UK insurers pledge £25bn to infrastructure

The news provides a boost to the government’s £375bn National Infrastructure Plan, partly funded by £20bn of divestments due to include its Eurostar stake.

A group of British insurers have announced plans to spend £25 billion (€30 billion; $41 billion) on infrastructure investments over the next five years, as part of the government’s efforts to get the ball rolling on a number of flagship projects.

The commitment forms the core of the revamped National Infrastructure Plan unveiled today by Chief Secretary to the Treasury Danny Alexander, which details £375 billion of planned public and private investments in energy, transport, communication and water projects over the coming decades.

The joint decision by six major institutions – Legal & General, Prudential, Aviva, Standard Life, Friends Life, and Scottish Widows – follows negotiations led by Lord Deighton, Commercial Secretary and former London Olympics chief, and the Association of British Insurers.

It comes a day before the Chancellor’s Autumn Statement and a week after the UK successfully battled against the introduction of new requirements to the Solvency II directive, which would have restrained the ability of insurers to invest in infrastructure and other alternative assets.

The funds are to be used alongside public spending as well as money raised through sales of government-held assets, with total divestments targeted by the Treasury now doubled to £20 billion.

This includes the government’s 40 percent stake in cross-channel train operator Eurostar, now being put on the block despite a 2010 decision to retain it. The company, which remains 55 percent-owned by the French government, posted revenues of £799 million and profits of £52 million last year.

A string of other, related measures announced today include a Treasury guarantee to build a new nuclear power station at Wylfa on Anglesey; a government guarantee to support the £1 billion Northern Line extension in south west London; a further £50 million allocated to redevelop the railway station at Gatwick Airport; the scrapping of plans to create a toll road on the A14; a new court to assess infrastructure-related planning disputes; and a £10 billion fund to test innovative ways to deliver broadband to remote parts of the country.

Fresh contract terms and strike prices also published today by the Department of Energy & Climate Change forecasted £40 billion of new investments in renewable electricity generation projects, with 16 of them now at the Final Investment Decision Enabling for Renewables (FIDeR) stage of the process.

Yet while the announcements provide welcome clarification on how the money will be spent, several industry insiders told Infrastructure International that there “wasn’t much in them” and that they contained “little new”.

Nick Prior, head of infrastructure at Deloitte, said that most of the measures detailed had already been mentioned in this year’s spending round or previous updates of the plan, and that most of the new spending would not kick in before the next general election in 2015. In addition, he noted, the announcements came on the back of a significant reduction in infrastructure spend over the last few years.

Patrick Twist, infrastructure partner at law firm Pinsent Masons, similarly welcomed the insurers’ investment pledge as sign of appetite for investing in the UK, but doubted whether the money would ultimately be deployed.

“UK pension funds have no experience of assessing infrastructure risk and it is quite unclear that they would be willing to accept those risks without some form of government guarantee. In the absence of that guarantee it will be surprising if a great deal of the proposed £25 billon is actually invested in economic infrastructure rather than housing and social infrastructure.”

Prior agreed, noting that what was missing today was not liquidity to fund projects, but prospects of good, guaranteed returns for investors. In a context where the government remained reluctant to increase its exposure, and where users would be unlikely to accept significant fare increases, he doubted whether today’s announcements would help unlock a significant deal pipeline.

Other observers welcomed the move as a positive, clear commitment to infrastructure on the part of the government – but Jeremy Blackburn, head of UK policy at the Royal Institute of Chartered Surveyors, also acknowledged that more was now needed to bring the private sector onboard.

“The government is quite rightly considering infrastructure investment holistically across transport, energy, utilities and connectivity. The focus must now be on developing business cases which reflect wider benefits for business and economic growth, and prioritise accordingly.”

The plan unveiled today builds on the £100 billion the Treasury had said it would spend on infrastructure over the next seven years. Looking to 2030 and beyond, the targeted investment has increased from last year’s £309 billion to more than £375 billion, with 291 of the 646 projects said to be already under construction.