Electioneering

Was it reasonable to expect anything substantial on the infrastructure front from a pre-election UK budget? Bruno Alves takes a look.

Alistair Darling, the UK Chancellor, put an end to months of pre-budget speculation on what the 2010 budget would do for infrastructure by announcing the creation of a £2 billion green infrastructure bank, to be financed equally by the public and private sectors.

The green bank was born after government found “that there is a significant risk of a gap emerging in the provision of equity capital to large complex infrastructure projects within the next few years”. Acknowledging that new, low-carbon technologies tend to increase the risk profile of a project, the new bank will operate like a commercial bank primarily dedicated to funding these types of projects.

As previously reported on InfrastructureInvestor.com, the bank will get about £1 billion from the government – derived from asset sales such as the Channel Tunnel rail link – with the private sector matching the government at £1 billion. And that’s pretty much it, as far as infrastructure is concerned.

Alistair Darling: budget
in hand

Business secretary Peter Mandelson’s rumoured infrastructure bank – which was said to be inspired by Germany’s KfW bank – never makes an appearance. The same for trade and investment minister Mervyn Davies’ plans to guarantee construction risk in order to attract pension funds to provide long-term debt for infrastructure. The latter only gets a fleeting – if rather vague – nod in an appended document.

That document, named Strategy for National Infrastructure, was drafted by the Treasury and Infrastructure UK and states that the authorities will “continue to engage with institutional investors to encourage [them] to be providers of long-term debt for infrastructure [and] work to identify ways to mitigate financial risks to enable long-term debt providers to access infrastructure projects”.

A more complete idea of what should be prioritised in UK infrastructure over the next 50 years and what the government is prepared to do to facilitate private sector access to financing it will only be unveiled at the end of the year, when Infrastructure UK releases the first draft of its National Infrastructure Framework.  But of course by then Labour might not be in power anymore, which could render many of these proposals mute.

All of which invites the obvious question: could the government do more for infrastructure in a budget released six weeks from a general election?

To paraphrase Andy Cox, an energy partner at KPMG, the new budget gives “a small nudge rather than [the] heavy shove” needed to address the problem of funding the UK’s massive infrastructure needs.

The UK is said to need about £400 billion in new infrastructure spending over the next decade. According to government data, £195 billion will be spent in the next five years – a substantial increase to the £150 billion spent during the previous comparable period. But, similarly to the last half-decade, the private sector is still expected to finance the majority of this expenditure.

This at a time when “the commercial funding markets are uncomfortable with the risk profile associated with much of the investment required,” said Nick Chism, KPMG’s global head of infrastructure.

That more needs to be done seems obvious. The green bank, which is still expected to take some time to be up and running, is targeting £2 billion. The energy sector upgrades over the next 10 years are estimated to cost at least £264 billion – not to mention the remaining upgrades to other sectors.

As Chism states, only “a long-term infrastructure investment strategy which [includes] new and better ways of cooperation between the private and public sector” can address the necessary spending.

Both Labour and the Conservatives are aware of this – though both certainly have different views on how to tackle the issue. But Darling’s budget doesn’t so much address the problem as tiptoe around it through the election-friendly prism of green infrastructure.

So the hard decisions are put off until next year’s budget. Watch for the discussion to begin later this year, when Infrastructure UK publishes its National Infrastructure Framework.