Infrastructure investment

- mind the gap?

Policy briefing

Key findings
Globally and in the UK, there is a significant backlog of infrastructure projects. These are critical in driving
growth and job creation, but in the wake of the financial crisis the capital to support such infrastructure
investment has been in short supply. The IFoA believes that the Government should consider the following
as key priorities to encourage increased investment that is sustainable:

• To develop a sustainable ‘pipeline’ of infrastructure projects so that this asset class can fit into a coherent,
long-term investment strategy.

• Policy should recognise that institutional investors differ from the public sector in how they perceive the
risks and returns associated with potential projects.

• Different types of infrastructure investment call for different approaches to issues such as financing,
regulation and risk management. This is demonstrated by the three case studies in this paper, on
renewable energy, transport and housing.

• Funding models should recognise that investors with greater risk appetites will tend to get involved in
projects at an earlier stage than investors who are more cautious.

• The National Infrastructure Commission represents a major opportunity to reverse decades of

underinvestment. It should have the status and authority to fulfil its aim to promote long term planning
and greater certainty for investors.

• The Government and the Prudential Regulation Authority should take full advantage of EU regulatory
changes to promote more infrastructure investment by insurance companies.

Future of
Investment
Policy
Informing the debate

1
Contents
Introduction - The infrastructure investment gap 3

The risk-reward trade off and capital efficiency 3

Infrastructure projects must be ‘bankable’ 4

The impact of Solvency II 4

UK Government strategy 4

- National Infrastructure Plan 4

- National Infrastructure Pipeline 5

- National Infrastructure Commission 5

The need for fresh and innovative public-private financing models 5

Case Studies

1. Securing our energy future/going low carbon – renewable energy 7

2. Becoming globally competitive – transport 9

3. Ensuring housing for a changing demographic – housing 11

Conclusions 13

References 14

2
Introduction
The infrastructure investment gap The risk-reward trade off and capital efficiency
Globally, there is a backlog of infrastructure projects that are Although infrastructure projects help to generate economic
critical in driving growth. The World Bank estimates that there growth, there is often simply a shortage of available capital
is a need for $3.7tn of infrastructure investment annually, to get them off the ground because that growth is only
whereas actual investment levels are only $2.7tni. in the future. In the years since the financial crisis, many
governments have faced a further constraint that they have
In the UK, a similar investment gap exists. According to had to consider whether funding infrastructure investment fits
Arcadisii, “(…) The UK is behind all other G7 members on into the wider context of austerity policies they are pursuing.
built asset wealth per capita, and has had a flat trajectory on Cuts to capital expenditure are easier to make than cuts that
investment share of GDP for several years since the financial will affect existing resources or services, and which will be felt
crisis of 2008.” immediately by voters. When economic conditions are tough
governments have less available capital and a harder challenge
So, why does this matter?
in selling higher taxes or user fees to the public, so the supply
Infrastructure investment is positively correlated with of public-private projects decreases. Even though there is
GDP growth and integral to supporting the UK economy.iii evidence that infrastructure development can promote growth
Well-functioning infrastructure provides support for the and job creation, governments may be forced to defer such
delivery of essential services such as energy and water, or for funding until the national balance sheet looks healthier.
moving goods in trade. With the UK’s existing infrastructure
Given governments’ capital constraints, although they may
becoming older, some of it well over a hundred years old,
be partially able to finance infrastructure projects they also
we are at risk of not being able to support our growing -
need to attract investment from the private sector. What then
and ageing - population. At a time when populations are
prevents private investors from viewing infrastructure as an
also expanding globally, with the rise of the Asian and Latin
attractive asset class in which to invest? One possible reason
American economies, we are further at risk of becoming
is that many large infrastructure projects do not get off the
globally uncompetitive. Over the longer term, the effects
ground because government and institutional investors have
of climate change could also have a major impact on the
a different perception of the risks and returns associated with
availability of energy and natural resources, particularly water.
these kinds of projects.
Against this background, investing in infrastructure
A government’s return thresholds might be lower than private
represents an opportunity to re-engineer the UK’s delivery
sector thresholds for viable infrastructure investments.
and consumption of these and other essential resources and
However, the government does not have unlimited capacity to
services, putting the adoption of new technologies at the heart
finance projects at low costs of capital, since its cost of funding
of the debate. However, in the wake of the financial crisis and
can become considerably higher in certain circumstances.
economic stagnation, the capital to support such infrastructure
Such a government might therefore choose to seek a
investment is in short supply. The UK Government, private and
reasonable amount of private sector financing to support overall
institutional investors, and UK citizens, alike all face difficult
infrastructure needs, but it should only do so with a realistic
questions and choices.
attitude that recognises that in order to invest, the private sector
will need to be able to achieve a reasonable return on capital.

