Welcome to the new normal. The overused phrase of the last few months to describe homeworking and social distancing can now be used to describe the position of private infrastructure investment in the UK after prime minister Boris Johnson’s speech this week.
In a world where coronavirus was a distant worry in a Chinese province, we shone a light in January on the UK’s upcoming budget, the “infrastructure revolution” billed by then-chancellor Sajid Javid, which we warned was unlikely to garner private sector support.
In the weeks that followed, the world changed, as did the chancellor, with Javid resigning and Rishi Sunak taking over. While a Treasury spokeswoman told us after Sunak’s budget in March that “we don’t do [public-private] partnerships anymore”, many of our conversations with industry figures over the past few months have included an expectation this would change in some way, with the billions spent in relief programmes by the Treasury stretching its budget.
Indeed, in our June issue asking leading market figures how covid-19 will change infrastructure investment, something mentioned in several answers was the expectation of more private capital involvement given the strain the pandemic has placed on government finances.
However, once the pioneer of the private finance initiative, the UK effectively ruled out these expectations this week, with the extraordinary “I am not a communist” proclamation by Johnson – which had previously never needed clarifying by a Conservative prime minister – as he set out infrastructure plans that would indeed be publicly financed.
“It sounds like a prodigious amount of government intervention. It sounds like a New Deal,” affirmed Johnson, as he sought to become Britain’s Roosevelt. “That is how it’s meant to sound and how it’s meant to be. That is what the times demand.”
And for people hoping for a rehashed version of PFI, Johnson came down on the side of those – many of whom sit on the opposite bench to him – who have long called the scheme a ripoff.
“It’s time now not just for a new deal but for a fair deal for the British people,” he declared. “We can do all this now, partly because of the prudent management of the economy in the last 10 years, but also because we’re planning to invest now, when the cost of borrowing allows it and when the returns are greatest.”
The £5 billion ($6.1 billion; €5.5 billion) of infrastructure improvements announced by the prime minister were not new, having been outlined in Sunak’s budget in March. But if Sunak provided the ingredients, Johnson outlined the method of building “better, greener and faster”, dashing the hopes of many in the private sector. The market still awaits the release of the National Infrastructure Strategy in the autumn and the results of the Infrastructure Finance Review, but these are unlikely to change the plans laid out by Johnson.
“There are billions of pounds of capital in pension funds looking for investment opportunities in infrastructure in the UK,” said Ted Frith, chief operating officer of UK infrastructure pension pool GLIL, in a statement. “So far, the government has given no indication as to what role, if any, private sources of capital will be encouraged to play in financing the ambitious plans. The industry is eager to get some clarity on this point.”
What clarity has been provided is in showing private capital where it won’t be needed.
“The announcement suggests a preference for private capital to be focused on consumer-funded assets, such as power, utilities and digital infrastructure networks, rather than support improvements to social infrastructure and transport such as schools, hospitals, roads and rail,” Darryl Murphy, managing director of infrastructure at Aviva Investors, told Infrastructure Investor. “Achieving a net-zero future and improving digital access are significant challenges, and will offer an opportunity for private investment to demonstrate its long-term value.”
Johnson name-checked “our wealth creators, our capitalists, our financiers” for applause alongside health workers, although they may not be so quick to return the favour.
Write to the author at firstname.lastname@example.org
We’d also like to remind you that our first virtual event, the Infrastructure Investor Global Offsite 2020, is less than two weeks away. Click here to find out more and to register for the event that will be held from July 13-15, bringing you keynote interviews, panel discussions and the opportunity to network with more than 250 investors and fund managers.