There is significant global interest in investing in infrastructure in London and the UK. London, in particular, has significant and growing needs for infrastructure development to accommodate a rapidly expanding population that is passing its historical peak.
This should be a match made in heaven, yet there is too often a gap between the alluring rhetoric of visionary statements and the credible and deliverable plans that would allow London and the UK to capitalise on the high levels of interest in UK assets within the investor community.
Focusing on London, Mayor Boris Johnson was right to warn last summer that it risks losing its position among the world's elite cities without a major programme of infrastructure investment to allow the capital to continue to operate efficiently and successfully. He spoke as he launched a consultation on the 2050 London Infrastructure Plan, the first attempt to set out the full range of infrastructure requirements for the capital over the next half-century.
During this time, the population of London is forecast to increase by 37 per cent to more than 11 million, delivering a number of serious infrastructure challenges. Demand for public transport is forecast to rise by 50 per cent, demand for electricity is expected to more than double, and 600 new schools and colleges will need to be provided.
But alarmingly, the scale of these challenges is understated. Johnson's plan only covers the area for which he is responsible – Greater London. Yet in reality London is a global city stretching in all directions from central London far beyond the M25, London's orbital motorway, and one that is increasingly economically, socially and culturally connected. To plan for London's infrastructure needs only in terms of Greater London would be a serious mistake.
For example, by following commuting trends across the region, AECOM recently analysed the housing shortfall for the 127 local authorities, including the London boroughs, within 90 kilometres of central London. This analysis identified a total need for more than 2.5 million homes by 2036. So far, sites have been identified within these authorities for approximately 1.5 million homes, leaving a shortfall of one million that still need to be found in the next 20 years.
To properly manage London's future growth, we must start looking at London as a metropolis with 20 million people today – which is expected to rise to 24 million people by 2036.
This shortfall cannot be met successfully if it is seen as merely a housing issue to be tackled by each local authority in isolation. It must be addressed through an ambitious development programme that looks at infrastructure in the broadest sense and courts the active engagement and support of local communities.
A comprehensive plan that covers the entire region must address transport, utilities, energy, communications and flooding infrastructure as well as homes, employment locations, education and healthcare facilities, and green infrastructure – all of the essential components that contribute to the efficient running of the London City Region.
But we want to go further. In our view, the new plan should be developed collaboratively between the Greater London Authority and regional local governments and should include the private sector utility businesses and regulators from the outset
The key factor is that it looks for opportunities to drive synergies and capture value across the various strands and for the region as a whole, and in so doing becomes an even more attractive platform for investment and action.
BUT WHAT ABOUT FUNDING?
The Mayor's plan builds on the campaign for greater fiscal devolution to cities, allowing for investment in much-needed local infrastructure and boosting the whole of the UK's economy.
Whether there is greater fiscal devolution or not, all these plans, most would agree, will require substantial outside investment. And this is at a time when banks are retreating from providing long-term financing to infrastructure projects. So we need to attract and retain institutional and international investment, whose main criterion is that the returns are right – not the geographical location of the investment – and keep both
London and the UK at the top of investors' attentions and interest
The good news is that international investors, from Australia, Europe, the Middle East, Asia, North America and elsewhere are targeting investment opportunities in London, attracted in part by its stability, dynamism and strategic international location
Jamie Storrow, managing director of global private markets investor Northleaf Capital Partners and co-head of its infrastructure investment programme, explains that “London, and the UK more broadly, offers an extensive set of infrastructure investment opportunities, including in the regulated utility, power generation and transportation sectors. The UK's longstanding track record of private ownership and robust rule of law makes it amongst the most attractive jurisdictions for infrastructure investing.”
Pension funds and life insurers, which are struggling to find attractive opportunities to invest their cash amid record low interest rates, are committing more money to real assets, which promise higher returns as well as an annual cash yield. Infrastructure funds attracted $40.7 billion in 2013, compared with $30 billion the year before and nearing the 2007 peak of $44 billion, according to Preqin.
According to one of AECOM's investor clients with a global infrastructure portfolio, “[The] issue with the UK at this stage is that there is a huge amount of capital available for that market. Middle East and Far East sovereign wealth funds have huge amounts of capital available to invest in UK infrastructure, and while we like investing in the UK too, it is sometimes getting too competitive.”
Despite the strong interest in the UK market among investors, there are still hurdles to overcome as institutional investors attempt to marry their responsibilities and duties within tight legal and regulatory frameworks that vary across borders. Infrastructure debt competes for attention with other asset classes, and strong competition might see investors move their investment allocations away from the UK's infrastructure assets towards other asset classes.
Large institutional investors generally want to directly invest in brownfield projects which tend to be lower-risk assets that offer inflation-linked returns to align with their long-term liabilities. The greater risks to investment in greenfield projects, and the specialist capabilities required to deliver them, mean that the large global investors in infrastructure typically invest through specialist funds or via co-investments with construction companies that support their construction activities with investments and have track records in project delivery.
In addition to institutional and sovereign investment, other means of attracting financing should be explored to support infrastructure delivery. These include expanding public-private partnerships (PPPs) into sectors where they have not yet been extensively deployed with appropriate tolls, user charges or levies, value-capture tools such as tax increment financing, or betterment levies used to provide funding to support infrastructure development.
The UK is clearly already an attractive location for international and institutional investors. With better integration of these projects and clearer identification of the benefits, London and the UK would improve their attractiveness to global investors as the UK's competition takes similar steps to attract a greater share of the global infrastructure investment pie.
Our future prosperity, not just in London but in the whole of the UK, depends on it.