High demand and low supply is the key trait of UK infrastructure. Recycling assets in the secondary market is perhaps the main source of deal activity. Andy Thomson asks why.
It’s Christmas Eve and you still haven’t bought those last few vital gifts. Finally, you find a shop window displaying exactly what you’ve been looking for. You reach for the door to enter the premises, only to find a “closed” sign staring you in the face.
This is what many infrastructure investors and advisers seem to experience in relation to the UK market. “The UK will always be a chosen investment destination,” says Richard Abadie, global infrastructure leader at PwC. “It’s business-friendly and people view its privatised assets as attractive. You can get the kind of regulated investments in water and airports that simply aren’t available anywhere else.
But the big challenge is where the new investment opportunities are going to come from.”
The level of demand to invest in the UK is not in question.
Towards the end of 2013, a group of UK insurance firms including the likes of Legal & General and Prudential, said they were committing £25bn to UK infrastructure over the following five years. Then, last year, a report published by law firm Pinsent Masons revealed that China planned to invest more than £100bn in UK infrastructure assets by 2025.
“It’s hard to see how they can invest that £25bn,” says Abadie, about the insurers’ pledge. “Whether it’s utilities or public-private partnerships (PPPs) or big one-off projects, there just isn’t enough investment opportunity, and the existing local and international investors are also allocating more to the sector, so deploying this capital will be tough.”
Anyone aware of the UK coalition government’s National Infrastructure Plan (NIP) may find all this something of a puzzle. First launched in October 2010 and subject to a number of updates since then, the latest version of the NIP in December last year referenced a pipeline of future projects worth some £466bn. In anyone’s book, this is an eye-popping number – it is around a quarter of UK GDP. Public investment in infrastructure was 1.5% of GDP in 2013/14 – in recent years it peaked in 2009/10 when it was 3.3% of GDP. Roughly three times the current amount from public sources comes from private sources.
Many infrastructure professionals do welcome a list of priorities, but the broad view is that it amounts to little more than a wishlist, which simply highlights the diverging views that the government and investment community have on what constitutes an attractive investment.
“It’s a great read, full of interesting facts and figures with lots of long-dated commitments, but shouldn’t be regarded as an investment pipeline given the type of assets and long timelines,” says Abadie.
Take a look at some of the UK’s flagship projects and it’s easy to see what he means. The 2,300mW Hinkley Point C nuclear power station in Somerset, with a construction cost of £24.5bn, is a landmark deal not just for its size, but also because it provides proof of overseas interest in the UK (admittedly in a sector that does not have the indigenous engineering skill). Led by French nuclear developer EDF, the project is also backed by Chinese groups understood to include China National Nuclear Corporation and China General Nuclear Power Corporation.
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