Government’s £15bn infrastructure investment pitch faces uphill battle to secure private finance

Chief Secretary to the Treasury Danny Alexander’s investment wish list showcasing project opportunities in schemes worth £15bn has some hurdles to overcome according to EC Harris's Mark Stewart. 

Danny Alexander

The ‘Investing in UK Infrastructure’ report was released at the Commonwealth Games business conference in Glasgow and focuses heavily on schemes in the north of the UK. Offshore wind farms are a major focus along with local energy projects, port and waterside developments, a major hospital scheme and a new national motor racing circuit in Wales.

However experts say that attracting private finance into the new infrastructure will be challenging as investment funds look for proven technologies, robust supply chains and double digit returns in relatively short timescales. “It is a good balanced list of projects but the limitation is that goalposts change all the time and investors are watching those goalposts change,” says Mark Stewart, head of energy at consultant EC Harris.

"Investors wary of cost price escalation are seeking a broad supply chain capable of absorbing risks such as material and commodity price inflation." 

Stewart points specifically to the recent changes to the energy regulation regime where Contracts for Difference (CfDs) are replacing the traditional Renewable Obligation Certificates (ROCs) as part of the electricity market reform process. The most recent iteration of the CfDs has seen the government place more emphasis on the need for energy projects to promote more local content such as job creation, a move away from earlier plans where technical quality was the main driver. “it is a goalpost changer. Our investor clients are getting really frustrated,” he said.

At the same time infrastructure investors, from traditional banks and private equity to more recent players such as sovereign wealth and pension funds, are seeking investments where the technology is proven with long term data sets to support return forecasts. And returns themselves must be in double digits, at least 14 percent year on year says Stewart, to convince internal credit committees to make the investment.

“The message from investors is that they want a double figure return every year for seven years, with a double figure return on sale or refinancing of the asset and unfortunately energy doesn’t lend itself beautifully to that equation.”

More scrutiny is also being given to the supply chain around the assets and the technology itself. Investors wary of cost price escalation are seeking a broad supply chain capable of absorbing risks such as material and commodity price inflation. They are also looking for experienced teams with a history of involving private finance, something that is difficult to find on small scale projects in fledgling markets.

On the bright side Stewart says that the stability of the UK market is attractive. “In terms of stability it is one of the best places to invest and everyone is coming and trying to gain a foothold in this market. As a company have helped four Asian companies in the past 18 months move into investments in the UK around infrastructure and energy.” Other interest is coming from the Middle East, Asia and China and Europe.

Growing interest is partially due to the improved clarity being given to UK infrastructure plans with the government now producing regular updates of the investment pipeline. Last week Infrastructure UK confirmed that the investment pipeline to 2020 and beyond is £383bn, up from £377bn in December 2013.

Read the investment guide here 

Download UK National Infrastructure Investment Pipeline here 

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