Government plans to use private sources of money such as pension funds to finance £50 billion of infrastructure development will only be successful if the public purse takes all the risk on investments, it has been claimed.
As part of the government’s growth plan, due to be announced alongside its autumn statement on 29 November, Chancellor George Osborne is expected to announce a £50bn programme of house, road and rail building with funding almost entirely sourced from the private sector. The government, buoyed by its £2.1bn sale of the HS1 rail link last year to a joint venture of two Canadian pension funds, believes a large amount of infrastructure investment can be secured from institutional investors.
However, PwC head of infrastructure finance and PPP Richard Abadie told Construction News that while the Treasury was to be commended for thinking about alternative sources of private financing to bank debt, the idea that pension funds would invest in new construction projects ignored their typical investment preferences.
“Pension funds are generally reluctant investors in construction risk and debt,” said Mr Abadie.
“Instead, they are active investors in post-construction operating assets with equity, and the reality is that there are limited assets for the government to sell.”
In order for pension funds money to go into shovel-ready projects, Mr Abadie said the government would either need to place the construction risk onto the public purse to make the investments more palatable - something the Treasury is keen to avoid - or else encourage pension funds to buy up bank debt from operating assets to allow banks to reinvest in greenfield schemes.
“The economic stimulus that is necessary for the UK is around greenfield infrastructure, and given that pension funds are very, very reluctant investors in construction, it is unclear how they will participate unless somebody else takes the risk, and that would have to be government and the taxpayer,” said Mr Abadie.
“The question you have to ask is whether that would be a good deal for the taxpayer?
“Instead, I think pension fund money should be directed at banks’ balance sheets to allow them to lend.
“The problem at the moment is that there is an expectation gap between what the banks want [to be paid for their loan stakes in operational assets] and what the pension funds are prepared to pay.”
There are private sector precedents for construction risk being absorbed to make investments more palatable to institutional investors.
In May the government revealed that among the range of products its proposed Green Investment Bank would offer is likely to be a first-loss contingency fund for the construction phase of projects to enhance the credit rating of operational assets.
The government’s proposals for attracting private investment have so far prompted a cautious reaction from pension funds.
National Association of Pension Funds chief executive Joanne Segars said: “Infrastructure is a good fit with pension fund liabilities, particularly in the absence of sufficient gilt issuance.
“Fresh thinking around how best to match pension funds with infrastructure projects is welcome.”
Meanwhile, CBI director general John Cridland said last week he believed that beyond any major initiatives to attract pension funds, changes to land use planning regulation could help facilitate private sector investment.
For all the news on government announcements around the Autumn Statement, see CN’s dedicated webpage.