New study calls for UK infra stimulus

A report examining how to catalyse £400bn of pension investment calls for a government “buy and sell” scheme with special treatment in the national accounts.

Three ideas to stimulate £400 billion (€464 billion; $610 billion) of pension investment into UK infrastructure are promoted in a new report by Pension Insurance Corporation and Llewellyn Consulting.

In a white paper entitled “UK Infrastructure: The challenges for investors and policymakers”, one idea is to provide a stimulus through “invest and sell asset transfers”.

These transfers would see the government borrow between £15 billion and £30 billion (1 to 2 percent of GDP) to directly finance infrastructure project expenditure with the “stated intention of subsequently selling these assets, either partially or wholly, when times are better”.

The report envisages this being applied to areas such as railway lines, sea ports, airports, bridges, toll roads and possibly social housing. It says that evidence from abroad, such as France’s high-speed rail network, suggests that such a stimulus would “in due course, induce the private sector to spend more”.

To counter the likely concern of markets and rating agencies regarding a near-term increase in public borrowing, the report suggests the “re-presenting” of the national accounts to make a “clear distinction” between public debt backed by saleable assets and general public debt that is not.

The report adds: “This makes explicit the idea that not all debt is created equal; not all debt is quite the dead weight on the economy that it is sometimes presented as being.”

A second area of focus for the report is the Private Finance Initiative (PFI), recently re-modelled as Private Finance 2 (PF2). The report notes that the UK Guarantees Scheme was introduced in July last year to provide backing for £40 billion of projects struggling to get needed finance.

However, it also notes that “tangible results have been few”, with just two contracts having been signed under the Guarantees Scheme so far. The report says that industry players think the initiative needs to go further to overcome market risk, with “perhaps less stringent conditions attached to the structure of the guarantees, and a willingness to extend it to projects that are not entirely dependent on a guarantee”.

The study suggests that, if PF2 were to “match the achievements” of PFI, it could represent additional capital spending of around £300 billion.

Thirdly, the report calls for the creation of a national infrastructure bank or fund. The bank or fund would have two main functions: to “provide a partial or full guarantee to support the initial equity cost of project finance where the private sector is reluctant to invest”; and to finance projects and raise funds for lending from the capital markets by issuing ‘national investment bonds’ which would be “attractive fixed income investment instruments for pension schemes”.

The report acknowledges that the “interventionist ethos” implied by a national infrastructure bank/fund could be “politically concerning” and insists that it must not become an “unwieldy and inefficient quango [quasi-autonomous government body]” that might represent narrow political interests or crowd out private sector finance.

The survey envisages that a national infrastructure bank/fund might take over the existing Green Investment Bank, which was created last year.

Pension Insurance Corporation is a specialist provider of insurance solutions for defined benefit pension funds; Llewellyn Consulting is an economics advisory firm.