Many large infrastructure projects do not get off the ground

because government and institutional investors have a
different perception of the risks and returns associated with
these kinds of projects

3
Infrastructure projects must be ‘bankable’
Two other reasons may exist for lack of private investment policyholders. The Prudential Regulation Authority (PRA) has
appetite. First, for many investors it is important to have a suggested that this could encourage larger asset allocations to
sustainable ‘pipeline’ of infrastructure projects so that this asset infrastructure and other alternative asset classes.vi
class can fit into a coherent, long-term investment strategy.
The IFoA believes that the UK Government and the PRA
Second, investors are more likely to commit funds to a project should take full advantage of regulatory changes at the
if it is ‘bankable’. This can be defined as having accurate, up European level to promote more infrastructure investment by
to date, sufficient and wide-ranging information and analysis insurance companies. In particular, they could consider the
to allow investors to commit funds to a project. Before they scope to relax liquidity requirements. These are appropriate
commit resources to their own due diligence assessments, for short-term investments but infrastructure investments are
potential financers – banks or companies – need to see generally long term in nature and realistic investors would not
evidence of a project’s feasibility. This is not just in narrow demand the same level of liquidity. We recognise that liquidity
financial terms but also in terms of social, economic, technical, risk must be managed appropriately, but the need for more
environmental and administrative factorsiv. There should investment means that differential treatment for infrastructure
also be a clear sense of the project’s purpose and objectives. is reasonable in our view.
Project proposals are often of limited use because of outdated
information or lack of analysis UK Government Strategy
National Infrastructure Plan
The impact of Solvency II
In its 2014 vii National Infrastructure Plan, the previous
Regulatory issues also have an impact on infrastructure
Government announced ambitions to increase infrastructure
investment. In the wake of the financial crisis, there was a drive
investment. From 2015-16 until 2020-21, there is planned
toward financial institutions, particularly banks, holding greater
spending of £411bn across the public and private sectors,
capital reserves to ensure that they would be able to better
with the Government pointing to an increase in overall
withstand any future economic shocks. Broadly welcomed
economic activity of £2.84 for every £1 spent on infrastructure
across the financial services sector, this nevertheless raised
construction.viii
concerns that the introduction of the Solvency II regime for
insurers could severely hamper their ability to take investment A key reason for the Government to seek private sector
risk. However, the Matching Adjustment under Solvency II helps involvement in infrastructure is the scale of the largest projects.
insurers to invest in social infrastructure projects such as power The Government may believe that a project is in the national
stations, housing and hospitals, as it actively promotes long- interest, and may even prefer it to be publically funded, but the
term investment in growth and infrastructure. required level of funds may simply not be feasible within its
fiscal strategy.
In September 2015 the European Insurance and Occupational
Pensions Authority (EIOPA) published advice proposing a The National Infrastructure Plan explains some of the principles
separate asset class to capture high quality infrastructure behind the Government’s priorities, such as the balance between
under the Solvency II standard formula.v This approach should public and private funding. It cites the potential to achieve value
encourage increased infrastructure investment by reducing risk for money as a driver for publicly funding certain areas, including
charges for qualifying investments in both equity and debt. roads, rail and science. In other areas the Government believes
that competition can achieve greater efficiency, and so private
Solvency II also introduces a ‘Prudent Person Principle’ for
sector funding is preferred for areas such as water, telecoms,
insurance company investment, which removes restrictions on
and electricity and gas networks. In some areas such as flood
investments provided they are prudent and in the interests of
defences a mixed funding model is used.

