Chinese and Qatari sovereign wealth funds are being targeted by the Treasury to offset an “irrational aversion” to construction risk which is delaying projects, the head of Infrastructure UK has said.
But Geoffrey Spence also insisted the challenge facing infrastructure is not as big as Margaret Hodge or the public accounts committee think.
The committee said last month it was “not convinced” proposals in the National Infrastructure Plan were credible in the current climate, or that they presented a “rigorous plan with clear priorities for action”.
While Mr Spence rejected this, he said “we have a shortage of people” willing to take construction risk in the UK, with an ongoing “irrational aversion” following the financial crisis, despite projects being completed to cost and budget.
He said the government was in a better position relating to overall risk, as it does not have the same thresholds as other investors. He added that work was under way with banks and capital markets to generate interest in greenfield infrastructure.
But he said some institutional investors did not want to employ the staff, others see it as low yield, while some “don’t want to get bothered with the complexity of construction risk”. This leads to a delay and an “unreasonably high cost” to infrastructure delivery, he added.
“It’s not because we have a preference for [sovereign wealth funds] investing in these projects, but because in some cases they may be a source of construction equity – certainly I think that’s true for Chinese investors,” he said.
“But in other cases it’s to remove barriers to investment, not because there’s a preference.”
“The situation is not as bad as some people like to make out. The challenge is not as big as some people think”
Geoffrey Spence, IUK
While risk aversion was a market failure, Mr Spence said there was a macro-economic imperative for the Treasury to deliver infrastructure as “quickly as possible”, which means intervening and encouraging investors into the market to ensure the UK is part of the “global race for capital”.
Mr Spence said Canadian funds have the staff and knowledge to do their own deals, while others such as Chinese and Qataris needed help to remove some of the blockages to investment, particularly China, where there needs to be a bilateral arrangement.
Construction News reported in February that Chinese contractors and investors had visited UK construction sites and are looking to JV with British firms.
“In one sense we don’t care where the money comes from,” Mr Spence said. “But what we do care about is that we are part of the global race to capital, and we’re keen to get rid of any barriers to investing in the UK.”
However, he also told the Delivering Growth through Infrastructure Investment event, hosted by Infrastructure UK and Dods, that there is work under way with banks and pension funds to help investment in infrastructure.
He said that while pension funds’ relationship with fund managers had “broken down” since the crisis, with managers seen as too expensive and offering the wrong product, they are trying to set up the £2bn pension infrastructure platform, which has raised £1bn so far.
While conceding the focus was on operating assets, he said the hope was that in five years’ time they will be familiar with the asset class and prepared to take construction risk.
“We have to keep things in proportion,” he said. “The situation is not as bad as some people like to make out.
“In other words, the challenge is not as big as some people think. It’s certainly not as big as Margaret Hodge thinks in terms of the recent PAC report.”
However, he added the Treasury will be putting forward a formal response to the PAC.
Mr Spence also said much of the £300bn NIP pipeline is set to be privately financed, but the main problems in financing are in “specific areas and in projects”, such as complex schemes including the Thames Tideway and Mersey Gateway.
Energy decision will reduce infrastructure pipeline, says Treasury
The £300bn National Infrastructure Pipeline will be reduced after the summer as a government decision on energy creates “winners and losers” in the market, Mr Spence said.
The IUK chief executive said the focus was on the private sector to fund many of the projects, especially energy, in the £300bn pipeline over the next five years.
He said the Treasury had agreed a control framework with the DECC for levy-funded spending, which sets out how much money the Treasury is prepared to allow consumers to spend on renewable energy.
“There will be prices for Contracts for Difference that will be released to support the energy market in the summer,” he said.
“What we’ll see is, actually, not all of those projects will proceed. So the £300bn itself will actually reduce as the government’s framework for electricity becomes clearer.
“There will be some winners who will have their projects go forward, and some losers, who won’t.”
He added that 30 per cent of pipeline funding will be public, and dependent on departmental budgets set out at the spending review in June.