Infrastructure Finance Review

United KingdomScotland

On 13 March 2019, HM Treasury and the Infrastructure and Projects Authority, published a consultation to kick-start the “Infrastructure Finance Review” (the “Consultation”) to assess the future of infrastructure finance in the UK and the challenges it faces and how best the Government can continue to support private investment in infrastructure projects. Responses to the Consultation will inform the National Infrastructure Strategy and the Spending Review (2019).

In our view, the focus of the Consultation on financing infrastructure, without an equal focus on the state of the contractor market, procurement models and a full analysis of the complexity of risk transfer suggests that industry stakeholders need to engage with the Consultation and ensure a wide range of responses are received.

As capital expenditure on public infrastructure is a devolved matter, the Chancellor’s decision on PFI/PF2 and the Consultation does not affect the Welsh Government’s use of its Mutual Investment Model nor NPD in Scotland.

The Consultation

The questions in the Consultation fall into three main categories:

  1. The existing market - these questions explore the status quo in the UK infrastructure finance market (including existing governmental tools), its strengths and weakness and the lessons learned from established models for application in the future.
  1. Infrastructure finance institutions – the Consultation seeks views on the impact of the European Investment Bank (the “EIB”) in the UK market, and the role that any replacement UK national finance institution could fulfil in the event that the UK loses its membership of the EIB on Brexit.
  1. New models and technologies – stakeholders are asked to comment on alternative models for private finance in government-funded infrastructure and the support required in order to finance new technologies.


The UK has, for many years, been an attractive jurisdiction for infrastructure investors (a fact supported by our CMS Infrastructure Index (2017). However, many believe that the level of political and regulatory uncertainty that has developed over recent years has diminished that attractiveness. This in turn has resulted in contractors and investors focussing on other sectors and jurisdictions.

This creates a variety of issues in the medium to long term - from damaging GDP to the absence of expertise in the event that Government wished to launch a pipeline of projects in the future.

The UK needs to remain competitive in its approach to maintaining (and enhancing) an investment environment that attracts private investment, while balancing the Government’s need to demonstrate value for the taxpayer. The tension between these two requirements will be most acute in riskier investments (for instance large-scale projects or those with nascent or relatively immature technology), where the level of risk transfer desired by the Government may not attract enough competitive participants.

The Existing Market

A strength of the private sector in alleviating this tension, which respondents may focus on, is the cost of construction and operation (rather than solely finance) where private sector provision can demonstrate savings to the taxpayer. Respondents drawn to the value for money debate may also challenge the perception that equity value is created at the expense of public sector outcomes. While recent failures (on both a contractor wide level and at a project level of which there are high profile examples in the public domain) have been highly disruptive to the public sector, the private sector has borne significant (and in many cases, most of the) financial consequences. The existing level of risk transfer in the UK market and a lack of pipeline has already turned some contractors away from the fixed price turnkey deals that are a feature of project financeable schemes. For those who have stayed, bidding and procurement in a very “thin” market has become highly competitive (potentially to the detriment of quality).

Consequently, there may need to be an acceptance by Government that there will be a trade-off between achieving a lower cost and the extent of risk transfer; the latter also affecting the statistical treatment of the project (and the impact on the Government balance sheet). The Consultation certainly recognises the use of on-balance sheet structures as a prospect but is less forthcoming about Government accepting a reduced level of risk transfer for projects on the basis of reduced margins (whether as a result of competition driving another “race to the bottom” or otherwise). Driving down price (in particular construction price) has been at the expense of quality and lessons need to be learned from that.

Stakeholders with an eye on the operation of infrastructure may point to the benefits of simplicity and fairness in payment and performance regimes. On the one hand, operators will look to avoid the opportunity cost and high levels of management required in highly specific service standards with severe sanctions where one can find fault if one looks hard enough. On the other, procuring authorities will wish to avoid contracts that are not flexible enough to meet changing user demands in an affordable manner. That need for flexibility is particularly acute in technologically advanced projects, which are the projects most likely to benefit from the involvement of the private sector.