The IFoA believes that the UK Government and the PRA

should take full advantage of regulatory changes at the
European level to promote more infrastructure investment
by insurance companies

4
National Infrastructure Pipeline National Infrastructure Commission
The planned breakdown of funding between public and private In October 2015 the Government announced the establishment
sectors in the National Infrastructure Pipeline is shown below of an independent National Infrastructure Commission (NIC)
and demonstrates the crucial role of the private sector. to set national priorities for infrastructure projects. In his
In terms of industry sectors, energy accounts for around 60% initial comments the incoming Chair Lord Adonis said the
of the Pipeline, while transport accounts for around 30% Commission would focus on building political consensus on the
(and for the majority of the individual projects). country’s long-term infrastructure needs. The NIC will set out
an integrated 5-year assessment of the country’s infrastructure
UK National Infrastructure Pipeline, 2015-2021: needs at the start of each Parliament, in the context of a 30
sources of funding year outlook. The Government intends that these 5-yearly
70 infrastructure reports “will help promote forward planning and
timely investment decisions, and provide greater certainty
60 for investors”.

50
The need for fresh and innovative public-
40 private financing models

30
The complexity of infrastructure finance brings opportunities to
innovate. New, more efficient financing structures can reduce
20 the risks faced by investors. There is a clear market demand
for such structures: for example, in a recent articleix the Chief
10 Executive of the Pensions Infrastructure Platform notes that
there are too many ‘greenfield’ projects with relatively high
0
Public Private Mixed risk profiles in the government’s pipeline, and the PIP wants to
see “more government projects structured in such a way that
sufficient risk is mitigated to make the projects an appealing
The second chart1 shows the planned sector breakdown of
investment opportunity for pension fund investors.”
the Pipeline and the split between public, private and mixed
funding for each sector. By far the greatest planned spending Debt investment generally provides 80-90% of the capital
coming purely from the private sector is in energy, with for infrastructure projectsx with the rest coming from equity.
approximately £220bn over the 2015-2021 period. Water is next This balance may reflect that relatively fewer investors will be
largest (£26bn), followed by Communications and Transport comfortable with the greater risks and uncertainties associated
(each around £6bn). Turning to public-private partnerships, with equity. It may also be a reflection of the type of financing
the greatest planned spending is in transport (around £30bn), balance that infrastructure projects and companies are seeking.
followed by energy (around £10bn) and flood (£3.5bn).

NIPP July 2015

(2015 - 16 onwards) £411.0 bn

Water £25.7 bn

Waste £1.1 bn

Transport £127.4 bn

Science and research £1.4 bn

Flood £3.5 bn

Energy £244.9 bn

Communications £7.0 bn

0% 20% 40% 60% 80% 100%

Private Public / private Public

1 National Infrastructure Pipeline Factsheet July 2015

https://www.gov.uk/government/publications/national-infrastructure-pipeline-july-2015/national-infrastructure-pipeline-factsheet-july-2015

5
Although equity investment is a fairly small proportion of the One of the guide’s key themes will be to emphasise the need
total, this tranche of finance is crucial because it plays a bigger for good quality information when making the case for a
role at the early stages that determine whether a project will particular project. For example, potential investors could be
go ahead. As we note in the case study on renewable energy, given access to the sponsors’ risk assessments. The onus
investors with greater risk appetites will tend to get involved should not be just on the sponsors to provide information,
in projects at an earlier stage than investors who are more but also on investors to maximise their income by being alert to
cautious. We believe that UK Government policy should take opportunities to enhance the asset during the project lifetime.
this into account by designing equity-based structures to target As S&P comment, there should also be enough publicly
the types of investor vehicles that dominate in the initial stages available information on projects to avoid having a two-tier
of a project. market between private lenders and institutional investors.

