Six major insurers will today say they stand ready to invest £25bn in UK infrastructure over the next five years.
Chief secretary to the Treasury Danny Alexander will describe the announcement as “a massive vote of confidence in the UK economy” to support £100bn of public investment to rebuild Britain over the next seven years.
Insurers say they could invest in schemes including transport, energy, housing, health and education.
The government will publish a new National Infrastructure Plan containing a pipeline of more than £375bn of planned infrastructure up to 2030 and beyond.
It will make further announcements (see box, below) including the creation of a new court for infrastructure to avoid judicial review delays impacting major projects; a proposed UK Guarantee for a new nuclear station at Wylfa; and £50m for a full redevelopment of the railway station at Gatwick Airport.
Insurers Legal and General, Prudential, Aviva, Standard Life, Friends Life and Scottish Widows, working together with the Association of British Insurers, are willing to invest following successful negotiations last week on the European directive Solvency II.
Examples of infrastructure investment by insurers
- Aviva is funding the development of Inverness College campus
- Legal & General has invested in several student accommodation schemes at UK universities
- M&G (Prudential) is providing funding for Alder Hey Children’s Hospital in Merseyside
- Friends Life has agreed a loan facility with Drax Group underpinned by the UK Guarantee scheme
The Treasury said negotiations had “ensured those capital rules incentivised life insurers to invest in a wider range of assets, including infrastructure projects”.
UK insurers had expressed concerns about the Solvency II directive, and Association of British Insurers director general Otto Thoresen had claimed the proposed rules posed a challenge to insurers’ ability to make long-term investments.
However, it is understood the ABI and L&G will be among those in attendance at an Institution of Civil Engineers event this morning, where Mr Alexander will set out a series of measures designed to improve UK infrastructure.
“We probably have up to £15bn to put into UK infrastructure and direct investments from L&G’s annuities portfolio”
Nigel Wilson, Legal & General
It is understood that the insurance funds have not yet identified schemes they will invest in, but are believed to be willing to invest in both new and existing infrastructure.
The news will provide a boost for the government, which has struggled to secure pension fund investment in recent years, having set out to secure £20bn-worth of money towards UK infrastructure in 2011.
However, questions will now be asked over the viability of schemes coming forward, with leading industry figures including Balfour Beatty UK chief executive Nick Pollard insisting recently that there was plenty of money to be invested in the UK but not enough viable projects to satisfy investors.
The insurers involved in today’s announcement are already involved in new infrastructure, including Aviva Investors which has an agreement with Crossrail to develop Liverpool Street West 101 Moorgate and is involved in the 1.55m sq ft residential-led Brickfields development at White City in London with Helical Bar.
Drax Group confirmed earlier this year that its £700m project to convert half of the UK’s largest coal-fired power station into a biomass plant in Selby would be the first to be underpinned by a UK Guarantee, after it helped it to secure £75m of debt from Friends Life.
The government will also announce:
- A memorandum of understanding with Hitachi and Horizon to support the financing of the development of a new nuclear power station at Wylfa in North Wales through a UK Guarantee
- £50m for a full redevelopment of the railway station at Gatwick Airport
- Strike prices for renewable energy
- Improvements to the A50 around Uttoxeter starting no later than 2015/16
- There will be no tolling on the planned A14 scheme between Cambridge and Huntingdon, construction of which is planned to start in 2016
- UK guarantee has now been agreed for the £1bn Northern Line extension to Battersea,
- A new court for infrastructure to avoid unnecessary delays in the planning process for major projects
- Long-term plan for flood defences, including naming key projects by the time of the autumn statement 2014
- Look at options to bring private capital into the Green Investment Bank to enable it to operate more freely in delivering its objectives
In August, Legal & General chief executive Nigel Wilson said the firm wanted to invest in social and economic infrastructure projects as part of a handover of infrastructure investment from banks to insurance companies and pension funds.
The firm is already a 46.5 per cent equity shareholder in premium residential housebuilder Cala Homes, which has plans to double in size by 2017.
He told the Sunday Telegraph: “We’ve got about £3bn of investment in infrastructure in the UK, but we probably have up to £15bn to put into UK infrastructure and direct investments from L&G’s annuities portfolio.”
“Once there’s a longer market record, the need for the government to support these transactions may diminish”
Robert Hingley, Association of British Insurers
In the 2011 autumn statement, chancellor George Osborne announced the creation of a new Insurers’ Infrastructure Investment Forum, being set up with the Association of British Insurers to encourage investment from the capital markets.
In March, several institutional investors appeared in front of the Treasury select committee, including Association of British Insurers director of investment affairs Robert Hingley, and set out the detail they needed to invest in UK infrastructure assets or new-build schemes.
They sought more clarity on UK Guarantees, private finance 2 and on who takes construction risk.
Mr Hingley pointed out that while up to 20 per cent of the relevant portfolio investment from annuities and insurance funds could be destined for infrastructure, there needed to be a flow of deals to provide comparability across projects, and enable the market to solve the teething issues.
“Funding is only part of the picture, and this support will only come forward if there is a demonstration that projects are investable”
Alasdair Reisner, CECA
He said: “It’s a little bit like getting the bicycle pedalling properly; once there is a continuing flow of deals, investors and banks are good at solving these problems.
“We may see that once there’s a longer market record, the need for the government to support these transactions may diminish.”
A white paper on UK infrastructure, published by Llewellyn Consulting and Pension Insurance Corporation in July, claimed there were several barriers to insurance firms taking a significant direct exposure to infrastructure investment.
“Today’s revised infrastructure spending programme is, again, strong on headlines but unclear on delivery.
“The government is working hard to attract investors such as the insurance funds, but the UK still does not have the right policy environment for these funds to be put to good use and make a real difference, which is compounding the problem.
“Who would want to take the risk and invest in a nation that cannot even put together a coherent energy policy without fear of ridicule?”
Mat Riley, head of infrastructure at EC Harris
On investment opportunities, it pointed to the “small number and sporadic nature of projects”, and a lack of political commitment to particular schemes over the long term.
It found there was a “lack of investor expertise in infrastructure; and consequent dependency on the due diligence of third parties, such as private equity funds, that may prove difficult to oversee”.
The report found there was a lack of transparency in and/or a scarcity of data needed to assess risk and return on projects.
“It is excellent news that the government has managed to draw in £25bn of private investment from insurers, assuming that the finance actually comes through – unlike two years ago”
Noble Francis, CPA
CBI chief policy director Katja Hall and CECA director of external affairs Alasdair Reisner pointed to the fact that the majority of national infrastructure projects were due to be delivered by the private sector and so the insurance industry’s potential to provide £25bn investment was good news.
But Mr Reisner said: “We equally recognise that funding is only part of the picture, and this support will only come forward if there is a demonstration that projects are investable.
“For this reason, it is vital that the government maintains momentum to address all other barriers that currently stand in the way of project delivery.”
Construction Products Association economics director Noble Francis said: “It is excellent news that the government has managed to draw in £25bn of private investment from insurers at a time when public funding is highly constrained, assuming that the finance actually comes through – unlike two years ago in the autumn statement 2011 when the chancellor announced £20bn of private finance through pension funds, wealth funds and insurers, but we saw less than 10 per cent of that actually come through.”