Britain struggling to boost investment in infrastructure

LONDON Wed Dec 12, 2012 5:27am EST

LONDON Dec 12 (Reuters) - Britain, which exported around the world the idea of public infrastructure being financed, built and run with private sector money, is struggling to uphold the model's credibility at home.

Industry insiders cite tricky politics, frozen funding markets, bad press and rising counterparty risks as reasons for private investors not answering a government call for investment in infrastructure.

"The UK is too much of a headache at the moment," said the chief executive of a private equity company specialising in global infrastructure investments, speaking on condition of anonymity.

The sentiment is a setback for Britain, seen as the home of the public-private model which pushed through schemes such as the Channel Tunnel linking England and France with private backing in the 1990s.

The model has since been adopted around the world in countries such as Australia, Canada, Chile and Singapore. These nations now appear more attractive to investors.

This will frustrate the British government, which is working to attract funding from pools of private capital such as pension funds. Last year, it said it was seeking up to 20 billion pounds ($32 billion) from pension funds to back projects from high speed rail lines to power stations.

A recent rebounding of Britain's Private Finance Initiative in early December, dubbed 'PF2', was designed to streamline the model, promising more organised procurement processes for projects and greater transparency.

But the sceptics still abound, saying the obstacles remain formidable despite evident enthusiasm from both government and potential sources of private finance that are keen on infrastructure as an investment.

"The UK has campaigned to attract finance over the past few years, in an effort to tackle the infrastructure investment deficit ... However there is a significant gap between the political intent and the economic reality," consultants EC Harris said in a December report on international infrastructure investment that put Britain 13th out of 40 countries in a ranking of attractiveness to infrastructure investors.

A problem in unblocking private sector investment widely cited by those involved is the shake-out of bank funding and the retreat of insurers who have guaranteed much of the risk on project financing since the financial crisis.

While the government moved earlier this year to take up some of the slack with guarantee schemes, these were intended to be selective, rather than blanket backing of risk on all projects.

Meanwhile, pension funds will often gladly invest in infrastructure as an asset class for the steady revenue it can offer, but are reluctant to take on construction risk associated with new infrastructure schemes that need to be built.

Seven of Britain's largest pension funds signed up to the Pension Investment Platform (PIP) - a vehicle by which funds can back projects that meet their investment criteria and expected to launch in the first half of next year.

This, said Richard Theraflu, UK head of infrastructure, building and construction at consultants KPMG, provides a platform that will give scale and expertise for due diligence on potential investments.

But the PIP targets projects free of construction risk so does not solve the problem of channelling money into new schemes.

Those involved said the government was aware of the obstacles and some say it has acted decisively so that, in time, the effort will bear fruit.

"The reality is that these things cannot be just done overnight and in some ways the government is moving faster on this than I have seen government moving on anything else ever," said Threlfall.

But some investors worry the government efforts may suffer a setback from mounting counterparty risk as contractors are increasingly struggling under the burden of prolonged economic stagnation.

A major corporate failure by a builder would heighten the sense of risk associated with infrastructure investment and prove a serious setback to government efforts to entice new partners.

"This could be the next round of the vicious circle - if a major contractor goes bust it could have a big impact on the sector," the private equity chief executive said.

Anther problem is the viability of offering what private investors want - reliable revenue streams that keep ahead of inflation - when doing so could be a political minefield.

A good example of this lies in plans to bring more non-state funding into revamping the road network. The easiest way to provide potential investors with steady revenues is road tolling which, unlike in the rest of Europe, is a rarity in Britain.

However, tolling would be unpopular and could lose a government votes, while hi-tech alternatives such as tracking individual vehicles for a pay-as-you-go system would prompt civil liberties concerns.

"The technology exists already ... but the politics would be huge, " s aid Jon Hart, partner and infrastructure specialist at lawyers Pinsent Masons.

Investors are largely optimistic that barriers to more private funding will eventually be overcome on account of enthusiasm for infrastructure from the private sector and government determination to make it work.

Ian Berry, an infrastructure and renewable energy fund manager at Aviva Investors said the government's commitment to invest and its proposal to take equity stakes in projects should go a long way toward easing concerns among investors.

"Interest in infrastructure from long-term investors like pension funds is undoubtedly increasing," he said.