Osborne’s planned infrastructure projects offer investment opportunities

30th November 2011

In theory, the sector should suit pension fund investors. It generates a long-term and inflation-linked income stream, ideal for asset/liability matching. This piece in the FT shows the development of the sector:

"Infrastructure has not been recognised as an investable asset class for much more than a decade. The first pension funds to invest sizeable amounts into projects did so in the late 1990s. They had the advantage of being early movers in a low-inflation, low-interest rate era and earned yields of 10-15 per cent a year. But by 2006 the types of investments available to investors had mushroomed. As competition for assets hotted up, prices soared and yields fell."

There are plenty of scholarly articles demonstrating why this can be an effective option for goverments and investors alike:

But, according to the NAPF, even those UK pension funds that have shown an interest in the asset class have only taken allocations of 2-3%; as this Reuters piece suggests: "The pension industry's appetite for infrastructure assets is satisfied by specialist fund managers offering indirect exposure to the sector.

"Infrastructure debt is a complex investment category reserved for highly sophisticated institutional investors," said Nicolas J. Firzli, co-chair of the World Pensions and Investment Forum. At this stage, the majority of UK pensions wishing to gain a degree of exposure to infrastructure debt or equity have done so indirectly."

However, there are parts of the world that have made a success of encouraging domestic pension funds to invest directly in infrastructure projects. A number of the large Canadian, Australian and U.S. pension funds have built up significant expertise in the asset class and have financed many domestic projects. In some cases, they have also invested in British infrastructure projects, or have managed infrastructure funds on behalf of British investors, who lack the required expertise.

This piece shows the sort of projects that have been funded in the US : "The American Society of Civil Engineers estimates the five-year infrastructure investment needs of the United States at $2.2 trillion and growing. Yet state and local tax revenues have fallen precipitously during the current economic downturn, with public officials reluctant to raise new sources of revenue from taxpayers and the public increasingly concerned with growing deficits and public spending.

"Chicago has been the leader in this regard, with its $1.8 billion long-term lease of the Chicago Skyway, the first long-term lease of an existing toll road or toll bridge in the United States, as well as its $563 million long term lease of its downtown underground parking garage system, its $1.15 billion street parking concession, and its continuing efforts to enter into a long-term lease related to Chicago Midway International Airport."

But for the time being, the majority of investment in infrastructure across the globe has been indirect – through specialist funds – and has only attracted a relatively small amount of pension fund assets. The Reuters piece talks about the possibility of issuing a bond to enable investors – both pension investors and others – to invest directly in specific infrastructure projects.

"This would involve pooling projects together and financing them through sales of interest-paying debt securities, possibly backed by some form of state guarantee, and could attract strong interest from insurers. The bond markets are a huge untapped source of finance and insurers have long been keen to channel more of the investments they manage into UK projects to help the economy fight its way back to growth," said Otto Thoresen, Director General of the Association of British Insurers, whose members manage investments worth 1.7 trillion pounds.

"British infrastructure bonds were regularly issued in the first half of the last decade by private contractors hired to build schools and hospitals under Britain's Private Finance Initiative. But they have not been sold in any volume since the 2008 financial crisis, partly because the withdrawal from the market of specialist "monoline" bond insurers has made it impossible for such securities to win an ultra-secure triple-A credit rating.

This opens up the possibility of private investors investing directly into specific infrastructure projects. Previously, they have only been able to invest through funds, usually across a variety of projects. Any existing private investment has been localised and unofficial.


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