3.4 Infrastructure UK was established after the 2009 Pre-Budget Report to coordinate the long-term infrastructure needs of the UK. Infrastructure UK is a unit inside the Treasury incorporating a number of policy, financing, and delivery bodies to lead work within the Treasury to enable greater private sector investment in infrastructure, and improve the Government's long-term planning and delivery. In the autumn, the Government will publish a national infrastructure plan that will set out priorities for UK infrastructure on a cross-sector basis. Infrastructure UK will also carry out an investigation into how to reduce the cost of delivery of civil engineering works for major infrastructure projects.
3.5 By consulting stakeholders, Infrastructure UK has identified that there is a significant risk of a gap emerging in the provision of equity capital to large complex infrastructure projects, particularly in the energy sector, within the next few years. This issue compounds the challenges posed by the reduction in availability and increase in cost of debt finance highlighted in this report. Infrastructure UK has also set out to identify the critical interdependencies that impact on economic infrastructure investment needs (Figure 13) and will publish an action plan, setting out how the risks and interdependencies will be managed, by spring 2011.
3.6 As a result of the interaction of these issues, there is a need to re-evaluate funding mechanisms across the whole range of public and private infrastructure investment. Some funders may be repaid from public sector payments for services, mostly originating in taxation, and others out of payments by users or consumers (see Figure 14 overleaf).
3.7 Infrastructure UK recognises that it needs to find ways to maximise funding sources, and in particular to find new ways for infrastructure projects to obtain funding from the capital markets. The main obstacle is that institutions, such as pension funds, do not have the internal credit approval processes and skills to assess the risk and return for investing in project bonds, typically issued with a lower credit rating than BBB.7 Such investors will only develop this new line of business if they believe that there is a substantial future pipeline of infrastructure projects that carry relatively low repayment risk.
Figure 13 Economic infrastructure
Source: Strategy for National Infrastructure |
Figure 14 Methods of infrastructure funding by sector, with examples
Source: Strategy for National Infrastructure |
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7 Investments are graded according to methodologies produced by credit rating agencies such as Standard and Poors (Range: AAA to D). Triple B (BBB) is the lowest investment grade rating and indicates a 0.32 per cent probability of default.