Richard Threlfall, UK head of infrastructure, building & construction at KPMG, comments on recent reports of lack of private finance for infrastructure investment:
“It is no surprise that private finance for infrastructure has now virtually evaporated. We first highlighted a year ago the impending collapse in long-term bank finance for infrastructure, and since then no clear solution has emerged. Banks are under much greater commercial and regulatory pressure to recycle their capital. As a result long-term bank finance for infrastructure is now effectively dead.
“In addition capital markets won’t lend into infrastructure unless they are insulated from construction risk. The combination of no bank or capital markets access has created the perfect storm, only masked by the low deal-flow in the UK at the moment.
“There are things the Government could do in the Autumn Statement to solve this impasse. Government could consider taking the refinancing risk on short-term bank lending. This means that banks would lend during the construction period of projects and refinance to the capital markets post construction. There is plenty of bank liquidity for short (5-7) year loans but the Government has so far refused to offer this support on the basis they want to see long-term finance for infrastructure.
“Government could also help re-open the capital markets to infrastructure. UK Guarantees has the capacity to do this, but the impact is being hampered by the Government only offering guarantees in most cases for up to 50% of the senior debt, to avoid projects coming on balance sheet – 100% construction period guarantees is what is required.
“The Pension Infrastructure Platform (PIP) is a red-herring because the pension industry is trying to focus on provision of equity for operational projects. There is no shortage of equity for infrastructure projects, and no shortage of finance for operational projects. A really smart move would be to use UK Guarantees to guarantee construction period investments by the PIP, and for the PIP to offer debt rather than equity into projects.”
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