Infrastructure Finance Review consultation March 2019 Infrastructure Finance Review consultation March 2019 © Crown copyright 2019 This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open- government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected]. Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. This publication is available at www.gov.uk/government/publications Any enquiries regarding this publication should be sent to us at [email protected] ISBN 978-1-912809-48-6 PU2247 Contents Foreword 2 Chapter 1 Executive summary and review process 3 Chapter 2 The infrastructure finance market 7 Chapter 3 Investment models and existing tools 18 Chapter 4 Governance 26 Annex A International comparisons 30 Annex B Consultation questions 36 1 Foreword This government is committed to improving and renewing our infrastructure. This matters for increasing productivity and boosting growth, but it also matters for our everyday lives and quality of life. The infrastructure we are developing needs to be adaptable to fast growing technological change, from autonomous vehicles and electric cars to the next generation of broadband and harnessing the power of data to improve delivery and maintenance. Both the public and private sectors will need to play their part. The government has already made great strides – in the last few years we have established the National Infrastructure Commission (NIC) and the Infrastructure and Projects Authority, created the £37 billion National Productivity Investment Fund to target spending in critical areas, and set out plans that will see public investment rise to levels not consistently sustained for 40 years. This is a long-term programme, and later this year the government will publish a comprehensive National Infrastructure Strategy, the first of its kind. The strategy will respond in detail to the NIC’s National Infrastructure Assessment, and will set out how we can continue to embrace the opportunities afforded by new technologies, decarbonise the economy, and create infrastructure fit for the 21st century. The role of the private sector is vital to these efforts, and the government remains firmly committed to supporting private investment in infrastructure. As this document sets out, we support private investment through a variety of tools, and the UK infrastructure finance market has huge strengths, attracting investment from around the world. We want to facilitate further private investment and involvement in infrastructure delivery. As we leave the European Union, our relationship with the European Investment Bank will change, and while we will explore the options for a future relationship with the EIB, we must and will be prepared for all scenarios. I am therefore pleased to be launching this open consultation process. Over the course of this review we will consider the infrastructure finance market, analyse future challenges, and look at the future role of the government in ensuring that viable projects can raise the private investment they need. I urge interested parties to engage with this review, and I look forward to many interesting discussions throughout the process. Robert Jenrick Exchequer Secretary to the Treasury 2 Chapter 1 Executive summary and review process Executive summary Context for the review 1.1 Infrastructure is essential for jobs, growth and productivity, and is one of five pillars of the government’s modern Industrial Strategy. Creating infrastructure fit for the 21st century includes improving broadband speeds and mobile coverage, enabling housing development, decarbonising our energy networks, reducing journey times, investing in water networks and increasing our resilience to climate change. 1.2 This requires major investment from both the public and the private sectors. The government is increasing public investment and targeting it in productivity enhancing sectors through the National Productivity Investment Fund. The government is also committed to the role of private investment in infrastructure. Of the projected £600 billion infrastructure investment pipeline for the next 10 years, half is forecast to come from the private sector.1 1.3 This investment will be made in a changing landscape. The rapid development of new technologies could create financing challenges, and the UK’s relationship with the European Investment Bank (EIB) will change as we leave the European Union. The government is keen to maintain momentum, and in this context, is reviewing both its existing set of tools for supporting infrastructure finance, and the way they are delivered. 1.4 This review looks to the long-term, and will inform both the 2019 Spending Review and the National Infrastructure Strategy. The review is being led by HM Treasury, working with the Infrastructure and Projects Authority. It will be supported by an expert panel. The infrastructure finance market 1.5 Chapter 2 sets out the role of private investment in infrastructure. The UK has one of the world’s most developed private markets for infrastructure, with investment from both UK and international investors flowing into numerous sectors including transport, energy, water, and digital communications. This is supported by a sophisticated system of independent regulation and, more broadly, by the UK’s strong legal framework and the 1 ‘National Infrastructure and Construction Pipeline 2018’, Infrastructure and Projects Authority, December 2018. 3 expertise and advisory capabilities of the UK’s world-leading financial and professional services sectors. 1.6 The chapter goes on to outline the characteristics of existing sources of infrastructure finance, and the role of the EIB as a source of lending. Working alongside commercial investors, the EIB has been a source of long- term investment in UK infrastructure. The UK will leave the EIB when it ceases to be a member of the European Union, and under the terms of the Withdrawal Agreement, the UK’s €3.5 billion of paid-in capital will be returned, with the first €300 million instalment due in December 2019. The government is actively exploring options for a future relationship with the EIB Group, and these options will be explored as part of broader negotiations on the UK’s future relationship with the EU. 1.7 The chapter closes with an assessment of the future challenges for financing UK infrastructure. The UK has a strong track record of attracting investment and there remains significant ongoing appetite for infrastructure investment. Future challenges could include attracting finance to new, unproven technologies and large, complex projects, and ensuring a steady supply of finance during periods of adverse market conditions. Investment models and existing tools 1.8 Chapter 3 looks at the existing tools used to support investment in infrastructure. The government and independent regulators have created mechanisms to ensure stable and predictable revenues. These include the Regulated Asset Base model in water and energy networks, and Contracts for Difference auctions in renewable energy. These existing mechanisms are updated and refined periodically by government departments and regulators, and are not the focus of this review. However, the government is interested in stakeholders’ views on whether lessons from these existing tools could be applied in new contexts. 1.9 The government has also historically used private investment to deliver economic and social infrastructure projects through the PFI and PF2 models. At the Budget, the government announced it would no longer use PFI and PF2 models for new projects. Government will not be seeking a like-for-like replacement for these models. The government is open to exploring new ways to use private finance in government projects, but the benefits brought by private finance must outweigh the additional cost to the taxpayer of using private capital, and the government will not consider proposals demonstrating the same characteristics as PFI or PF2. 1.10 The chapter then sets out the role for government in supporting financing where it is in line with broader policy objectives and offers value for money for the taxpayer. The chapter describes the tools the government currently uses to support financing directly, including the UK Guarantees Scheme (UKGS) and co-investment funds for new technologies. The government is seeking views on whether, looking to the future, it should expand, reduce or change the use of these tools. 4 Governance 1.11 Chapter 4 explores the institutional options for delivering government support for infrastructure finance. Existing tools such as the UKGS and co- investment funds are delivered by the Infrastructure and Projects Authority, the government’s centre of expertise for infrastructure and major projects. In the National Infrastructure Assessment, the National Infrastructure Commission recommended that if access to the EIB is lost, the government should establish a new operationally independent institution (see Box 4A for the full recommendation). The House of Lords European Union Committee also recently recommended the government should consider the case for a new institution.2 The government is seeking views on whether reform of the existing institutional structure is needed, and the costs and