The chief executive of Infrastructure UK has a multi-billion pound question to answer – how do you make roads, bridges and tunnels irresistible to investors? But Geoffrey Spence is feeling upbeat about a solution.
“Discussions [with pension funds] have gone better and faster than I anticipated,” he says. “That does not mean they are concluded, but I think we are a lot nearer to creating a platform for pension fund investment today than I would have expected at the end of last year.”
Talks between the government and UK pension funds began after the Chancellor George Osborne’s autumn statement in November.
Mr Osborne said he expected to get £20 billion of infrastructure investment from the funds, and published a pipeline of infrastructure projects, which for Mr Spence offers a clear signpost for the construction industry.
“The reason we have done this now is to help the construction industry to see where they should prioritise their supply chain and business to make a better market,” he told Construction News.
He says, having provided contractors with “a lot of information” he now wants to see them think carefully about where the opportunities lie.
Mr Spence has been leading the department tasked with finding private finance for UK infrastructure since last July. He has a wealth of public and private-sector financial experience – he is a former head of the private finance initiative unit at the Treasury under Labour, was a member of Gordon Brown’s exclusive Council of Economic Advisers, and he has led on project finance at Deutsche Bank and global infrastructure at HSBC.
Degree of scepticism
When the potential for pension fund investment in infrastructure was announced, there was a certain degree of scepticism. But Mr Spence says it was the pension funds that approached the government in the first instance, interested in the potentially stable and inflation-linked returns.
The diverse and complex nature of the sector means smaller British funds have not necessarily had the skills or experience to tap into the market. But they certainly have money. The National Association of Pension Funds alone, which lobbies to shape UK pension policy and represents 1,200 funds, has £800bn of assets. Despite this, British pension funds as a whole invest only 2 per cent of their trillions of pounds of assets in infrastructure.
Mr Spence says talks have been moving towards a “pension infrastructure platform”, which the funds would own.
“It is a way of getting over their problem where none of them are big enough to forge a team that specialises in infrastructure. We are helping them…to create such a platform to give them a collective ability to invest.
“There is a slightly too limited view about pension funds which is they either buy debt or equity, but the other thing we are exploring with them is a different way of investing, which is where they directly own the asset. They might do a deal with a developer or operator or contractor to handle the physical side, the management side, but will basically own the asset.”
The collective size and expertise would mean pension funds can invest “an awful lot more” and earn higher returns, similar to those made by Canadian funds such as Ontario Teachers.
“That’s where the announcement of £20bn comes from – increased investment on the back of a new model and new capacity to invest.”
As Construction News revealed, the main pension fund associations in the UK – the NAPF and Pension Protection Fund – have no interest in new infrastructure. But Mr Spence says there are ongoing discussions with a separate group that does – including private equity firm Meridiam, which brings in investors from public and private pension funds, life insurers and multilateral banking organisations, providing expertise for the duration of the bidding process and acting as a shareholder from construction to operation.
“Some of it could be greenfield [new infrastructure]. Pension funds have different appetites, but there are investors at the moment who are investing in greenfield.”
Mr Spence insists that the debate over what replaces PFI, which has been the main source of private investment into major construction projects in the past 20 years, is a separate issue.
Just last week the House of Commons public accounts committee – led by Margaret Hodge MP – said the lifetime cost of the schemes was £4 for every £1 spent, with future debts in 2009/10 at £131bn.
Meanwhile, major contractors submitting their responses to the Treasury’s call for evidence in its review of PFI stressed the urgency of government backing for a reworked PFI.
Mr Spence says the debate is about the right procurement model, rather than whether facilities are built, adding there is “no reason” why a reformed process cannot benefit all parties.
He says contractors have been reluctant to talk about risks on projects or tended to focus more on shareholders than on the public.
“Business has got to make its case and make it on a larger platform than just its shareholders – to society as well. That is not a case the government will make for them.”