Special report: The money’s not the problem

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London’s enormous Crossrail project stands as a clear example of what can be achieved when well-conceived national building projects trigger large-scale investment. With a £16bn spend over six years, Crossrail is generating the equivalent of 55,000 full-time jobs. Once fully-operational, analysis suggests it will add £1.24bn of economic, employment and transport benefits each year.

Significantly, while Crossrail is funded on the public sector balance sheet by a consortium of Transport for London, Network Rail and the Greater London Authority, there was also the clear possibility of using the private financing model. The UK is the global centre of expertise in private infrastructure finance; a sprawling network of builders, lawyers, accountants, technical and financial advisors, lenders and investors whose market-leading capabilities take them into projects all over the world. Would the UK government tap into that capacity to deliver a surge of infrastructure investment?

The UK chose a more cautious path. Without renouncing the possible benefits of investment in government projects, policy emphasis was given to debt reduction and intricate financial reform. And so a neutral position has emerged: there has been no investment spending for the sake of stimulation but equally there is a desire to see those projects that emerged from the usual political, bureaucratic and planning processes proceed. The government’s inclination to release projects has also been hampered by anxiety that, post-crisis, the private financing markets could not support new projects anyway.

The analysis does, however, tell a somewhat reassuring story. Where government provides clear policy direction in favour of investment, industry and capital markets find a way to deliver projects. The flip side is that where policy lacks direction, and crucially, where no investment projects are released for tender, no amount of government-backed funding initiatives can cause investment to occur.

Energy is, perhaps, UK infrastructure’s success story. Against the backdrop of a looming energy deficit—attributable largely to a fleet of coal-fired power stations about to fall foul of modern environmental regulation—the shift from carbon-producing generation to wind power, both on and offshore, solar, biomass and waste-to-energy has produced around 9,000MWs of new, renewable generation capacity. What’s more, all of this was installed between 2008 and 2013. Approximately 20 per cent of the nation’s generation capacity will be retired by the end of this decade—the need for further investment is strong.

The threat of EU sanctions and the real risk of energy blackouts later this decade has spurred the government to incentivise investment in green energy. Where these schemes have created a fundable business case, the private sector found the capital and made the project happen.

In contrast, social infrastructure (schools, hospitals and so on) and transport infrastructure (road and rail) have not been subject to such a clear imperative. Because there is less perceived urgency, proponents of investment programmes in these sectors have found it harder to be heard over the philosophical debate on privately-funded infrastructure.

The recently closed Mersey Gateway project tells an interesting story. A £600m bridge project was procured by Halton Borough Council (HBC), one of the UK’s smaller local authorities, using an innovative transaction model and pioneering funding structures. HBC pressed on with their procurement through the depths of the crisis and attracted an impressive field of first tier international contractors, investors and lenders to their process. Three fully underwritten bids were submitted in April 2013 and turned into a fully-funded project in March 2014. What does this say about the availability of capital to fund new infrastructure investment?

Since the financial crisis there has been a flight to what are seen as safe investments in a low interest rate environment—this has brought investors round to regarding infrastructure as another asset class in which to invest. Pension funds, insurance companies and sovereign wealth funds the world over have been steadily increasing their portfolio allocations to direct infrastructure investment. Australian and Canadian pension funds commonly allocate 10-15 per cent—the rest of the world is just getting started. This wall of infrastructure capital has enlivened the infrastructure market, although only a small number of investors are willing to take on the risk that comes with new-build projects. Notwithstanding this, there are numerous well-funded specialist investors (including the new UK Pensions Infrastructure Platform) in construction projects. The constraint since the financial crisis has not been the availability of capital—it has been the flow of deals in which to invest.

There is a similar picture in relation to the availability of lending for infrastructure. With their stable cashflows and long asset lives, infrastructure projects have been heavy users of the debt markets. While the financial crisis and the ensuing regulatory storm have taken many traditional bank lenders out of the project finance market, there is still a diverse market of traditional project finance banks, new entrant institutional lenders (insurance companies and pension funds), specialist infrastructure debt funds and a resurgent, deep bond market. The bond market is aided by the intervention of public initiatives such as the UK’s Treasury guarantee scheme and the European Investment Bank’s “project bonds” product. The combination of this suite of funding options gives restored confidence that even large projects can be funded.

With the volumes of investment in the energy sector and with Mersey Gateway demonstrating that this can also be delivered for transport infrastructure, it’s clear that there are ample pools of debt and equity capital to make projects happen. The ball is in the government’s court. It must bring more projects to the market.