Similarly, debt-based approaches could be tailored to the Actuaries are well-placed to contribute to efforts to bridge
construction and operational phases of projects. The ratings the infrastructure investment gaps, especially in relation to
agency Standard and Poor’s (S&P) has identified xi 10 factors Public Private Partnerships. Actuaries have the relevant skills
it thinks would unlock long-term infrastructure investment to identify, analyse, measure and mitigate the risks faced
and develop project bond markets. These include having by potential private sector investors, and have developed
standardised financing structures which are nevertheless techniques (some described in this paper) that have already
flexible enough to accommodate specific deals. Interestingly, been successfully applied to infrastructure. Much actuarial
S&P suggest that the UK’s PPP and PFI project bond markets work is concerned with long-term projections, while investors
could be a model for rolling this out across Europe. Another of in infrastructure will often have a 20 or 30 year time horizon.
S&P’s recommendations is putting in place a construction credit Actuaries work for, or advise many of the biggest potential
support package, for example an unconditional letter of credit infrastructure investors, such as life insurers and pension funds,
from a financial institution to cover, e.g. the replacement costs and therefore understand these institutions’ requirements.
from a failed contractor.
As the following three case studies illustrate, different types
Sponsors’ and investors’ perceptions of project risks are of infrastructure investment call for different approaches.
almost as important as the risks themselves, and here there For example, on renewable energy we discuss how a Danish
are opportunities for innovation to make information more wind farm has been financed using a ‘co-mingled’ investment
transparent, so that perceptions are more realistic and less platform in which the construction company and a private
exaggerated. The IFoA has been working with the Institution equity fund jointly own the equity. Similarly, on transport we
of Civil Engineers on a guide to ‘front-end thinking’ (previous discuss the social cost-benefit analysis, which is a means of
collaborations include RAMP, which is discussed later). translating the non-financial issues affecting major construction
projects into more quantifiable terms. Finally, on housing we
refer to research highlighting the potential benefits of easing
regulatory restrictions on investment in affordable housing.

Sponsors’ and investors’ perceptions of project risks are

almost as important as the risks themselves

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Renewable energy
Case study 1

Securing our energy future/going low carbon

As populations expand, the demand for energy is increasing. In order for insurance companies and pension funds to source
This, combined with the Government’s commitment to ‘bankable’ assets, it may be necessary to adopt a flexible
becoming low carbon by 2020, means that the Government is approach to the provision of finance. Recent years have
calling on pension funds and life companies to invest in new, seen asset prices being bid-up, as many investors crowd into
renewable technologies. the sector. Those investors who are able to adopt a nimble
investment process may find that they are able to remain
In 2003, the proportion of UK energy supply coming from involved in negotiations for assets. For example, commercial
renewable sources such as wind and solar was only 3%. banks are traditionally in the business of structuring loans on
By 2014 this had grown to 18%. The Government’s target flexible terms, and institutional investors could perhaps allocate
by 2030 is 27%, suggesting continued rapid growth and funds/finance with flexible draw-down terms as and when the
investment opportunities over the next few years. project needs to purchase equipment and pay for services; this
would aid the project to lower financing expenditures.
Some of the growth to date has been encouraged by
Government subsidies, but this is a double-edged sword
because the subsidies are not guaranteed for the long term. Renewable energy case study
Money is often available for new incentives but stops when
they are no longer new – for example feed-in tariffs for solar Jädraås Wind Onshore Windfarm is an interesting example
power providers were reduced in April 2015. The risk of this of innovative finance because it contains many elements
happening can discourage investment. often cited by institutional investors as pre-requisites for
infrastructure investment, more specifically, renewable
The Government will introduce a new regulatory regime energy projects. These elements are:
called Contracts for Difference by 2017. Under this scheme the
Government will pay renewable providers the additional cost of 1. Cross-border jurisdictions
the technology over and above the wholesale electricity price. 2. Electricity certificate 1 scheme which supports the revenue
This will continue for 15 years, giving providers more stable
returns and therefore leading to more stability for investors in 3. Exports credit guarantees
the sector. 3.1 Supported the economy through exports of
manufactured goods,
It seems that some regulatory constraints, such as the Matching
Adjustment under the Solvency II regime, have been alleviated 3.2 Enabled the purchase of debt securities by an
from an infrastructure viewpoint. This is in part due to EIOPA institutional investor, by acting as insurer of last
consultation with the insurance industry, but another major resort should the project fail to pay on schedule.
factor is the requests from and need of governments for
institutional money to finance infrastructure projects and It is also an example of a mid-sized pension fund with
emission and energy targets. As such, and given this proposed €13bn of asset under management, which has an
new role for insurance companies and pension funds, it seems articulated investment strategy into renewable energy.
wise for the actuarial profession to pay especially close A co-mingled investment platform was used. We have
attention to the potential pitfalls and possible rewards from chosen to use a mid-sized pension fund as an example, as
providing institutional financing towards these infrastructure opposed to the larger institutional investors, as this will be
development goals. of interest to a greater number of midsized investors who
could replicate or benefit from this investment process.

