28 May 2012
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CBI: govt should underwrite infrastructure investment

Public sector funds should be used to underwrite infrastructure investment by the private sector to help kick-start projects, a report by the Confederation of British Industry recommends.

The report, An offer they shouldn’t refuse: attracting investment to UK infrastructure claims that the quality of the UK’s infrastructure has fallen to 28th in the world, behind countries including China, Germany, Czech Republic and identifies several measures that could raise up to £250 bn of investment to modernise it.

The business lobby group wants the government to provide “credit enhancement” for infrastructure, such as putting up a minority share of project funding but placing itself lower in the list of creditors should the project run at a loss. Other suggestions include capital allowances and tax credits.

The news follows an apparent policy shift from the Deputy Prime Minister Nick Clegg, when he said the government would offer financial guarantees to developers of infrastructure and housing projects as part of a plan to drive growth in the economy.

Clegg told the Financial Times it was the government’s “absolute priority” to use its own balance sheet to inject credit into the economy. It is thought that the government would guarantee the ridk for specific projects, enabling the private sector to raise finance more cheaply.

The policy, which the FT reports was agreed by senior ministers, including the prime minister, earlier this month, would see the government’s contingent liability only become a debt if the guarantee was ever called in.

KPMG economist Richard Threlfall told Building magazine the approach could make borrowing 2-3% cheaper for investors.

Other recommendations in the CBI report include: targeting specific projects to enhance their credit rating, making them more attractive to investors and pooling pension funds beyond the Pension Infrastructure Platform (PIP).

CBI director general John Cridland said: “Infrastructure spending offers the UK the elusive boost we are all seeking. Business has been disappointed that we haven’t made more headway in the past six months, and hopes that this report will act as a catalyst.

“The government must make smarter use of limited public finances. By underwriting and lifting the credit rating of certain infrastructure assets, it can make them less risky and more attractive to investors.”

But the government must also produce a set of priorities in key areas such as roads and aviation, one economist told Building Design magazine: “There’s a complete policy vacuum in some major areas ...In transport there is not a very clear set of objectives and policies that the government has set out. That vacuum is a major problem for investors.”