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Private capital and public infrastructure: A happy marriage?

With an estimated pipeline of £411bn, the quantity of proposed UK infrastructure investment is unprecedented.

Launching the new National Infrastructure Commission, George Osborne’s pledge to “get Britain building” has renewed the UK’s commitment to construction.

Infrastructure has matured into its own asset class with considerable appeal for private investors. But what attracts institutional investors to the nuts and bolts of the UK economy?

Infrastructure offers long-term and sustainable ‘real’ returns to institutional investors, many of whom need reliable inflation-linked cash revenues to match the future liabilities they have to pay.

Add these attractive fundamentals to the current volatility and uncertainty equity investors have recently faced, and you can see the attraction of infrastructure investment.

Despite this harmonious marriage of supply and demand, fulfilling the mandate to get the UK building still has its difficulties.

Timing is everything

It takes time and money to bring infrastructure projects to fruition. But investors want deals now.

“Development risks need to be better managed for investors to overcome their wariness of hard hats and yellow diggers”

Many of the largest are more willing to deploy capital into operational assets than into construction projects, as the former are guaranteed to yield returns immediately – ‘ready-to-eat’ investments.

Greenfield construction and development risks need to be better managed for investors to overcome their wariness of hard hats and yellow diggers.

Government support, protection from non-insurable risks and a shift towards structuring projects with cash yield prior to completion all help minimise risk. It is also up to investors to upskill with specialist expertise to manage more complex greenfield transactions.

Tried and tested

Investors like to work to a blueprint for transactions and that is why the secondary market is so well-established. Greenfield infrastructure requires investment to fund development and procurement processes are usually direct to government with high bid costs.

Repeatable deal structures can reduce costs and allow investors to re-use their know-how with the comfort that if one deal is unsuccessful, time and money is not wasted.

“Investors need to present themselves as reliable long-term partners because taking a passive role is not always the favourable option”

All is not gloomy though: the industry can bring value for money to consumers alongside attractive returns to investors. Take regulated utilities, such as the offshore electricity transmission sector or the new Thames Tideway Tunnel, where private capital is harnessed to reduce the relative cost of construction for households’ bills.

The demand for increased infrastructure investment can continue to provide a boon for investors, contractors and government alike.

Ensuring a lasting relationship

Some investors’ expectations and demands are neither realistic nor sustainable. Investors need to present themselves as reliable long-term partners because taking a passive role is not always the favourable option.

Large investors need to pay more attention to partnering with infrastructure developers and managers who have the necessary skills and know that construction is also a consumer-facing business.

More efficient and replicable deal structures, quicker delivery processes and enhanced procurement methods can all help in bringing private institutional capital into the UK infrastructure fold more effectively.

Long-term institutional investment and infrastructure opportunities should be a happy marriage – but like the real thing, both sides need to work at it.

Giles Frost is director of Amber Infrastructure

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