Wealth and efficiency drive

The UK needs a new legal framework for infrastructure projects to benefit from overseas investment

The publication last month of the CBI report An offer they shouldn’t refuse: attracting investment to UK infrastructure comes at a critical time for the UK infrastructure market.

With many European countries facing structural budget deficits and debt markets continuing to operate under significant strain, there is a need for governments to either monetise existing infrastructure assets or adopt creative strategies to fund ­infrastructure development.

One of the key categories of ­investor identified in the CBI report is sovereign wealth funds (SWFs). A number of these already hold interests in developed UK infrastructure, but as the eurozone crisis intensifies there is likely to be increased competition between European countries to attract this form of institutional ­investment.

The UK Government has set out its ambitions for improving the UK’s ­infrastructure development in the National Infrastructure Plan 2011 (NIP) and has committed to finding new sources of capital for UK infrastructure projects. SWFs appear to be increasingly central to the success of the NIP and the Government has ­emphasised that it will take action to ensure that the UK market benefits from investments by overseas ­investors. But to date that action has  focused largely on raising the visibility of the opportunity by means of high-level political and trade visits rather than through solid policy or legislative changes.

The UK has been very successful in attracting SWFs and other institutional investment for regulated ‘brownfield’ infrastructure where the returns are reliable and the regulatory environment is settled. Examples include the numerous institutional investments in water, electricity and gas networks and transport infrastructure. The much greater challenge facing the Government is to attract this form of investment to new ‘greenfield’ infrastructure projects, which carry much greater risk during the construction phase.

The development of major new UK infrastructure has historically moved at a very slow pace, with political, planning and regulatory hurdles meaning projects are often delayed and delivered over budget. An example of this is the High Speed 2 railway from London to Birmingham, which is already subject to legal challenge and potential delay.

If the Government is serious about attracting institutional investment into new infrastructure then it needs to put in place a legal framework for projects to be delivered on time and to budget while at the same time ­providing incentives for early-stage investment, for example, through risk-sharing or tax concessions. ­Reform in these areas will not be easy in the current political ­climate but is likely to be essential to attract institutional investors to provide upfront investment in UK infrastructure.

Time is of the essence for the ­Government and the opportunity for SWF and institutional investment may not exist a few years down the line as the competition for this ­capital intensifies. Unless the Government is willing to back its words with real change then it risks missing out to countries that move quickly to ­embrace this form of investor and provide an attractive and efficient ­investment environment.