“The government’s analysis of problems is much more convincing than its action to solve them,” was how Labour MP John Healey, in an article written for us earlier this year, described the UK coalition government’s infrastructure delivery shortcomings.
One of the most pressing issues is how to encourage institutional investors to back the greenfield projects that the government is keen to get built under its £375 billion (€451 billion; $613 billion) National Infrastructure Plan (NIP) – a revamped version of which was unveiled in this week’s Autumn Statement (previously known as the pre-Budget Report).
Nor is this an easy problem to solve. When governments talk about long-term investment in infrastructure, they tend to have in mind large-scale, visionary greenfield projects that will create jobs and ensure the economy remains competitive. But when institutions talk about the same subject, they are often pondering smaller-scale, brownfield investments.
Hence, we witnessed yesterday’s apparent case of talking at cross purposes – with the government lauding the pledge by six insurers (including Legal & General and Prudential) to invest £25 billion in UK infrastructure over the next five years as a boost to its NIP, and the insurers themselves insisting that they were not bound to invest in NIP projects (and seemingly hinting that they would prefer to support social rather than economic infrastructure).
The difficulty many institutions have in backing the likes of power stations and offshore wind – where investment is sorely needed – is exposure to construction risk. In order to address this, the government launched a guarantees scheme in July 2012 through which it would underwrite projects and thus provide sufficient comfort for investors to support deals they might otherwise consider too risky.
Up until now, the snail’s pace of the scheme has only served to provide ammunition for political opponents, with just one guarantee completed in 15 months. But this week’s statement unveiled three further guarantees for the Wylfa nuclear power station in Wales, London’s Northern Line underground extension to Battersea, and an energy efficient lighting scheme for car parks.
Following October’s announcement that a string of projects had ‘pre-qualified’ for an aggregate £33 billion in guarantees, there is reason to believe that the scheme could yet be the government’s most useful weapon in delivering on its promises.
There was another reason for the government to feel just a little more optimistic this week. Around a month ago, came clarification that Solvency II rules would not mitigate against long-term investment in infrastructure by insurers to the extent initially feared.
Whether that was a contributory factor in the £25 billion pledge is unclear, but the government can only take encouragement from increasingly confident insurers.