Infrastructure is absolutely vital for the development and running of our lives. Ask anyone who lives in Cornwall or Devon after the severing of the main railway link to the South West by the recent storms. In this article, infrastructure and projects expert David Hickman looks at the eagerly awaited National Infrastructure Plan (NIP), recently published by HM Treasury, which promises substantial new investments by the government. However, by no means all of the projects described in the NIP are actually new, which is understandable given the time it takes to plan and develop large-scale initiatives.
Key areas for investment
The NIP emphasises that “the government has put long-term investment in roads, railways, energy, telecommunications and flood defences at the heart of its growth plan”. So in essence the key areas are big infrastructure. The “Top 40” priority investments are highlighted along with a new hot desk which is being set up at Infrastructure UK (in the Treasury) to lend central support to these projects. It is stated that the pipeline of ongoing projects coming to the market is worth £375 billion, of which the biggest slice by far is in the energy and transport sectors (see table below).
There are masses of statistics in the NIP, and it would be easy to get lost in these. But where do the best opportunities lie for participants in the projects market? The following look like good examples of projects to track:
- Roads projects: a commitment to the £1.5 billion A14 Cambridge to Huntingdon project. This is of strategic importance for freight transport heading from the Midlands to Felixstowe, and it also links in with planned construction of new housing in Cambridgeshire. It will not be a toll road.
- HS2 (£42 billion): the massive high-speed rail project linking London, Birmingham, Manchester, and other northern cities. A controversial project which is by no means assured of going ahead but already generating considerable work in terms of scoping and development.
- Northern Line tube extension to Battersea. This links in with the redevelopment of the Battersea Power Station site. The government is committing to act as guarantor to the Greater London Authority in borrowings of up to £1 billion.
- £50m redevelopment of Gatwick Railway Station.
- A new rail terminal at the port of Felixstowe, on which construction has already started.
- New nuclear power plants at Hinkley Point C and Wylfa Newydd. Hinkley appears to be going ahead, with EDF as prime investor. However, it may be subject to a “wobble” due to the European Commission challenging the British government over whether Hinkley falls foul of the EU state aid rules. Wylfa is also expected to proceed, with Hitachi providing private finance and the government acting as guarantor.
- Superfast broadband featuring £790m of central government investment.
- Water supply, e.g. Thames Tideway Tunnel.
- Flooding & coastal management, e.g. Leeds City Flood Alleviation. A highly topical area for investment, given the recent storms.
- Science & Innovation, e.g. The Francis Crick Institute.
- Local Enterprise Partnerships (LEPs). The government is setting up the Local Growth Fund (LGF).
So how are these projects to be financed?
The NIP explains that financing methods will vary widely. The spectrum ranges from those receiving full government funding to projects which are entirely funded by the private sector. In many cases “finance gaps” are identified, and there are various ways in which such gaps can be filled. A great deal of emphasis is put on the UK Guarantees Scheme (UKGS) under which the government underwrites elements of funding. The UKGS is already up and running and projects such as the Drax Power Station have already been supported to completion under it. The Scheme will continue until 2016. Projects such as the Northern Line extension (above) are being lined up for further guarantee support.
Consistent with the government’s approach of welcoming overseas funders of projects, many sovereign wealth funds (such as Qatar and China) and private companies (such as Hitachi) are making big investments in UK infrastructure.
Another relevant factor is that the government now prefers to be an equity investor in many schemes. Where public authorities commit to do this, such investments this will be overseen by a central unit in the Treasury.
The other area of innovative funding involves institutional investors: insurance companies and pension funds in particular committing to fund projects through a form of bond finance. The days of projects being substantially debt-financed appear to be over, at least for the present.
Making it easier
A key message is that the government is trying to reduce red tape and delays which can have a very damaging effect on public sector projects. In particular, reforms to the planning system are highlighted. The Hinkley Point Nuclear Power plant is cited as an example, development consent having been obtained relatively quickly for this using the new Major Infrastructure Unit in the Planning Inspectorate.
Legal and commercial issues
It is intended that the plan set out in the PF2 (“Son of PFI”, as it’s been dubbed) Guidance issued in December 2012 will apply. In essence this confirmed that the old PFI procurement approach, used on many hospitals, schools, etc. over the last decade, will no longer be used. The current government wants to achieve greater flexibility on the contracts used on public projects, so as to avoid problems like on the large PFI hospital projects. Some of these have proved too expensive for the NHS Trusts that commissioned them and inflexible in terms of their change mechanisms.
As the public sector will be considering whether to have its own equity stake on each project, a suite of documents including a standard Shareholders’ Agreement has been published and is being used on a new wave of schools projects.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.