28th May 2012
The Confederation of British Industry has called on the government to take steps to make infrastructure assets more attractive to pension funds. It wants to raise the credit rating of infrastructure projects and secure tax breaks for the sector. This could, the CBI suggests, provide a much-needed boost to British industry at a time when economic numbers are flagging. But will it work?
The CBI release says : "If we want to see the billions of pounds needed to upgrade our ageing infrastructure and secure jobs and growth for the long-term, the Government must make smarter use of limited public finances. By underpinning and lifting the credit rating of certain infrastructure assets, it can make them less risky and more attractive to investors.
"If we can capture just a fraction of the £1.5 trillion of capital held in UK pension funds, and invest a further 2% of their total assets in infrastructure, this would make a huge contribution to renewing our energy, transport and other infrastructure."
The group proposed that the Government lifted the credit rating for infrastructure projects to above investment grade (BBB-). It also proposed a dividend tax credit targeted purely at new projects, which would make infrastructure more attractive to defined benefit pension funds.
Initially, it should be said that infrastructure assets are a natural choice given the investment profile of pension funds. They provide a long-term, inflation-linked income, which neatly matches the liabilities of this part of the market. Foreign investors have entered UK infrastructure assets and infrastructure has proved a popular investment for pension funds globally.
We have explored this previously on Mindful Money: "Last week, a massive Canadian retirement scheme joined up with a consortium of Japanese pension funds and banks to set up a $20bn infrastructure fund that will invest in major projects such as airports and roads."
But to date UK pension funds have steered clear. There was some progress in November last year with the NAPF and the Pension Protection Fund signing an agreement with the government to boost investment in the sector.
They said at the time: "Structured correctly, infrastructure assets can provide the necessary investment profile that pension funds require, and pension funds can be an important source of private investment. However, the current investment model makes it difficult for them to invest efficiently in infrastructure."
Progress has been slow. Around 10-12 major pension funds have signed up to the infrastructure platform, but there is still widespread reticence.
This piece shows the current thinking of the pensions industry: "Leave aside that while some pension funds have signed up to the platform, many are distinctly unwilling to bankroll high risk infrastructure projects. Given that cost of government debt is so low, reflected by chancellor George Osborne's decision to look into locking in current low borrowing costs by issuing perpetual bonds, there have to be question marks over creating an elaborate and potentially much more costly mechanism to fund infrastructure projects. Anybody remember the private finance initiative?"
The moves proposed by the CBI would certainly go some way to address the reluctance of pension funds to invest and would seem to place relatively little pressure on government finances. The question of whether it would boost UK GDP is more difficult to assess.
In the meantime, Goldenboy on the Telegraph site proposes an alternative option: "We need an independent sovereign wealth fund charged with making infrastructure investments that generate a return. The fund should be given £500bn which can be borrowed by HMG at current rates of 1.8% and only invest when rates of return are at least 5% -not a demanding target. The profit should go towards filling the black hole that is state pensions – the removal of this black hole will give the markets the confidence they need to lend this money without demanding a premium.
"There are plenty of projects that can make this return but the fund could be given certain rights to make planning decision and to levy local charges in order to enhance the returns. For instance if a new railway line makes all the buildings in a town a lot more valuable, then the fund should have the right to take a part of this value. Similarly it should have the right to purchase land at prices before the new railway arrives to capitalise on it by building new homes and factories. And so on."
The presence of a strong sovereign wealth fund certainly made the difference for some companies during the credit crisis. However, they were generally countries that had some money in the first place.
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