What role will private investment take in the long term?
Last week I joined a group of experienced debt and equity investors to discuss the UK’s long term infrastructure needs.
It was one of a series of evidence gathering events taking place across the country, and will contribute to a “national needs assessment” - a project being led by ICE and 12 other organisations including KPMG. It will establish the UK’s needs and priorities up to 2050 and will rightly factor in “who pays” and how. The evidence will be presented in a report to be published this autumn, and provided to the National Infrastructure Commission (NIC) to support its own needs analysis.
Some interesting perspectives arose at the debate. The old chestnut of funding vs financing emerged early on, and it is clear the NIC must embrace the question of affordability when it comes to future investment. This points to greater economic analysis of the economy. Measuring infrastructure investment in relation to future UK GDP is a potential solution; this approach will also force greater prioritisation of investment and hopefully facilitate discipline.
But what role will private investment take in the long term? We need a simple approach to ensure we assess what is required, how we’ll pay for it and how it will be financed. But in order to undertake this analysis, government must understand what is financeable, for example, what sources of capital are being sought and do projects need structuring to support the investment required. Thames Tideway is an example of this.
The investors around the table posed an interesting question – if we were sat at the same table in 1986, looking ahead, what would be said about our future infrastructure needs?
While capital is not considered a constraint in the current market, it may not always exist. Changes to banking, insurance and pension regulations could have a material impact on the appetite and return requirements for investors and government should watch for unintended consequences of changing the financial regulatory environment.
When it comes to regulation, infrastructure remains underpinned by the regulatory asset base model in many sectors and government tinkers with this at its peril. Investors are more conscious of political risk and while they can manage uncertainty it is important not to take retrospective actions that jeopardise future investment.
The investors around the table posed an interesting question – if we were sat at the same table in 1986, looking ahead, what would be said about our future infrastructure needs? We need greater analysis of the impact of investment over the last 30 years, and to learn from what has worked and what we were unable to predict.
Disruptive trends and the impact on investment were also debated. Future gazing is fascinating - delving into the exciting and challenging world of driverless cars, decentralised energy and battery storage. But I’m left wondering if future generations will participate in similar debates asking why we were unable to foresee the inevitable change over the next 30 years, plan more effectively, and ultimately shape our future investment needs.
This brings to the fore the role of the NIC in establishing our needs to 2050, and the importance of a comprehensive evidence base to underpin the vision and inform the decisions we need to make now.
Darryl Murphy is a corporate finance infrastructure partner at KPMG