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Geoffrey Spence: Whitehall focused on economic infrastructure

The government is urging investors keen for more public-private partnership social infrastructure deals to look to energy schemes as it concentrates on getting economic infrastructure off the ground.

Infrastructure UK chief executive Geoffrey Spence told Construction News there had been a shift in focus within government from social to economic infrastructure when it came to attracting private investment.

Mr Spence said investors looking to benefit from the government’s private finance 2 model needed to move their focus towards the energy market if they wanted to make money.

He added that over the past 20 years the government had invested money in rebuilding or refurbishing “major pieces of social infrastructure”, including hospitals, government buildings and schools, through the old PFI model, but stressed that its priorities had now changed.

“What [the financial sector] often say is, ‘Can we just have more PFI-type deals for hospitals?’ and the message we have to give them is that the world has changed,” he said.

“We have to focus on High Speed 2, Network Rail projects and energy projects; it’s just changed.

“And if you as a business, either on the finance or construction side, really want to benefit from project finance-type deals, you’ve got to shift your focus onto the energy market, for example, if you want to make money.”

“We all get frustrated at the slow pace of some of these major projects; it would be lovely if we could give ministers absolute power, but we’re in a democracy”

Michael Fallon, construction minister

Construction Products Association economic director Noble Francis said the government’s record of bringing private sector investment into new rather than existing infrastructure had been poor in recent years, as returns were uncertain.

“Shifting focus towards energy investment makes sense given that there is a desperate need for energy investment in the UK,” he said.

“However, with Ofgem investigating energy companies, there is increased risk surrounding any returns on new investment – hence Centrica stating it would delay investment in gas-fired power stations due to the investigation.”

Clyde & Co partner Liz Jenkins said energy projects are not necessarily better suited than transport infrastructure schemes to project finance, but said that energy was “where the most immediate options are” for investors.

The construction industry and institutional investors have repeatedly called for a larger pipeline of social and economic infrastructure projects suitable for private finance.

The government pledged in November 2011 that pension funds could inject £20bn into UK infrastructure. In December 2013, it said insurers were ready to inject £25bn over five years into infrastructure.

But insurers questioned whether the £25bn investment would materialise at a KPMG infrastructure investment conference last month.

The government’s reform of the PFI, PF2, has also been shunned by central government departments, including the Ministry of Defence, and has failed to generate a strong pipeline of social infrastructure.

PF2 was introduced by chancellor George Osborne in December 2012 as a faster and more transparent model to procure major infrastructure projects.

“The problem providers of private capital face is there are very few projects ready to invest in and there is no overall plan to pay for the financing”

Gershon Cohen, Aberdeen Asset Management

Mr Osborne pledged revisions to PFI, which his party had heavily criticised for being too expensive when in opposition.

However, 17 months on, the government has only confirmed it will use PF2 on five Priority School Building Programme batches of schools and on the new Sandwell hospital.

Preferred bidders are in place for two schools batches, but none of the six packages has reached financial close.

Construction minister Michael Fallon told Construction News this week there was a “steady stream of investment into energy projects” and pointed to the eight renewable energy projects that received backing from government last month, expected to bring up to £12bn of investment into the UK.

He said: “We announced the financial investment decision enabling projects a few weeks ago and those are all ready to go: eight projects selected on the basis that they are shovel-ready, such as offshore wind and biomass conversion in the energy sector.

“We’re also seeing a big upturn in construction on the civil side of rail under the five-year plan, so there’s plenty of investment.”

Cabinet role for infrastructure ‘confusing’

Michael Fallon has rejected calls to create an infrastructure minister at cabinet level, insisting the move would be “confusing”.

He added that ministers in all government departments, including the Treasury, were responsible for driving through the government’s National Infrastructure Plan and said a separate department would not improve this. 

“I don’t think you need to tinker with the Whitehall furniture to do anymore there; I think we’ve got to use the structure we have,” he said.

A Construction News poll on showed 31.7 per cent of those who took part said they wanted to see an infrastructure minister at cabinet level.

Sixty-one per cent said they wanted to see an infrastructure minister serve at cabinet with responsibility for housing as part of the brief.

Just 2.4 per cent said they did not want to see an infrastructure secretary, while 4.8 per cent said housing should be prioritised before infrastructure.

Mr Fallon said he sympathised with the industry over its frustrations with projects getting off the ground.

“We all get frustrated at the slow pace of some of these major projects; it would be lovely if we could give ministers absolute power, but we’re in a democracy – we have to take into account local communities,” he said.

“We have to make sure there’s local buy-in, developers have to make sure they abide by that, not ride roughshod over what local communities want, but developers have to engage and these things sometimes take longer than they would take in a country that isn’t as democratic as ours.”

Aberdeen Asset Management head of infrastructure funds Gershon Cohen said it made sense to bring forward projects that had “the most immediate benefit to economic growth”, but stressed that all types of infrastructure were important to underpin a successful economy.

He added: “A successful economy requires a healthy, well-educated workforce and I think that one needs to balance both social and economic infrastructure investment and not pursue one without the other.

“The problem providers of private capital face is that there are very few projects ready to invest their money into and there is no overall plan to pay for the financing of the infrastructure in the UK – is it coming from economic growth or consumers through higher utilities prices and/or taxation,” he added.

Chief construction adviser role

The government has yet to decide whether it will extend Peter Hansford’s role as chief construction adviser beyond November, according to Michael Fallon.

Mr Fallon declined to confirm whether Mr Hansford would continue in the role after his two-year term in government comes to an end this year.

He said it was “a bit too early to consider what will happen in November” but praised Mr Hansford for “doing great work”.

Mr Hansford was appointed to the role in July 2012, taking over from former construction adviser Paul Morrell, and is due to finish his initial tenure in November 2014.

He led the publication of the industrial strategy for construction, Construction 2025, which sought to improve fair payment for contractors working in the construction industry.

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