The principle of ”electricity certificates”, (ECs) is different to feed-in-tariffs [in which the producer receives additional revenue per kWh of electricity generated];
1

under the EC scheme, producers of renewable energy receive ECs from the government per kWh of electricity generated from renewable sources. If a producer at
year-end-audit fails to display ECs in proportion to electricity sold (ie. ECs are linked to revenue), then the producer is financially penalised. ECs are structured to be a
penalty for not producing electricity from renewable energy sources, as opposed to a payment which positively subsidises generation from renewable energy sources.

7
 The co-mingled platform organises the development, Asset Allocation: Thanks to the export-credit guarantee of
construction, operational and investment process by the loan provided by the pension fund to the project SPV,
collaborating with site developers and project sponsors: the pension fund was able to allocate the EUR120mn loan as
a sovereign asset as the loan was effectively AAA-rated and
• Site developer: perform site survey, planning permission. backed by the Kingdom of Denmark. This is interesting, as
• Project sponsors: purchase the project from site developer, pension funds may have a proportionally smaller allocation of
and own it via equity. In this case, a private equity fund, and assets to the alternative asset class, under which renewable
the construction company are co-project sponsors. energy and infrastructure investments may often fall.
• Special Purpose Vehicle (SPV): set up by the project Merchant Revenue and Revenue Risk: Merchant revenue is a
sponsors. The project SPV takes on both revenue and costs market-based revenue. The Scandinavian electricity markets
(capital, operational, and financing costs). are liberalised, and project revenue is therefore exposed to
• Financial arranger: commercial bank arranging the market fluctuations of the price of electricity. In this case,
transaction, and which also provided the loan. the revenue risk was mitigated through entering hedging
contracts.
• Loans: provided both by a mid-sized pension fund and by a
second commercial bank. Decommissioning costs are comparatively low at €1.6 per kW;
likewise decommissioning risks are low.

In order for insurance companies and pension funds to

source ‘bankable’ assets, it may be necessary to adopt a
flexible approach to the provision of finance

