• Infrastructure
  • Real Assets

Re-imagining partnerships in infrastructure finance

While the shape of the UK’s future relationship with its European neighbours is still unclear, the question of how to finance infrastructure fit for the 21st century is equally pressing, argues Darryl Murphy.

3 minute read

a view of tower bridge

The vast scale of investment needed to make the UK’s transport, energy, social and telecoms infrastructure fit for purpose is certainly focusing minds. An infrastructure development pipeline worth £600 billion over the next ten years was set out in broad terms in late 2018.1 From improving resilience to climate change and providing data and power infrastructure, major sums are going to be required, with around half expected to be from the private sector.

However, although the UK has a long and innovative history of mobilising private capital, there is clearly no appetite to use established public private partnership (PPP) models from either the left or the right of the political spectrum. So, there is an immediate need for new tools and ideas to get projects over the line.

Public or private? What happens now?

funding mix in the pipeline 2018/19 to 2020/21 by sector (£bn)
UK Infrastructure & Projects Authority. As at 26 November 2018

Delivering tomorrow’s infrastructure needs

The first and most important consideration is that tomorrow’s infrastructure needs are very different to those financed before. The risks that come from financing data infrastructure with obsolescence risk or mega-power projects at a time of energy transition are clearly unlike those from low-risk utilities, like water. Many of the projects on the drawing board are large, do not have proven financing or funding models, nor will they generate stable, predictable cashflows from the outset – features that appeal to institutional investors. 

In the short term there is a need for short duration, high risk-bearing capital, which is typically not a comfortable fit for many European pension schemes and other institutional investors. With that in mind, there is clearly a need for be a new, independent body supporting government policy on infrastructure, providing early stage capital and ‘pump priming’ key technologies. With a public-service remit, and the intention of staying public, it could focus on the specific technologies that might bring positive socio-economic or environmental returns. Direct lending, using credit enhancements, or co-investing with a body like this might take some early-stage projects out of the starting blocks and to the point where institutional investors, and even the wider community, want to be involved. 

As an institutional investor, we are particularly interested in the scope for credit enhancement, through flexible guarantees that could address specific risks like complex construction or counterparty credit risk. Institutional debt investors mainly have appetite for investment-grade projects, particularly those investing to fund pensioners’ annuities. We believe using credit enhancement where there might be material illiquidity premia - say in single-A to BBB rated credits - could mobilise significant capital.

The equity element is also worth touching on, as up until now successive governments have not really been able to capture equity gains under the ‘old’ PPP-type models. Instead, there have been cases where private sector operators have carried the bulk of the risk, but also been able to take gains when operating performance has fallen short.

Getting this part right this might mean some real ‘win-wins’: for the government in delivering on its commitments; for private sector stakeholders, who could make a genuine contribution to enhancing assets and services; and for the public, the users. But for that to materialise, there needs to be greater clarity around what ‘success’ is and communicating the findings to the public.

The reality is that the outcomes achieved by many privately financed projects have not been regularly assessed before now, but until this happens it will be a challenge to demonstrate value for money has been achieved. That is why providing hard evidence supported by data must become an immediate priority for the infrastructure finance community. 

Evolution of future financing models

In terms of future model design, appetite for PPP is lacking but it appears the regulatory asset base (RAB) model - as used for financing the Thames Tideway Tunnel (TTT), London’s super-sewer - could play a more prominent role. There are important differences between the PPP and RAB models in terms of risk transfer and to date the RAB model has only been used for consumer funded investments.. Broadly, the RAB model can be used to define a broader risk allocation between a wide number of stakeholders which can reduce the overall cost of capital of the investment.

Ultimately, the model could be rolled out quite widely for large-scale projects where cost certainty is difficult. Developing automated signalling and train controls on live railways, carbon capture and storage, nuclear power and wider digital infrastructure are examples that come to mind.

The long-term challenge, of course, extends far beyond the current political malaise. Working through how the right institutional framework and a more appropriate alignment of incentives can draw the best-qualified stakeholders to the table should be a priority in one of the most advanced infrastructure markets in the world.  

A version of this article originally appeared in IPE Real Assets.


  1. Projects worth £600 billion in the pipeline as government gets Britain building. UK Infrastructure & Projects Authority. 26 November 2018


Related views

Important information


Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.