Why should pension funds back an infrastructure bank?
A National Infrastructure Bank could allow pension funds to invest in vital national projects, but persuading them to part with their money won't be easy.
Author: Alistair Osborne, the Telegraph |
It is , on the face of it, a difficult trick to pull off. As this month’s Budget will testify, the Government has pinned its growth agenda on securing 250bn of public and private sector investment in Britain’s creaking infrastructure over the next five years.
But finding the money is no easy task. Bank finance for big projects remains scarce, and local authority budgets are being cut by 26pc as the Government sets about eliminating our 127bn deficit by 2017.
It is a quandary that requires innovative thinking ? the latest example of which is the call for ministers to create and part-fund a new 30bn National Infrastructure Bank, partly financed by the most recent 50bn round of quantitative easing, to help break the funding logjam.
The idea is the centrepiece of a new study from the local government think tank Localis and Lloyds Banking Group that will be announced today, alongside a speech from Eric Pickles, the Communities and Local Government Secretary ? though his presence should not imply the Coalition is already sold on creating an infrastructure bank.
As the study argues, though, such a bank could address various funding issues, while creating a new public-private investment model that might replace the politically discredited Private Finance Initiative.
The issue is how to tap the near 2 trillion held by UK pension funds ? and direct that into infrastructure investment. Today, only about 1pc of that money, about 90pc held by private funds, is invested in infrastructure ? a paltry amount when the Government is looking for a 118bn spend in the energy sector, 89bn on transport, 21bn for the water industry and 20bn in the communications arena. Ministers reckon 70pc of this spending should come from the private sector.
As disclosed in George Osborne’s Autumn Statement, the Government is working on outline deals to win 20bn of infrastructure investment from pension funds.
But substantial obstacles remain. The funds are usually too risk averse, or prevented by their credit committees, from investing in greenfield projects, where the risk of cost overruns could wipe out their equity ? at least without some form of government guarantee. They are also too disparate, with the 1,200 members of the National Association of Pension Funds running funds ranging from 35bn-plus to just tens of millions.
Within the public sector alone, there are 101 separate local government pension schemes (LGPSs). But, as the study authored by Richard Carr, a research fellow for Localis, says: “Despite piecemeal moves towards infrastructure from the various LGPSs, the challenge remains how to drive investment from the sector as a whole.” He notes that “amalgamating the 101 schemes into five funds of around 30bn each has been discussed, as has a full merger”, though points out that “high performing funds may well argue that they have little to gain from such a collaboration”.
Instead the report recommends an infrastructure bank that would leverage private sector capital ? similar to the institution announced in America last November by President Obama.
The report reckons that the new bank would “achieve a level of capital which provides a greater range of potential investment options” and “convert a series of understandably conservative individual pension funds into a larger, pragmatic but proactive, investment institution whilst retaining each fund’s independence”.
The study suggests that the Government should provide 8bn of initial funding, potentially by using QE to “purchase bonds issued by any national infrastructure bank”.
A further 4bn of start-up capital would come from the LGPSs. That would be used to build a capital base over four years of 30bn, with the LGPSs investing 2bn a year in bonds from the bank and private pension funds chipping in 2.5bn.
The bank would then use its capital to lever in private funding for a range of projects, along the lines of the Nordic Investment Bank, set up by five Scandinavian countries in 1975, that used its AAA rating last year to raise ?3bn (2.5bn), relatively cheaply, on the capital markets. The bank has recently helped fund new trains for the Swedish railway, housing in Finland and a Swedish hospital.
The study notes that, for public pension schemes, “a national institution would avoid the legal hurdles potentially inherent in investing directly in local infrastructure” ? though there would still be structural challenges to overcome. The Government would want, for example, to keep the bank’s balance sheet off the public accounts ? like PFI schemes. So, it would have to be managed at arm’s length from the Treasury.
The infrastructure bank is only one of the local financing options put forward by the report to kick-start infrastructure funding. The study also recommends using such things as Tax Increment Financing, municipal bonds, the 500m Growing Places Fund, and selling enterprise zones to the private sector.
In a foreword to the report, Jesse Norman MP, who sits on the Treasury Select Committee, notes that the bank is a key recommendation, adding: “At a time where an under-confident but cash-rich private marketplace is coupled with a shortage of public capital, this approach needs urgent consideration.”