Allianz.com: Allianz has invested in several infrastructure assets in the UK. What makes it such a favorable location for investment?
Christian Fingerle: Decades ago, the UK Government recognized that private sector capital was key to helping build and maintain the country’s infrastructure. Today, the private sector represents a crucial source of capital for financing infrastructure projects.
The stable and transparent legal system, regulatory framework and tax regime all serve to induce international infrastructure investors to invest in the UK. Its good reputation will continue to help the country attract capital under competitive conditions.
Ultimately, that benefits its citizens and taxpayers. We view the UK as a primary market for infrastructure investment and have therefore made three investments in the country so far.
What are key elements of the framework you mentioned?
Over time, the UK has developed a well-tested contractual framework (often referred to as PFI, Private Finance Initiative) for the delivery of PPPs. A PFI provides clear allocation of responsibilities and risks between the various stakeholders.
By establishing common standards for the financing of PPPs, a PFI facilitates the efficient and competitive procurement of PPPs, making it possible for investors to develop economies of scale in pursing such investment opportunities. In March 2014, the total capital value of current PFI deals exceeded GBP 56 billion.
In 2010, the UK Government introduced the National Infrastructure Plan (NIP), which outlines its strategic objectives and identifies 40 priority investments vital to the future of economic growth. The NIP sent a strong message to investors that infrastructure is going to be a top priority for the next ten years and even beyond.
The NIP gives investors like Allianz a transparent and clear insight into the UK’s future project pipeline and funding requirements. Since they can rely on the assumption that these projects will ultimately be delivered, investors are able to commit the necessary resources to develop these investment opportunities.
This is a very important factor because, in many other countries, investors can’t be confident that such projects will actually be realized. Our investment in London’s Tideway Tunnel is an example of such a top priority project.
While in some countries PPPs have been regarded with skepticism, they seem to have a generally positive perception in the UK. Why is that?
People in the UK generally understand that the private sector financing of public sector infrastructure offers value for money. In many countries, however, public opinion remains a potential hurdle to the more widespread development of PPPs.
For instance, people often become skeptical if just one of their country’s PPPs has failed in the past. Others are fearful that privately or foreign-controlled national and essential infrastructure assets won’t take the well-being of the nation’s citizens into account. Some argue that their governments are able to carry out such projects more economically than the private sector.
In general, it is these kinds of negative public-perception issues that slow down the development of PPPs in other countries. However, it is also fair to say that there are skeptical voices in the UK as well, though to a lesser extent than in other jurisdictions.
What are the advantages of PPPs?
PPPs have several benefits. One is that financing public infrastructure through private investors not only addresses the funding issue, but also transfers risk from the public sector to private investors.
In addition, execution is often better under private ownership. Projects carried out by PPPs are more likely to be delivered on time and within budget than government-funded projects. That’s because private investors bear the costs when the projects don’t perform as planned and government officials do not.
One of the most interesting projects in recent times is the aforementioned Tideway Tunnel. London’s sewage system currently lacks the capacity needed for a modern city of its size.
The investment needed for the tunnel was considered to be too large and complex for Thames Water to finance alone. With this investment, we are partnering with the UK Government and effectively supporting a financing gap.
Allianz has joined a consortium to provide private sector financing for the project. It is one of the largest infrastructure projects in the UK over the next decade – with an investment volume of over three billion GBP to be met by our consortium. An innovative procurement method, combined with the current low interest rate environment has contributed to significant cost savings for the entire project, substantially reducing the contributions expected from the end consumer.
What can other countries learn from the UK?
First, it is important to develop a reliable framework that establishes clear principles of how stakeholders will interact with each other and how risks will be allocated to the various parties. Such frameworks increase the efficiency in procuring PPPs tremendously.
Second, governments should clearly define their investment priorities and develop a long-term investment plan that allows all market participants to properly prepare for these projects while removing policy uncertainty.
Third, PPPs are only able to thrive in an environment where there are clear benefits to the public and where a positive perception in the public prevails. Finally, governments need to be aware that success does not happen overnight. It takes years of hard work and conviction to earn the trust of all the stakeholders involved.
(Text: Stefanie Rupp-Menedetter)