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The race is on

Creative solutions from both the public and private sectors are being discussed to establish an active UK capital market.

How to create an active capital market for infrastructure financing to help fund the £434 billion (€497 billion; $700 billion) in infrastructure spend the UK is estimated to need over the next decade?

The apparent target is deep-pocketed institutional investors, with both the government and private sector discussing solutions to make them comfortable enough to invest in infrastructure en masse, filling the gap left by cash-strapped banks.

On the government side, Mervyn Davies, UK trade and investment minister, kick-started proceedings in late January when he told the Financial Times that he saw pension funds as the “big prize” to plug the country’s infrastructure needs over the next 10 years.

Fully aware that the construction period drags the majority of infrastructure projects below investment grade, Lord Davies suggested the government is willing “to take some of the building risk before converting [infrastructure investments] into long-term loans”.

One way to do this could be to create a state-backed infrastructure bank – a possibility currently being discussed by the government. The bank would help projects get started before siphoning off debt to insurers and pension funds at credit ratings they would find attractive, Tim Breedon, the head of Legal & General, the UK’s largest pension fund manager, told the FT.

Ofgem, the UK regulator for electricity and natural gas, is so keen on attracting investors to fund the £200 billion it needs to refurbish the sector that it is proposing the government scrap the current liberal system in favour of a tightly regulated market that would lure investors through guaranteed long-term pricing. The more radical of Ofgem’s proposals argues for the creation of a centralised renewable energy market and a central buyer of energy.

More recently, Ian Pearson, economic secretary to the Treasury, said in an interview that the government was considering two other solutions to attract financing to green energy investments. One could see the government, which is the largest buyer of energy in the UK, offer long-term public sector contracts to green energy producers. The intention is that these contracts would make it easier for producers to raise private sector funds for their investments.