Major contractors say it is ‘highly unlikely’ that institutional investors will invest in ‘large numbers’ in infrastructure

The UK’s largest construction firms have cast doubt on chancellor George Osborne’s ambition to attract up to £20bn of institutional investment into infrastructure and have called for the government to adopt a more “realistic” approach focused on a reformed private finance initiative.

In the autumn, Osborne said he wanted to raise £20bn from pension funds as part of a plan to boost investment in UK infrastructure and has launched talks with institutional investors aimed at realising this.

But in its response to the government’s consultation on reform of the private finance initiative (PFI), the UK Contractors Group (UKCG) said it was “highly unlikely” that institutional investors, such as pension funds, would invest “in large numbers” in infrastructure schemes as the government hoped, owing to the perceived high risk. It said this was despite the reality that “in the vast majority of cases assets are built to time and budget”.

UKCG director Stephen Ratcliffe said contractors were calling for a more “realistic and pragmatic approach” that recognised that there was “quite a bit of work to do to convince institutional investors that construction is a reasonable risk”.

“The view is that going from near zero to a massive amount of investment is probably unrealistic,” he said.

Ratcliffe said pension funds “lack people who have a good understanding of the construction aspect of projects”.

He said UKCG, which represents more than 30 of the UK’s largest contractors, had met with the Treasury as part of its continuing talks with pension funds and the next step was to get contractors, pensions funds and the Treasury around the same table.

Clear decisions are needed on the future of PFI to provide direction to the market

UKCG response

But he said that he doubted sufficient progress would be made by next month for any announcement to be made in the chancellor’s budget. “Three to six months is a more reasonable timetable,” he said.

In its response to the Treasury’s consultation, the UKCG said a more “realistic shorter term option” to investment in the construction phase of infrastructure projects, which is perceived to be more risky, would be for institutional investors to focus on the operational phase of a PFI asset.

“The goal should be to enable investors to invest once the construction phase has been completed and any operational defects have been addressed - this is probably five to seven years into most projects.

“If such a market could be created, project sponsors would be able to borrow funds on shorter terms from commercial banks before the investment could flip to the pension funds. This may reduce the cost of borrowing, and will ensure a wider pool of funding sources for infrastructure projects.”

The UKCG also called for a more balanced assessment of the cost and benefits of PFI and warned that uncertainty around the future of PFI risked delaying infrastructure investment.

“Clear decisions are now needed on the future of PFI to provide greater direction to the market - the danger is that the current uncertainty will lead to a hiatus in procurement decisions while people await decisions on PFI’s future,” the response said.

The UKCG also warned that, with PFI now replicated around the world, the lack of clarity around the future of the initiative in the UK - and moves to cap equity returns for investors - could see the UK losing investment and expertise to the international market.

“Because PFI is now an international market there is also a danger of losing capacity in the UK unless government makes a clear policy statement soon on how it intends to take forward the PFI model,” the response said.

UKCG: Key points for government action on PFI

The government should:

  • Send a clear signal to the market on its intentions for PFI
  • Publish a pipeline of projects that are intended to be financed with private money, including clear timescales
  • Bundle together smaller projects to create economies of scale
  • Remove some of the unnecessary risk that is transferred to the private sector
  • Develop new PFI models that allow institutional investors to invest at lower risk
  • Acknowledge that the private sector needs to make a reasonable financial return