Aviva pledges £500m funding to develop UK’s infrastructure

Aviva's David Barral.
Aviva's David Barral.
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AVIVA is to make £500m of funding available in the first tranche of the insurance industry’s commitment to invest £25bn in UK infrastructure over the next five years.

The group expects to allocate new money for debt financing of projects including transport, utilities, hospitals and schools.

It comes two weeks after the wider investment commitment announced together with firms including Legal & General, Prudential, Standard Life, Friends Life and Scottish Widows.

The £25bn pledge followed changes in European rules, backed by the UK, which incentivise investment in a wide range of assets.

Aviva already has £5bn invested in UK infrastructure including PFI loans for schools, universities and hospitals and investments in corporate bonds of utility, airport and railway companies.

Aviva employs around 4,300 people in Yorkshire at sites in Leeds, York and Sheffield.

Its life business, led by chief executive David Barral, is headquartered in York.

Chief executive Mark Wilson said: “Aviva is contributing to the building blocks of the UK’s future, making an additional £500m available immediately to invest in the country’s schools, hospitals and transport.

“We’ll focus on investments which are good for our policyholders, good for society and good for the UK economy.”

Aviva said yesterday that its commitment follows last month’s deal on new European capital requirements for insurers – known as Solvency II – which had proved less burdensome than initially feared, freeing up more money to invest.

Earlier this month, the Government set out more than £375bn of planned public and private investments to 2030 and beyond in its new national infrastructure plan.

Many big insurers are eager to invest in infrastructure projects because they offer long-term, inflation-beating, regular returns from road tolls and rents which are in keeping with the companies’ long-term liabilities on pension products.

However, they said early proposals under Solvency II would have hampered their ability to commit money to projects by forcing them to lock up more capital.

The insurance industry had argued that making insurers reduce risk by holding more capital in reserve, often in short-term Government debt, was at odds with Government policy to harness private capital for infrastructure projects.

“There is a mis-match between potential investment finance being skewed into short-term Government debt while the same governments desperately need it to be channelled into projects to boost short-term growth and develop long-term productive capacity,” the Association of British Insurers (ABI) said in a report earlier this year.

Tidjane Thiam, the group chief executive of British life insurer Prudential, said last month that he had considered relocating the group’s headquarters outside Europe because of Solvency II proposals.

Boosting private-sector infrastructure investment is a priority for the coalition Government, because an unexpected rebound in growth so far this year has been driven, to a large extent, by consumer spending, which many analysts believe is unsustainable.

Many British power stations will become due for replacement in the next few years, while roads, railways and airports are overcrowded.

Earlier this month, Treasury Secretary Danny Alexander said the new investment by the insurance industry was “a massive vote of confidence in the UK economy” and would help fund the £100bn of investment projects that he announced in June.

Critics have claimed that the coalition Government has erred by cutting public investment after it took power in 2010 in order to reduce the budget deficit.

While the Government says borrowing more to fund investment would endanger market confidence in its public finances, some critics say it would be cheaper in the long-run to finance some projects through issuing more public debt.

Earlier this month, the Treasury said it aimed to oversee £375bn of major infrastructure investment over the next 20 years, up from £309bn last year.

Projects include the construction by Hitachi of a new nuclear power station in north Wales – which the Government said would receive a public guarantee to shield private-sector investors from some of the risk of the project. The Government also said it would provide a guarantee for a £1bn extension of London’s underground system.

greg.wright@ypn.co.uk