ICAEW.com works better with JavaScript enabled.

Infrastructure investment: from growth to stability

9 February 2021: To address the effects of the pandemic, UK regional investment funds have had to shift away from funding growth to stabilise businesses in the hardest-hit areas.


Pre-COVID, UK regional investment strategies revolved around growth. Now even infrastructure projects at the UK regional level are evaluated on the basis of the stability they will deliver to local economies, companies and workers.

“The agenda has had to change,” says Dr Yvonne Gale, Chief Executive of NEL Fund Managers Limited and Business Growth Board member at the North East Local Enterprise Partnership (LEP). “Investment decisions are being made on the basis of safeguarding jobs.”

“We ask, ‘Does this business employ people and are they good jobs? Would it be a good use of money to try to keep these people employed? But also, does the business have good prospects? Are we just papering over the cracks? Or is this a business that has long-term viability but is suffering short-term disruption.’ We're not here to prop up zombie companies. We’re here to help businesses access finance to move on a level.”

Dr Gale is certain the funds she manages will include more growth funding in a matter of months, but for now she is seeking to invest in businesses to stabilise them so they can contribute to the local economy over the medium-term.

Given the nature of the north-east UK economy, many of the applications to the fund that Dr Gale manages come from engineering and manufacturing companies. On the infrastructure side, she is most likely to get applications from subcontractors, not the primaries. “We might be approached for funding by a company that has been appointed to put up dozens of phone masts, for example, and requires a loan to help with project cashflows,” she says. “We do a lot of funding of supply chain work.”

Bottom-up infrastructure planning

Dr Gale points out that UK regional infrastructure planning is essentially bottom-up. “Government sets the big agenda, but it's actually lots of tiny individual projects that make the big projects happen.” 

So, the delivery of infrastructure projects works at supra-national, national and local level, and there might well be different players operating at different points in this delivery. To add to the complexity, funding mechanisms tend to work to different time horizons. That reality creates endless problems.

“There's definite value in having a long-term plan over an extended period of time and proper long-term thinking,” she says. “To do that, you need long-term finance, whether that's commercial or public sector. The big infrastructure funders, say pension schemes or life assurance companies, work to, say, 20-year horizons. Government's financing doesn't extend that far by any stretch of the imagination.”

Dr Gale points out that we’re coming to the end of an ERDF programme. “I'm very lucky. I work on five-year to 10-year projects. In ERDF terms, that's at the extreme end of funding. But even I am going to need visibility on the next 10 years.” Of course, the detail on how the UK Shared Prosperity Fund will work is parlous, so planning is currently rather elusive. 

Immense undertakings

Dr Gale’s funding activity falls under the general heading of risk capital. “We provide finance for growing and early-stage businesses, often beyond the risk the commercial sector is prepared to take,” she says. “We do it through a series of funds. These funds tend to exist in locations where there has been a lot of de-industrialisation. The funds are there to inject cash into the economy, through the allocation of risk capital. There's quite a lot of complex work in constructing these funds. And they have to be designed to fit the market.”

The suite of funds Dr Gale helps manage is valued at £120m. “We have a decent-sized project team working on these funds for a good period of time. They involve complex financial instruments and we have complex stakeholders – we have to make sure that everything is properly documented,” she says. “It’s the same for any kind of infrastructure project – they're not designed on a kitchen table by one person, they’re quite immense undertakings.”

Approximately every five years, NEL Fund Managers begins a new fund. “By the time we get to the end of year three of the five-year term, we have to start preparing for the next one. Naturally, any of these projects have very long lead and planning times. It doesn't matter whether you're creating an investment fund or you're laying a railway, it's the same problem: the lag-time between having a good idea and bringing the project to fruition is years, not months,” she says.

Under EU membership, the UK paid into the European budget and was allocated money for regional development by the EU that flowed into the Ministry of Housing, Communities and Local Government (HMCLG). Project owners around the UK then put forward their projects for funding but, to win that bid, support from the local LEP was essential. 

“So, the fund manager led the application, but they did so by making sure everybody else was in support. The fund manager approached HMCLG with the other stakeholders in the project and asked for funding, having already secured a certain level of private funding. And then HMCLG would decide whether or not that project versus another one is a good use of the money,” she says.

“The LEP is involved in what gets commissioned. They're also involved in who gets to deliver it. Even though the money doesn't flow through the LEP, the money will cease to flow if you don't align with the local economic plan.”

Deploying the funds in the right way

Dr Gale points out that there are numerous parties who have an interest in ensuring the funds are managed and deployed in the right way. “It’s about the economy as much as it's about the performance of a contract. So, because these are five-year to 10-year projects and because the economy is always fluid, and because the funds are designed two years out, the world can look quite different by the time the funds are deployed.”

Funding criteria tend to revolve around achieving the best value, but other objectives, such as the move to the zero-carbon economy, are also part of the mix. “The whole net zero agenda has arisen very quickly but there is much greater awareness than when these funds were created. The agenda can be fluid, so we have to both deliver to the original objectives in the fund management contract and adapt to changes in the economy like COVID-19 and the transition to net zero. Safeguarding jobs is not in our contract and the contract definition of what was considered a low carbon project reflected thinking at the time.”

An example of a funded and completed infrastructure project that is not considered to be environmentally focused is a plant that washes and breaks used plastic bottles into granules to go back into use. “That didn’t get recorded as contributing to decarbonisation because the definition of carbon reduction in the fund management contract is based on how, at the time, we all thought carbon reduction would occur. I would argue there's more positive change on the net zero transition than is reported because the pace of implementing change is happening faster than our contracts and funding structures were designed for.”

For now, the focus remains on funding stability at the regional level. Better times will see a return to more growth funding, and time will also see ambitious investing to reach the net zero transition as a clear focus in future funds.

Article series: Infrastructure and Recovery

A plethora of financial, climate, health, societal and business issues have resulted in significant challenges for economies globally. Pressure on public finances, and the need for simultaneous levelling up, will be immense – while private investment must be more enlightened. Where does infrastructure investment fit into recovery?