Warning issued over investors’ ability to make decisions on UK infrastructure investment

Academics say advice given to the UK government on its infrastructure strategy is hindering decision-making for institutional investors.

The academics, who are connected to the Edhec Business School in Paris, warned that pensions could be put at risk owing to issues such as a “lack of financial assessment” to do with climate resilience of infrastructure.

They said this did not help in decision making and “in particular does not provide a precise incentive for investment in infrastructure resilience”. 

This and other doubts are voiced after the UK National Infrastructure Commission (NIC) – which advises UK government about infrastructure investment and management – published a second set of recommendations for the government’s infrastructure strategy on October 18.

By NIC’s reckoning, private sector investment in UK infrastructure needs will have to increase from around £30 billion to £40 billion over the last decade, to up to £50 billion in the 2030s and 2040s. 

But the Edhec Infrastructure & Private Asset Research Institute, the specific group responding to the report, said the conclusions and recommendations of the NIC assessment were “neither adequate nor realistic”.

NIC’s assessment specifically focuses on the climate resilience of infrastructure and its contribution to the decarbonised economy.

The academics agreed with the NIC on the importance of the electrification of the economy – but they have “serious doubts” on the assumptions and recommendations made to achieve it.

NIC did not highlight the risks to the climate and the environment that are posed by the acceleration to end thermal energy versus the increase in the carbon-intense manufacturing of electric vehicles, said the critics.

Similarly, the critics said there was no guarantee of supply for renewable electricity and referred to a Edhec report published in 2022, which they said showed that the conditions for a sustained expansion of investment in renewable energy in the UK were “not met anymore and that regulation is increasingly failing to support the price stability that the sector needs”.

Other issues for Edhec were to do with infrastructure resilience to, for example, flooding – but the NIC report did not provide sufficient information on the consequences of physical climate risks like this, according to the academics. 

Edhec said the NIC had used “vague formulas that are intended to please all stakeholders” and had praised the virtues of competition over the direct regulation of prices, before insisting on their limitations. 

The report fails to highlight that the climate transition, the improvement of the resilience of infrastructure, and the preservation of natural resources, will involve considerable “destruction of capital” and reorientation of investments that can only increase the cost of capital of investors. 

The NIC did not highlight that the alignment of the UK economy, and of infrastructure in particular, will have negative financial consequences on households, whether it involves financing infrastructure through public taxes or indirectly through the tariffs of infrastructure services, said Edhec. 

“These considerations, which should be at the heart of any public policy on the topic, are notably absent and make for poor advice to the British government.”

NIC said that its second assessment includes “probably the most comprehensive assessment yet of the infrastructure costs associated with supporting regional growth and reaching net zero”.

NIC said government must be frank with tax-payers about the costs of infrastructure.

“While there’s no doubt that the Commission [NIC] is recommending significant changes to upgrade the country’s infrastructure, they have all been costed in line with government’s guideline for public investment. What’s more, making these investments now should lead to permanently lower infrastructure costs for households,” said NIC.

© 2023 funds europe

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