5.10 In addition to creating a stable policy and regulatory framework, it is important for Government to be confident that planned investment is financeable. Availability of finance has not been a major impediment to delivery of infrastructure projects in recent years, other than a brief period in 2008-09, when there was severe disruption in the global banking markets.
5.11 Looking ahead, most of the currently planned investment in the pipeline is either publicly financed or is likely to be financed through corporate balance sheets. This is true for instance of most road and rail network investment, almost all the investment in the regulated utilities (such as electricity and gas transmission and distribution and fibre optic cable roll-out) and a significant proportion of investment in the electricity generation sector. There is little evidence that there is any immediate systematic financing constraint that will hold back infrastructure investment.
5.12 However, over the medium term, there is a possibility that corporate balance sheets may become more constrained. For example, the Department of Energy and Climate Change noted in their White Paper on Electricity Market Reform (July 2011), that the size of the offshore wind and new nuclear pipeline (if all sites are fully built) may exceed the capacity of sponsors' balance sheets to raise finance in the time required to meet the Government's renewable energy and de-carbonisation targets.
5.13 In addition, internal competition for capital within the multinational companies that are key players in the UK infrastructure market is likely to increase. There is also likely to be greater competition for overseas institutional investment.
5.14 This makes it important to ensure that there remain alternative routes for balance sheet constrained sponsors to raise debt and equity for their projects. The most common current alternative is for projects to raise project finance debt from commercial banks. It is possible that this will become more challenging over the medium term for a number of reasons including:
• changes in banking and insurance company prudential regulations (known as Basel III and Solvency II, respectively); and
• potential asset quality questions in some of the eurozone banks historically active in the long term infrastructure lending market, leading banks to try and conserve capital.
5.15 A large potential pool of private finance lies with institutional investors such as pension funds. However, historically, institutional investors, and pension funds in particular, have tended not to play a major role as direct investors in infrastructure assets, for a variety of reasons including:
• limited capacity to assess project risks and make direct investments, as a result of which most pension funds tend to invest in infrastructure indirectly through intermediaries such as infrastructure funds, or by buying shares or bonds of publicly listed utilities;
• the lack of a clear benchmark for measuring the investment performance of infrastructure assets; and
• a shift in the future infrastructure pipeline to assets, such as the infrastructure associated with a low carbon economy, that lie outside the risk appetite of many institutional investors.
5.16 The Government is taking a number of steps to respond to these challenges.