Going private

The power sector is in a better position than most. Infrastructure has been recognised by government not just as an option, but as fundamental to the economic success of the UK.
It showed its commitment to the sector through the recently published National Infrastructure Plan, which identified five infrastructure sectors to focus on, including power and energy.

The plan went on to state that £200bn of infrastructure investment will be needed over the next five years to deliver on key projects.

But while political commitments to “decarbonisation” will help to drive certain UK energy and renewables projects, questions remain about the sources and supply of funding. Only some of the money needed will come from public funds. The only remaining option is for the rest to come from private investment. Whether this is from the pension funds market, infrastructure equity funds, debt capital markets or even sovereign wealth funds remains to be seen. One thing is for sure: whatever the source, cash will not be forthcoming without positive investment conditions and the correct balance of risks and rewards.

Some 24% of specialists surveyed thought energy and renewables the best infrastructure investment, though many were concerned about funding

The problem
Recent research conducted by Berwin Leighton Paisner (BLP) of 130 senior infrastructure specialists revealed that while 24% considered energy and renewables the most attractive infrastructure investment, many expressed concern over the funding of these projects. Some 44% cited a reduction in funding as a significant threat, while 70% identified the availability of credit as the key driver in the success of future infrastructure projects.

The solution
Infrastructure is a long-term investment and has been an undervalued asset class that has often been overlooked by certain sectors of the investor community, with only 0.5% of total UK pension fund money invested in it. The senior debt banking sector, in particular, tends to take a short-term view due to capital constraints and a risk-sensitive approach. This is making infrastructure significantly slower, more costly and difficult to finance.

It is clear that the government has a role to play in helping to manage the risk investors may face by providing a pipeline of attractive investment opportunities and, where required, underwriting the money.

But all those with a stake in infrastructure must be more active in identifying new methods of investment. New tax incentives and even infrastructure debt funds should be considered as possible ways to deliver infrastructure programmes.

As the government seeks more private cash, traditional PPP/PFI structures are being re-evaluated, to simplify the bidding process and to create a greater balance of risk and reward. Many of the experts surveyed by BLP suggested that in the future, private sector partners should play a much greater role at the “front end” of infrastructure projects, in originating the terms and outcome while the government falls into the role of “a positive enabler”.

On a more upbeat note, despite concerns over funding, our report showed that the industry is optimistic about the future for the sector, particularly for energy and renewables, and that there is still an appetite for investing in these programmes. Given the right encouragement, innovations in funding and project delivery, and effective support from the government, infrastructure can - and will - flourish.

Mark Richards is partner in Berwin Leighton Paisner