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CBI tells government to 'get smarter' on infrastructure investment

Business powerhouse calls for government to help de-risk and kick-start projects, as pension funds say UK infrastructure is becoming “an embarrassment”.

The government should use its AAA rating to make packages of infrastructure projects more attractive to UK pension funds, the UK’s biggest business lobbying group said today.

Providing a better pipeline of upcoming green and brownfield infrastructure opportunities, with all projected construction and operation stages of government-commissioned projects, is also needed to help pull in investors, said the Confederation of British Industry.

In a new report today placing infrastructure at the heart of economic growth, the CBI said government must be “smarter” about the way it stimulates private investment in infrastructure after a “disappointing” six months of talks with UK pension funds.

It comes as the National Association of Pension Funds – one of the government’s prime investor targets, representing 1,200 funds and around £800 billion in assets – said UK infrastructure is “becoming an embarrassment”.

Chancellor George Osborne targeted £20bn of investment from UK funds in his autumn statement. Treasury officials have been meeting with pension representatives since then.

Although there are some large funds interested in new infrastructure, the NAPF and Pension Protection Fund have no appetite for greenfield (new build) infrastructure, partly due to the construction risk.

A lack of sector experience and the small size of the funds also mean they are talking to government about creating a national infrastructure platform, as reported in an exclusive interview with Infrastructure UK chief executive Geoffrey Spence.

The CBI is now proposing that government enhances the credit rating of several projects at a time using contingent liabilities. These are liabilities placed on the balance sheet which may or may not be incurred later.

The CBI also suggests banks should partner with institutional investors under “new investment models”.  It would mean banks lending over the construction period of the project, with the institutional investors then buying the ‘de-risked’ assets.  Government could also play a part in underpinning the refinancing, the CBI said.

Officials would not say which specific projects in the National Infrastructure Plan should be targeted, but instead highlighted previous government announcements on a potential guarantee for the Thames Tideway and tolls on the A14.

They also said energy, and in particular offshore wind, could lend themselves to the financing models.

John Cridland, CBI Director-General, said business has been “disappointed that we haven’t made more headway in the past six months”.

“To help make investors an offer they shouldn’t refuse, the government must enhance the credit rating of brand new projects, extend capital allowances to cover all types of infrastructure, ensure Solvency II doesn’t act as a brake on growth and consider the introduction of a time-limited dividend tax credit for pension funds investing in new projects.”

Joanne Segars, chief executive of the NAPF, said UK infrastructure is becoming “an embarrassment and a bottleneck” which desperately needs a revamp, but added they are “well underway” with the development of a new pension infrastructure platform.

“Many of the CBI’s concerns about skills, scale, and investment viability are well known to pension funds, and the PIP will help address them.”

A Treasury spokesman said government has already said it will consider using targeted guarantees to support specific projects when investors “cannot accommodate certain risks”.

He said - as announced by the PM and deputy PM Nick Clegg in recent weeks - the government is “now examining ways in which the principle of guarantees can be used more extensively to boost investment in infrastructure.”

 

The CBI report - An offer they shouldn’t refuse: attracting investment to UK infrastructure - calls for government to:

Target specific projects to enhance their credit rating and make them more attractive to investors; take projects above investment grade BBB-

Pool pension funds beyond the Pension Infrastructure Platform (PIP) and build up in-house skills

Commercialise the public sector’s approach to infrastructure and create a single, attractive shop window for would-be investorsEnsure Solvency II doesn’t act as a barrier to private investment

Provide a better pipeline of upcoming green and brownfield infrastructure  opportunities, with all projected construction and operation stages of government-commissioned projects

Promote a bank and institutional investor ‘model’ to allow them to comply with Basel III requirements without jeopardising long-term investment in infrastructure.

Extend capital allowances to ensure all infrastructure projects are treated equally

Look at establishing a dividend tax credit targeted purely at new projects

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