In this blog, Matthew Levine, IFoA Policy Manager gives an overview of the IFoA’s recent work on infrastructure.

Matthew LevineIt seems to me that infrastructure is one of those words that people use confidently even though different individuals might be referring to slightly different things (think: backstop). 

There is more than one valid way to think about infrastructure. For example, we tend to think infrastructure is buildings – or at least human constructions – but the National Infrastructure Commission’s (NIC’s) approach is to see infrastructure as a combination of assets and services. The assets can include natural features like rivers and flood plains, as well as built structures.  What makes them infrastructure assets is when they form networks and, by doing so, they enable services to be provided. So, transport assets like roads and railways (and rivers) enable a service: the movement of people and goods.

The NIC identifies six categories of infrastructure and there are probably no surprises in their list: transport, energy, water and sewerage, flood risk, digital and waste. It’s interesting that housing is not included - this reflects the NIC’s remit, which is set by the Government, and covers only ‘economic’ but not ‘social’ infrastructure. By contrast, the IFoA and its working party on infrastructure do not have such formal constraints, so we are able to cover areas like housing.

To have a broad understanding of infrastructure it is vital to appreciate the different perspectives of the stakeholders involved.  When the Government sponsors a piece of new infrastructure, such as a bridge, its goal may be to stimulate growth in a particular region.  However, private investors in the project are more likely to focus on achieving adequate returns to compensate for the risks they have taken. A single individual could experience conflicting perspectives.  For example, as a citizen I might be quite distressed if construction of the bridge was cancelled for financial reasons, since it could have saved me much commuting time.  However, as a member of a pension scheme invested in the project, I may welcome the cancellation if it means that major future losses for the scheme will be nipped in the bud.

But why should the IFoA take an interest in infrastructure?  One important reason is that actuaries are often involved in advising on long term liabilities, whether from a pensions or life insurance perspective.  Many infrastructure projects are long-term in nature, providing returns that generally keep pace with inflation, for relatively low risks – all characteristics that make them well matched to these liabilities.

But if this is true, why is there a shortage of private investment in the infrastructure projects that society needs? The IFoA has just published a Policy briefing paper on Infrastructure Finance which examines the reasons for this so-called ‘investment gap’.  It includes a case study looking at Islamic ‘sukuk’ bonds and how the government could potentially adapt this approach to increase private infrastructure investment without increasing its own debt. 

The complexities of finance are just one element of infrastructure projects.  There are also other important aspects, such as the appraisal process for deciding if the project is feasible, and also how we can model different scenarios to understand possible outcomes.  One common feature of all these elements is uncertainty and in November we joined forces with the NIC to run a roundtable event looking at how to manage uncertainty in infrastructure policy.  This was kindly hosted by the Department of Engineering at Cambridge University and you can read our summary of the discussion.

Well, I hope that gives you a clearer idea of infrastructure, but if not, having a look at our other infrastructure outputs might be a useful backstop …