UK Budget: role for private finance in infrastructure delivery remains unclear

Jonathan Hart of Pinsent Masons, who specialises in infrastructure project finance, was commenting after UK chancellor Rachel Reeves made a series of funding pledges for new infrastructure in the Budget on Wednesday.

Delivering new infrastructure faster is at the heart of the government’s plans to get the UK economy growing. Among other things, it has committed to: deliver 1.5 million new homes before the next general election due in 2029; improve school buildings and build new, and modernise existing, hospitals; make the UK a clean energy superpower, by scaling up renewable energy generation capacity and supporting carbon capture usage and storage (CCUS) and green hydrogen projects; support road and rail network improvements and investment in electric vehicle charging infrastructure; and facilitate data centre development to underpin investment in AI and other new technologies that can support business innovation and efficiencies.

Since coming to power in July, the government has taken some action towards achieving those objectives. This includes opening a consultation on changes to the National Planning Policy Framework (NPPF) and approving a raft of ‘nationally significant infrastructure projects’ that were awaiting decisions regarding development consent – including for a number of solar and data centre projects.

Recently, the government also confirmed that a new National Infrastructure and Service Transformation Authority (NISTA) is to become operational in the UK by spring 2025, to lead on strategic planning of major infrastructure projects as well as on their delivery. A new 10-year national infrastructure strategy is also to be published in the spring, while a new Planning and Infrastructure Bill is expected to be introduced to the UK parliament early next year.

Regarding infrastructure finance, the government has already launched a new National Wealth Fund, to mobilise over £70 billion of private investment – in clean energy and other growth industries and to support delivery of its new industrial strategy. In her maiden Budget announcement, Reeves confirmed that the National Wealth Fund will be tasked with ensuring its investments “by default, earn a rate of return at least as large as that on gilts”. Gilts are government bonds that provide investors with a guaranteed return on investment, typically at lower rates than investors might achieve from riskier investments.

Further details on the government’s own spending plans for infrastructure emerged in Reeves’ announcement.

According to the Budget, the UK government will increase capital investment by over £100 billion over the next five years – including by £13bn alone next year, bringing total spending for 2025-26 to £131bn. Over £35bn will be spent on economic infrastructure in 2025-26, the government confirmed.

Priority transport projects to benefit from funding include the Transpennine Route Upgrade between York and Manchester; the East West Rail scheme, to connect Oxford, Milton Keynes, and Cambridge; and tunnelling works to Euston station as part of the HS2 project; while the roads budget will also increase by £500m next year to support maintenance works.

The enhanced capital investment will also go towards supporting a school rebuilding programme and to “critical maintenance, repairs, and upgrades” across the NHS estate, while a further £1.2bn to deliver extra prison places was also pledged, among other things.

On private finance, the model for catalysing investment is less clear, though the government is considering ways to encourage stewards of pensions savings to invest in UK infrastructure, and the wider role it has to play is recognised within one of the seven growth missions at the heart of the new Labour government’s plans for “rebuilding Britain”, with higher public and private investment, improved infrastructure like transport, and planning reform all envisaged under that mission.

Hart said: “There were some eye-catching numbers and commitments relating to the UK’s infrastructure pipeline, but it remains to be seen what role private finance might play. The Budget did not appear to deliver a full-throated return of PFI, PPP, PF3, or anything like it. It was observed that investments in infrastructure would have to deliver equivalent returns to those that can be expected if invested in government gilts. Achieving this will be no mean feat. Investing in infrastructure, particularly green field projects, brings risk and is certainly riskier than the more usual buying and selling of government bonds – notwithstanding the immediate reaction in the gilts market to the Budget.”

“There are grounds for optimism but many of the obstacles that dogged the previous government – in terms of capacity, planning and speed of delivery – may end up being magnified in the short term if the chancellor’s speech is really going to constitute a restart for the delivery of capital projects across the country,” he said.