Why satisfaction may not be guaranteed

“Will the government achieve what it wants to?” was a question posed by Infrastructure Investor to a market source in the wake of the recent announcement of the Treasury’s plan to underwrite up to £40 billion (€50 billion; $62 billion) of private loans for major infrastructure projects (see also our UK Special Report which accompanies this issue). “That depends upon what it wants to achieve,” came the reply.

This was no mere prevarication on the respondent’s part – it does in fact cut right to the heart of the matter. If the government’s intention was to give a boost to infrastructure projects in the long term, few would dispute that it has taken a step in the right direction.

One of the hottest topics for some time now has been the challenge of how to lure institutional investors such as pension funds to fill the funding gap created by the unwillingness of banks post-crisis to commit to lengthy tenors. Using the government’s balance sheet to credit-enhance projects is certainly one way forward. Business organisation the CBI was quick to hail the move as a “big step towards unlocking the £250 billion of investment” referred to in the UK’s National Infrastructure Plan late last year (two-thirds of which was expected to come from private sources).

However, if the intention of the government was to deliver an immediate boost to a rapidly contracting construction industry and, in turn, give a jump-start to the UK’s apparently flatlining economy, the relevance of the guarantee scheme is less clear. Critics were quick to point out that projects needing guarantees to help them secure finance are “pipeline” projects rather than “shovel-ready” – i.e., it will take months or years before they have an impact on the construction industry or wider economy.

As Alex Carver, an infrastructure and transport partner at law firm Freshfields pointed out: “The reality is that there is a very limited number of projects, where the private sector is involved, that are already ‘in finance’ and literally ‘shovel ready’ where a financial backing guarantee or government co-lending is all it takes for these to have the certainty to get off the ground.”

“Many projects have been completed without any need for such assistance and doubtless many more will be too,” he added.

Critics will also ponder whether there’s an element of smoke and mirrors being deployed. The announcement of the guarantees came on the same day that the International Monetary Fund lowered growth prospects for the UK economy in 2012 from 0.8 percent to 0.2 percent. Arguably, the government needed to be seen to be doing something. Never mind that the ‘something’ is not much of a solution for the immediate problem.

Public purse

A better answer to current woes would almost certainly be an injection of cash from the public purse. But that, in these times of enforced austerity, is self evidently problematic. As Nick Prior, head of infrastructure at Deloitte, told us: “We welcome what the government is doing in terms of making sure the required finance is provided but, if the objective is to drive economic growth in the short to medium term, more direct funding is needed.”     

And that brings us back to the question of what the government really wants to achieve. As things stand, institutional investors interested in investing long term in infrastructure – of which we’re led to believe there are many – will be happy enough. Construction companies, on the other hand, may pause to wonder what all the noise is about.