Investment forum champions public/private partnerships for faster green infrastructure investment

A new forum for infrastructure investors has made a recommendation for the UK to scale up public/private infrastructure partnerships to manage major project risk and improve their investment grade.

The recommendation from the Infrastructure Delivery Forum has been made off the back of changes to the regulatory framework for insurers that are due to be implemented this year, known as Solvency UK. These changes will aim to help leverage £100bn investment over the next 10 years by expanding the range of assets in which the insurance industry can invest. Much of this investment will be geared towards green infrastructure, spanning energy generation, transport and housing initiatives, the forum said in a report.

The forum wants public/private partnerships to be scaled up to improve business cases for investment in major infrastructure projects. It believes this will help make more large projects investment grade, which is done by adopting financing models where public funds smooth risk or volatility from investments, allowing private money to deliver long-term, large-scale and reliable finance over decades.

Insurers and pension firms are major investors in UK net zero infrastructure and could provide nearly half the total required capital needed over the next 10 years, according to the forum. While this is the case, current rules restrict firms to investing in a relatively narrow set of asset classes with fixed returns.

A further recommendation from the forum involves the use of new investment models. The Infrastructure Delivery Forum stated that project owners need to utilise innovative investment models to unlock private sector investment for infrastructure projects, suggesting even creating new financing models.

Using the success of the Regulated Asset Base (RAB) model that has been used to finance both the Thames Tideway Tunnel and Heathrow Terminal 5 – and is proposed for use on nuclear plant Sizewell C – the forum believes using alternative funding models for large schemes can increase their investment grade.

It said: “RAB models have typically been used in the UK to finance large scale infrastructure assets such as water, gas, and electricity networks.

“The RAB model provides equitable risk sharing, is based on well understood precedent such as Thames Tideway Tunnel, and the mechanisms help provide revenue certainty over a long time period given long construction phases. The model allows a company to charge consumers to construct and operate new infrastructure.

“These highly predictable cashflows enable financing, at scale, by the insurance industry. Expanding this approach to other sectors of the economy, such as housing and property, could open up more investment by insurers.”

The final recommendation the group makes is for the government to publish more long-term strategies as firms invest their customers’ money over decades so need to be as sure as possible of the long-term horizon.

Steps for this recommendation include the implementation of national transition plans, sector strategies or empowering executive agencies, such as the National Infrastructure Commission, to have a broader remit and be less at the mercy of short-term political cycles.

The forum further stated one of its next steps towards leveraging more finance from insurers is to identify specific projects within each working group to develop new funding mechanisms, pilots or project pipelines to invest in. It will then work with key stakeholders to transform these into investable propositions for insurers.

The report says: “Different sectors will require bespoke solutions. Investment pilots will be able to test these, and the forum acknowledges that there will be value not just in returns, but in learnings from the process. If successful, these can then be replicated nationwide, at greater scale.”

The Investment Delivery Forum was set up last summer by the Association of British Insurers (ABI) to speed up the delivery and adoption of the new regulatory framework.

Investment Delivery Forum chair Nicky Morgan said: “This report shows the initial results of pooling our industry’s knowledge and working with a range of leading experts across infrastructure, investment, regulation, and economics.

“In parallel with our productive work with the regulator, we look forward to the next phase of our mission, working alongside local and national government to get pilots off the ground.  These will help evolve funding models, understand the scale of some barriers and test new approaches that could then be scaled up at pace.”

Treasury economic secretary Bim Afolami said: “It’s encouraging to see industry working together to deliver £100bn worth of investment to support UK infrastructure.

“This interim report represents a significant milestone, and the Government eagerly anticipates seeing these critical investments come to fruition.”

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