8
Transport
Case study 2

Becoming globally competitive

Transport is the second largest sector (after energy) in the in rolling stock by the train and freight operating companies.
National Infrastructure Pipeline, and the largest in terms of On the roads side, the Government is seeking match funding
individual project numbers. from industry to develop technology for Ultra Low Emission
Vehicles (ULEVs), and in 2014 the Highways Agency appointed
The Government’s flagship rail project, High Speed 2 (HS2), 26 companies to a Collaborative Delivery Framework to carry
aims to connect 8 of the UK’s 10 largest cities and improve out design, engineering and construction work on major
capacity and journey times. The experience of seeking private strategic roads.
finance for High Speed 1, the rail link between the Channel
Tunnel and London, was that the private sector could not raise An interesting longer-term development is the evolution of
enough money and the Government had to issue bonds to autonomous vehicles. In February 2015 the Department of
finance the work. In the case of HS2, the Government intends Transport published a major report xiii which cites a number of
this to be publicly funded because of the size and complexity potential advantages of such vehicles, including mobility for
of the project, although there may be limited private sector more of the population, greater productivity, reduced emissions
involvement, for example in financing the building of new and congestion, and ultimately better road safety.
stations.xii
The development of driverless cars at a significant scale
Turning to roads, forecasts suggest population and GDP growth would require major infrastructure, including sophisticated
will lead to major increases in volume of traffic in the coming ‘collaborative’ IT systems and networks of electric charging
years. The Government’s strategy is therefore to increase road points. If the report’s assumptions are correct, the relatively
capacity and reduce congestion. The National Infrastructure relaxed regulatory environment in the UK will attract major
Plan includes £15bn proposed investment from public funds in investment in developing these technologies by manufacturers
road improvements which will create 1,300 new lane miles over and testing organisations over the next few years. These
the current Parliament. The Government’s priority for roads is companies will seek access to finance. There are many potential
the Strategic Road Network, which represents only 2.4% of all risks for investors: technological problems, legal issues,
roads in England but carries a third of cars and two thirds of uncertainty about future demand for driverless vehicles, and
HGV traffic. ethical concerns around potentially allowing those vehicles
to ‘make’ life-or-death decisions in accident situations.
Most investment in both rail and road is publicly funded, Manufacturers will carry out risk audits but there will also be a
reflecting the limited scope to achieve efficiency through need for independent audit, and we believe that actuaries could
competition. However, the private sector accounts for nearly a play a role in this by researching, analysing and assessing
third of the proposed transport spending, mostly through PPPs. these risks.
Examples of private sector finance include ongoing investment

A typical route into infrastructure investment is listed

debt ... this could be an attractive option for investors in
current initiatives like ULEVs or indeed driverless cars in
the future

9
A typical route into infrastructure investment is listed debt, One of the distinguishing features of RAMP is that it focuses on
and according to the IFoA’s Working Party on Non-traditional quantifying the financial impact of risks wherever possible.
Investments xiv this could be an attractive option for investors For example, the RAMP framework includes a description of the
in current initiatives like ULEVs or indeed driverless cars in the social cost-benefit analysis. A traditional cost-benefit analysis
future. The Working Party notes that such listed debt generally captures projected cost and revenue cash flows for a project
has an investment grade rating. The rating is usually given early under a range of scenarios. In a social cost-benefit analysis
on, at the construction phase, but it doesn’t usually change. non-financial impacts can be imported into the analysis by
However, default rates are higher during construction and into converting them into monetary values. An example relevant
the first year or two of operations, so projects that survive to the transport arena might be reduced congestion on local
past that stage may have a stronger underlying credit rating minor roads resulting from additional lane capacity on the
than the ‘official’ one. This could make the debt attractive for Strategic Road Network.
investors in the operational phase.
There is a close connection – which the Government
Risk Analysis and Management for Projects acknowledges - between transport infrastructure and major
housing developments. In a recent consultation paper ,xv
(RAMP)
Transport for London argues that Crossrail 2 could stimulate
As mentioned in the previous section, the IFoA and the house building in areas with poor transport links, which would
Institution of Civil Engineers have collaborated to develop a lead to regeneration of the local economy. It points to evidence
methodology known as RAMP (Risk Analysis and Management that merely the expectation of future benefits from Crossrail 1
for Projects), which provides a framework for analysing and has led to significant housing developments. We now look at
managing project risk to promote better decision-making housing in more detail.
and greater likelihood of success. RAMP is an example of how
actuarial risk management techniques can be of practical
benefit to investors in assessing potential infrastructure
investments. This framework is in fact already used by Crossrail
in its risk-management process.

