In the UK, it’s in desperate need of an overhaul. Not only do we need to replace ageing buildings, but we also need to upgrade and enhance our energy network and find ways of tackling the effects of climate change.
The trouble is that it will cost a lot of money. Anyone who has had their driveway resurfaced, added solar panels to their roof or donated money to get a church or school building repaired will know it can cost thousands of pounds. So imagine how much a new motorway, solar farm or hospital building amounts to.
The scale of the challenge is huge. To reach our 2050 decarbonisation goals alone, it’s estimated we’ll need to invest £50bn per year. And while the Government will play a big role in this, private investors will play an even larger one.
How the Government will help fund infrastructure development
The energy transition and pathway to net zero are a top priority for Keir Starmer’s Labour Government. They featured prominently in the election manifesto – second only to UK growth. At the International Investment Summit in October 2024, the Prime Minister was keen to highlight that his Government had secured £63bn in financing to support renewable energy, infrastructure and technology projects.
Starmer also criticised the current regulatory environment as being too complex and promised to get rid of what he called the “anti-growth” regulation that can delay infrastructure projects in the UK.
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“Where it’s stopping us building the homes, the data centres, the warehouses, grid connectors or roads, train lines, you name it, then mark my words, we will get rid of it,” he said.
The Autumn Budget also contained a number of infrastructure-related announcements. Chancellor Rachel Reeves pledged £5bn for one-and-a-half million new homes by the end of Parliament, alongside £1.4bn to rebuild schools, £1.2bn to deliver extra prison services and £1.6bn for road maintenance.
She also said she wanted the UK to become a “clean energy superpower”, setting aside £8bn for carbon capture, usage and storage infrastructure and £200m for electric vehicle (EV) charging infrastructure, among other commitments.
Most recently, the Chancellor has announced what she calls the “biggest pension reform in decades”. She plans to merge the UK’s 86 council pension schemes into a handful of pension ‘megafunds’ and set a minimum size limit on defined contribution (DC) schemes in the private sector to encourage consolidation. Local Government Pension Schemes and the DC market are set to reach £1.3trn by the end of the decade, so the hope is that while they won’t be obliged to do so, these larger funds will have sufficient scale to invest more in public services, big infrastructure projects, and tech start-ups.
When will this investment in infrastructure begin?
Since coming to power, the new Government has already made inroads, scrapping the ban on onshore wind, launching Great British Energy, setting up the National Wealth Fund, increasing funding to secure private investment in renewables through the Contract for Difference auction, assembling ‘mission control’ to accelerate the Government clean power mission, and setting out initial financial support for projects in the Autumn Budget.
However, it seems we will have to wait until the spring of 2025 to get clarity on the Government’s 10-year infrastructure strategy and its 2030 Clean Power Action Plan to drive the fundamental changes required to deliver our nationally significant infrastructure projects. What is clear is that private investors will have a huge role to play in the coming years.
The UK has the ability to become a ‘clean superpower’, but if we don’t want a lack of ambition to be our kryptonite, we’ll need to up our game. The first industrial revolution took 100 years to play out, the second took 65 and the third 40. We’ll have just 25 years for an infrastructure revolution to achieve our 2050 goals.
The pros and cons of investing in infrastructure
With our pension pots likely to include more infrastructure in future, it’s good to know the pros and cons of the asset class.
The good news is infrastructure is compelling for investors in most market conditions. Because it is critical to society, it tends not to be sensitive to the health of the wider economy – demand is resilient, and it has a low correlation to other asset classes, so gives valuable diversification to an investment portfolio.
Infrastructure assets also tend to benefit from long-term contracts that provide predictable cash flows, and attractive contractual provisions with revenues typically linked to inflation. As a result, the income they yield is both resilient and predictable. Infrastructure’s long-term nature lends itself perfectly to pension investments.
Today, infrastructure investment is more compelling than ever. The UK Government’s commitment to the sector and the sheer amount of work involved means it will extend over several decades. It’s a once-in-a-century opportunity to transform our economy.
As with all investments, infrastructure is not without its risks. There is construction risk in the early days – which is why the Government and the private sector tend to share the risks at this phase together. Operational management and business risks are also factors to consider, along with environmental, social and regulatory risk.
Can I invest in infrastructure outside my pension?
While the allocation to infrastructure may take a little time to increase in our pension pots, it is possible to invest in the asset class today via individual stocks, listed investment companies and open-ended funds.
Many infrastructure companies, such as electricity or gas suppliers, are publicly listed, so you can invest directly in their individual shares or their bonds.
If you prefer more diversification, you could opt for an open-ended infrastructure fund that invests in a portfolio of shares or bonds across a broad range of infrastructure sub-sectors and geographies.
In the UK, we are also very fortunate there are a number of listed closed-ended investment companies (CICs) that themselves invest in a range of infrastructure projects and can offer exposure to targeted sub-sectors such as renewable infrastructure or social infrastructure. These listed closed-ended investment companies can invest directly in both the equity and debt of projects.
Shayan Ratnasingam is senior research analyst at Gravis
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