Governments must improve the way they manage risk for investors if they are going to attract essential capital needed to fund infrastructure projects, a global conference in London heard last week.
Delegates at the conference on the financing challenges for infrastructure were told that the risk associated with infrastructure is a key obstacle to enticing money from institutional investors and pension and life funds.
The UK government has yet to identify how it will generate the private sector investment due to make up 70 per cent of its £200 billion infrastructure spending in the next five years.
Jim Pierce, global infrastructure practice leader at credit insurance specialist Marsh, which hosted the event, said he was concerned about the ‘disconnect’ between the public and private sectors, and the lack of a model for bearing risk that can encourage investors to put their money into new-build public sector projects.
“It is really clear to me that the public sector is not going to be able to fund new assets. There is lots of money chasing too few bankable deals.”
Deutsche Bank managing director of capital markets Mike Redican, who spoke at the conference, told Construction News afterwards: “Two big issues are how construction risk is negotiated; individual contractors may not on their own be capable of taking the construction risk, so they may need some support, and then on the actual operating of it once it is running, they want to be minimising the volume (usage) risk.
“If that means help from government at various stages as well as structures that help the private sector be involved, then that is fine.”
Ulrich Stark, head of infrastructure at Nordbank, said bank finance is the best option at construction stage due to its flexibility, with other funds suitable at the operational stage.
In an interview with CN, Rob Holden, the former chief executive of Crossrail and the man who oversaw the construction of the Channel Tunnel Rail Link, said the government needed to manage its part of the risk equation more effectively and not pass it on to contractors.
“There’s no doubt that some risks are only capable of being taken by government; for big projects the planning risks are an obvious example.
“I know there are issues at the moment in the nuclear industry about proposed new nuclear power stations; governments are the only ones in a position to take on that planning risk, and to expect somebody else to take it on is naive in the extreme.
“People talk about placing the risk with the party best able to manage it, and while I buy into that approach, I don’t always think it’s put into practice, particularly by government.”
If contractors take on risks they do not control, it only pushes up costs, he said. “The best party to manage risk is the one best able to control it; if you move away from that and contractors take on risk, they’re not in a good place to manage. They’re going to price up contracts at the risk of making the contract unaffordable.”
He called on Infrastructure UK to be tough on the government to provide a better connection between the public and the private sectors.
The government’s Construction Strategy says a standard approach to risk and contingency management is to be agreed with Infrastructure UK by January.
IUK is also investigating the risk transfer to the private sector associated with private finance.
Laing O’Rourke director Stephen Hockaday said top tier contractors could not devolve risk.
“If you think you can pass it down to suppliers, you are being naive. Unless you manage that risk for the whole period, it will get you in the end.”