10
Housing
Case study 3

Ensuring housing for a changing demographic

According to the ONS, around 230,000 new homes need to In 2015 Legal & General formed a partnership with Dutch asset
be built each year in England to meet future demand (without manager PGGM to construct affordable accommodation for
addressing a large historic backlog), but only 137,000 have the rental market xviii. The rental income will be available to
been built on average over the last 10 years xvi. A significant institutional investors as an asset class, aiming to offer high
increase in construction is needed to meet future demand and income security and diversification.
to plug the historic gap. The National Infrastructure Plan does
not devote a specific chapter to housing, unlike energy, roads, Should the public or the private sector be in the vanguard of
rail, water, flooding and communications. This is because the devising credible housing infrastructure projects and financing
UK Government does not classify housing as infrastructure, structures? The Housing Forum, a membership network of
even though most other European countries do. One view is private and public sector UK housing organisations, argues
that this approach leads the Government to give less priority to that this is a Government role, citing examples from France,
housing, which explains the size of the investment shortfall and Germany and Scandinavia of institutions which are “essentially
the lack of private investment in the sector. xvii state investment banks which invest in long-term projects of
‘public good’ such as infrastructure and affordable housing. xix
The reason for the Government’s position may be that to build They are better able to assess both the borrower and the
homes which are then sold on to individuals is a short-term project. However, they are also technically expert and are
business model; it does not meet the expectations of most able to advise developers using their in-house teams.” What
infrastructure investors who are seeking a secure and regular the Housing Forum proposes goes well beyond the National
income stream over many years. However, it is possible to Infrastructure Commission’s role, which will be largely advisory.
convert the sale proceeds of the new housing stock into a more Their proposal for ‘state investment banks’ would be radical in
typical infrastructure income stream. For example, a simplified terms of UK political culture, but it does highlight the challenge
structure for an institutional investor could look like this: of attracting sufficient private sector investment to meet the
UK’s housing needs.

Interest +
Sale proceeds Loan
principal

Investor Families Mortgage

(e.g. large Developer and lender
pension fund) individuals (bank etc)

Creation of
Capital Repayments
housing assets

The IFoA would urge the Government to focus on making

the regulatory environment supportive to housing
associations given that they build the great majority of
affordable homes

11
So what is the Government actually proposing? housing market, representing around a third of all current
When launching its National Infrastructure Plan in December construction. Housing associations build the great majority
2014, the Coalition Government announced £2bn of spending of affordable homes (although there is some evidence of
on housing until 2020. In its November 2015 Spending Review, interest from other players including insurance companies like
the Government announced a doubling of its housing budget Prudential) xx, but according to think tank Policy Exchange they
over the current Parliament, to deliver at least 400,000 have the capacity to double the level of building, which would
affordable homes including 200,000 Starter Homes, 135,000 help to clear long local authority waiting lists for social housing.
new Help to Buy Shared Ownership homes and 10,000 Rent to Policy Exchange argues that the reason housing associations
Buy homes. The Government will also release enough public are not doing this is that they face restrictions in the way they
sector land for 160,000 homes, and provide £310 million of can invest capital, and lack access to cheap debt finance.
funding to deliver 15,000 homes at Ebbsfleet, the first garden The IFoA would urge the Government to focus on making the
city in the UK for over 100 years. regulatory environment supportive to housing associations
given that they build the great majority of affordable homes.
In order to build the planned 200,000 Starter Homes, the
Government will pay house builders £2.3bn over the next Any long term approach to meeting national housing priorities
five years. The government funding will allow the builders to must engage with a range of political issues, including the
provide at least a 20% discount on these new homes, which will consequences of an ageing population. This is one of the IFoA’s
only be available to first-time buyers under 40. By providing policy priorities, and in particular we have made important
subsidies up front rather than when homes are sold, the contributions and continue to be engaged in policy on the
Government is likely to increase participation in the scheme funding of long term care, including the degree to which it is
by developers. necessary or desirable for individuals to sell their homes when
they need residential care. The ageing population also suggests
Starter Homes will fall into the category of ‘affordable homes’ – increased demand for care and nursing home accommodation.
housing which is available to rent or buy at below-market rates.
Affordable homes are an important component of the overall