One of the main challenges for private finance investment in public infrastructure in the UK has been its negative public perception. This was the case long before the demise of Carillion but the public’s view has hardened through recent high-profile failures of large outsourcers and contractors. The Consultation does not seek to address this perception gap. Nonetheless, potential respondents may view increased social engagement and responsibility as a critical part of any response.

Demand and funding capacity in the UK has been high for many years, therefore some respondents may question the benefit of a replacement for the EIB at all, or at least in known and understood sectors where a national finance institution may crowd out investors, particularly given the slow recent projects pipeline. However, for pathfinder or complex projects the benefit of a domestic institution could be more keenly felt (as demonstrated in earlier off-shore wind financings). Therefore, participants may suggest that the mandate of any proposed organisation should be closely aligned with the models for delivery that the Government adopts in order that the institution steps in at the right time and place. Furthermore, respondents may wish to use the opportunity to shape the mandate in relation to engagement on issues/matters in the operations phase of a project.

It remains to be seen whether stakeholders are of the view that the co-investment fund model deployed by the Government in recent years creates a sustainable market for projects in contrast with the historical use of subsidies and the Green Investment Bank when solar PV and wind generation were emerging technologies.

New Delivery Models

It is likely any near-future pipeline in infrastructure will focus on new technologies (e.g. fibre and EV infrastructure), the decarbonisation of the energy market (such as district heating models and storage solutions) and large-scale economic infrastructure, rather than social infrastructure (other than housing and student accommodation). The Consultation acknowledges this by focusing on economic infrastructure where, in our view, the models being adopted are fit for purpose.

There is the potential for a number of delivery models, including consumer-based models such as contracts for difference/regulated asset bases and direct government intervention such as public guarantees. While an array of financing models is useful, respondents may feel that optionality should be balanced with models that get the best out of the strengths of the private sector (economies of scale, due diligence, asset preservation, depth of know-how and risk analysis).

In order to achieve value for money for taxpayers in terms of both output and cost, contractors and investors will need to commit sufficient resources to build up and maintain expertise, and apply that resource across a number of investments, which requires a clear pipeline and known and standardised models.

Stakeholders could also comment on whether the co-investment fund model deployed by the Government in recent years creates a sustainable market for projects in contrast with the historical use of subsidies and the Green Investment Bank when solar PV and wind generation were emerging technologies.

More positively, some market participants could alight on the potential reciprocity that can exist between infrastructure, which has an intrinsically social value, and the increased importance that investors are placing on ESG (environmental, social and governance) criteria and sustainability in investment decisions. Infrastructure finance models have an opportunity to enshrine such criteria, which may also assist in improving the public image of private investment. There is an opportunity for stakeholders to reshape the private sector’s involvement in infrastructure finance and highlight its role in advancing innovation, addressing geographical investment deficits, creating skilled jobs and playing a role in sustainable and clean development.

Finally, the demand for social infrastructure and the need for a new model to deliver it cannot be ignored.

We allude to some of the well-rehearsed issues above. Respondents may wish to address this in their responses and pay particular attention to what a new social infrastructure model may need to focus on. Examples may include:

  • introduction of social value (for example improving social welfare and wellbeing, training and sustainability) into contract evaluation which is monitored and enforced throughout the life of the project;
  • the allocation of change in law (including Brexit) risk;
  • public sector / community sharing in the financial success of projects that perform well;
  • public sector representation on the board of the project company;
  • increased flexibility to effect variations; and
  • greater contractual focus on partnering with dispute avoidance procedures included as mandatory and which are supervised by an appointed third party (which could be the IPA, for example).

It is essential that the opportunity to engage on the development of infrastructure is not missed.

Next Steps

The Consultation is open to responses from all interested parties, and the deadline for responses is 5 June 2019.