UK Infrastructure Investment by the Insurance Industry

Later today (29th November 2011) the Chancellor George Osborne will make his Autumn Statement. The Government has let it be known in advance that they will bring forward infrastructure projects in an effort to get some growth into the UK economy.

As well as bringing forward future Public expenditure to be spent earlier than previously planned, and reallocating departmental underspends, the Government has pre-advertised that it is trying to get UK insurance companies and institutional funds to invest in UK infrastructure.

It will be interesting to learn the details of this when it is announced by the Chancellor. Amongst the issues which need to be addressed and questions that need to be answered are:

Who will finance the project development and project delivery phases of the infrastructure investment? The institutional investors normally only invest in completed projects once they have been completed and have a secure income stream over a long period.  The short-term finance is usually provided by the banks, but we all know they they are part of the current problem, so will it be the Government which provides the up-front funding and then they sell on the projects once they are de-risked to the institutional investors?

How will the Insurance Companies and other institutional investors obtain and structure their income streams once they buy the completed projects? Will it be via, say, tolls on roads, or rents on schools etc guaranteed by the Government? Will the investors be willing to operate on a project-by-project basis, or will they wish to set up Special Infrastructure Bonds via which to advance funding to Government? I think they will insist on Special Infrastructure Bonds, with income streams guaranteed by the Government – but the Treasury doesn’t like hypothocation so how will this conflict of needs be overcome? Surely, without these special Infrastructure Bonds, with the guarantee of the money actually going to infrastructure investment, any investment is just an investment in Government Gilts (and so public borrowing).

If the price of the Special Infrastructure Bonds (and investments by overseas wealth funds) is above that which can be obtained for the sale of Government Gilts (currently very low) then what is the point of the special bonds? Will the Government pay higher interest rates just to get the borrowing off the balance sheet somehow? But I thought the Government didn’t like off balance sheet financing anymore. And isn’t foreign investment into the UK just shipping out long term income overseas and removing money from our economy?

How this questions and issues are addressed is going to be very interesting – but don’t expect the institutions to put lots of money into infrastructre anytime soon.

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