12
Conclusions
The IFoA welcomes the UK Government’s recent actions competence in what is a new sector to many, and matching
to encourage private sector infrastructure investment. The policy initiatives to the specific circumstances of each subsector
National Infrastructure Commission in particular represents of the infrastructure market. We have examined how some of
a major opportunity to reverse decades of underinvestment, these issues affect three of those subsectors: renewable energy,
and to make good on the commitments in the National transport and housing.
Infrastructure Plan and Pipeline. The IFoA believes that the
Commission will help to reduce uncertainty for investors We have highlighted some of the contributions that actuaries
and thus increase investment in infrastructure. To make a can make in this area. Actuaries are risk management
significant impact, however, we think the Commission will need specialists whose work typically demands a long term
to establish a reputation for setting clear priorities that the perspective. We have the skills to innovate new tools and
Government acts on - and that will take time. techniques that address the infrastructure investment gap.
Actuaries also work for or advise many of the biggest potential
The IFoA believes that the Government and the Commission infrastructure investors, such as life insurers and pension
need to attack some of the deep-set issues that underlie the funds. In short, the actuarial profession is willing and able to
investment gap, such as the ‘true’ cost of capital between the play a growing role in helping to solve the problems we have
public and private sectors, building investor confidence and discussed in this paper.

The actuarial profession is willing and able to play a

growing role in helping to solve the problems we have
discussed in this paper

13
References
i http://www.ft.com/cms/s/0/0ac1a45e-86c8-11e5-90de-f44762bf9896.html#axzz3uIPpeYRb

ii Arcadis, page 16 of https://www.arcadis.com/media/8/1/D/%7B81DC63EB-831F-41F3-BB8E-542031D8E3A6%7D9385_Global%20Built%20Asset%20

Wealth%20Index%202015%20UPDATED%20WEB.pdf

iii Ibid page 16

iv http://www.engineers.org.uk/content/improving-bankability-infrastructure-projects

v https://eiopa.europa.eu/Publications/Consultations/EIOPA-BoS-15-223%20Final%20Report%20Advice%20infrastructure.pdf

vi At an industry forum in October 2015

vii National Infrastructure Plan 2014 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/381884/2902895_

NationalInfrastructurePlan2014_acc.pdf

viii https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/381884/2902895_NationalInfrastructurePlan2014_acc.pdf p16

ix http://www.pensions-expert.com/Comment-Analysis/Time-for-more-infrastructure-incentives?ct=true

x IFoA Non-traditional Investments Working Party paper, January 2015 http://www.actuaries.org.uk/news-and-insights/news/new-research-benefits-and-

challenges-insurers-considering-non-traditional p35

xi http://www.engagedinvestor.co.uk/Journals/2013/10/22/d/p/m/How-To-Unlock-Long-Term-Investment-In-EMEA-Infrastructure_Oct2013.pdf

xii https://infrastructurepunk.wordpress.com/2014/04/24/hs2-dont-expect-the-private-sector-to-pay-up/

xiii https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/401562/pathway-driverless-cars-summary.pdf

xiv IFoA Non-traditional Investments Working Party paper, January 2015 http://www.actuaries.org.uk/news-and-insights/news/new-research-benefits-and-
challenges-insurers-considering-non-traditional p37-38

xv https://consultations.tfl.gov.uk/crossrail2/october2015/user_uploads/g8.pdf - p17

xvi http://www.policyexchange.org.uk/images/publications/freeing%20housing%20associations.pdf p5

xvii http://www.theguardian.com/housing-network/editors-blog/2014/jan/31/affordable-housing-infrastructure-investment

xviii http://www.moneymarketing.co.uk/lg-enters-600m-build-to-rent-deal-to-pay-pensions/?cmpid=pmalert_1979094&utm_medium=email&utm_
source=newsletter&utm_campaign=mm_daily_news

xix http://www.housingforum.org.uk/resources/influencing/housing-forum-reports/the-abc-of-housing-growth-and-infrastructure---january-2014

xx http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10597339/Prudential-plans-1000-new-UK-homes.html

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