors would have greater attraction to some of the investment needs that we have," he said.

The government announced its intention to develop new construction sector procurement models as part of its industrial strategy, which sets out a range of sector-specific 'deals' aimed at boosting UK productivity. A new procurement standard, to be developed by the industry in conjunction with the Infrastructure and Projects Authority, will be based on the whole life value of projects, rather than just initial capital costs.

The Infrastructure Forum backs this approach in its own report, urging those involved in projects to consider whole life cost and value for money when deciding how best to procure for that particular project. The best route will depend on a "balance" of factors, including cost of capital, ability to transfer price and performance risk, the need for flexibility, and the balance of management competence and track record of delivery between the public and private sector partners.

The report recommends a "mixed economy" of delivery models including government-owned companies ('GovCos'), public private partnerships (PPPs), utilities and long-term private ownership. To increase the level of trust that the government and the public have in the benefits of private sector ownership and delivery of infrastructure, it recommends a move towards the 'TrustCo' model, in which the social purpose of the asset is enshrined in the governance of the project delivery vehicle at the outset.

This model could be used to impose voluntary limits on the actions of the company, such as a commitment to sustain certain credit ratings or to invest on a sustainable basis, to give greater voting rights to long-term investors, or to have employees or customers represented on the company's board, according to the report.

"While in theory it might be feared that investors would be uneasy imposing such constraints on project companies, in practice such goals are wholly consistent with the purpose of delivering long-term infrastructure, and will result in long-term stable cashflows, reducing the need for frequent regulatory intervention," the report said.

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