The new UK Labour government is talking up its desire to see more private sector investment in major infrastructure projects with pensions funds and other major institutional investors expected to respond.
The details are not expected until the new Chancellor of the Exchequer, Rachel Reeves, delivers her Autumn Statement on 30 October. With the government elected on a promise of boosting growth and delivering a range of major improvements to UK infrastructure there is likely to be plenty of detail about how much is needed and who will be expected to provide it, writes Contributing Editor David Worsfold.
The mood music and initial pronouncements suggest that institutional investors will be expected to step up to the patriotic plate and invest more in UK infrastructure projects. There will be concerns that the government could lurch too far towards some form of mandated investment into public sector schemes seen in other countries and sometime dubbed pension fund nationalism. Reeves talks optimistically about how supporting the ambitious projects lined up by the government can boost fund returns but many in the sector will be sceptical of such claims.
There is talk of ambitious new partnership schemes for some of the largest schemes, with the Treasury keen to stress that these will not be a re-run of the private finance initiatives (PFI) favoured by the last Labour government which have been widely criticised for the ongoing costs hospitals, schools and other PFI projects are facing.
Top of the list is the huge Lower Thames Crossing, the £9bn project to build a new tunnel under the River Thames to the west of the current Dartford crossing bridge and tunnel. Along with many of the other projects, the government wants to keep as much of the cost as possible off the government balance sheet and is therefore looking to institutions to step in. The challenge is to incentivise this to make it attractive.
With this project there is a long-term revenue stream from the tolls that can be thrown into the mix, perhaps on indefinite or extremely long-term contracts. Offering this to private sector investors will have to be balanced against the maintenance and operating costs of the crossing.
With other major infrastructure projects in energy, water, health and education where the government will be keen to avoid increasing its own borrowing requirements to finance them the options are less attractive – at least politically.
To make these appealing investors will need to be confident of adequate returns and this will bring the costs to consumer and public sector bodies into the picture which will probably mean consumers paying more unless the government subsidises prices. That would also put some of the financial burden back onto the public sector balance sheet – just what the government is trying to avoid.
This dilemma is real but not without solutions, says OMFIF, an independent think tank for central banking, economic policy and public investment, chaired by Lord Meghnad Desai, emeritus professor at the London School of Economics and Political Science.
“Advocates of privately financed investment have emphasised the benefits flowing from private sector expertise in the provision of services. There is another powerful argument for financing investment other than purely through gilt sales. Involvement of the private sector in the delivery of services makes possible recourse to other forms of finance – equity as well as senior debt – and providers of finance that might have a limited appetite for UK gilts, for instance sovereign funds, large pension funds (not necessarily from the UK) and a variety of banks.
“Such investors will only contribute to increasing infrastructure investment if they can earn what they consider appropriate returns on capital, which in turn will involve large price increases.”
OMFIF says lessons must be learned from recent experiences of trying to attract private investment where the returns were not seen as adequate:
“The 2023 auction for offshore wind licences failed because the price offered was too low. The water industry believes that it needs to invest much more than is currently proposed by the regulator if it is to deal adequately with wastewater and sewage. This in turn would involve significantly higher price rises than the regulator or government want.”
This means making tough political choices:
“If private finance is to be used to ramp up investment in hospitals and schools, potential private sector partners will want assured returns over the life of their investments, which will be a charge on future health and education budgets.”
This is the conundrum that Reeves will be picking her way through with Treasury officials between now and 30 October.