The stakes are mounting for Chancellor George Osborne’s November 29 growth review – at least as far as the infrastructure community is concerned. That’s because, in the last couple of days, talk of the imminent unveiling of a £50 billion (€58 billion; $79 billion) plan that will pool local pension money to develop the UK’s infrastructure has grown louder.
The rumour mill has been helped considerably by yesterday’s announcement that HM Treasury will reform the much maligned Private Finance Initiative (PFI) – the UK’s standardised procurement model for public-private partnerships – to make it cheaper, more transparent, and (surprise, surprise) to encourage “a stronger role to be played by pension fund investment”.
It’s becoming pretty obvious that the UK government will put infrastructure at the centre of its November 29 growth review. The Chancellor has been under pressure to promote growth as the UK economy flirts with a double-dip recession. And the government’s strategy of blaming the Eurozone for its woes – while timely and greatly helped by Eurozone leaders’ mishaps – will not allow it to escape criticism should negative growth be resumed.
Likewise, it’s very clear that the UK government wants pensions to be the main funders of its infrastructure plans. But of course, that’s very different from actually producing a credible framework that will secure pension fund investment in infrastructure – the long-sought, post-crisis Holy Grail of infrastructure investment.
So here’s what the rumour mill tells us: the government is apparently planning to channel up to £50 billion of pension money to fund its infrastructure plans, which will include new roads, power, broadband and social housing.
It aims to do this by creating a so-called ‘pension infrastructure fund’ that will pool UK pension assets. At the moment, there are no details on what this vehicle would look like or why pensions would want to put their money into it (we’re assuming they won’t be conscripted to do so).
Will this ‘pension infrastructure fund’ be an orthodox infrastructure fund – and if so, who will manage it? Will it charge fees – and if so, will they undercut market rates? Or are the pensions investing directly – and if so, will the government underwrite a certain return on its investment?
Business secretary Vince Cable recently expressed astonishment that “foreign institutions will invest in British infrastructure but British companies won’t,” before admitting that it’s up to government to “create a framework regulation” that allows local pensions to fund UK infrastructure. He was offhandedly referring to Canadian pension investment in UK infrastructure. Indeed, the rumour mill indicates that the UK wants local pensions to imitate their Canadian counterparts.
But convincing your country’s pensions to fund your country’s infrastructure – what the UK government seems to want – is very different from encouraging them to become sophisticated infrastructure investors – which is what many of Canada’s pensions decided to do in order to pay their liabilities.
Has the government cracked the code for pension investment in infrastructure and is it preparing to unveil a credible framework on November 29? Probably not. But here’s the more limited upside: it has at least realised that it has no chance of financing its infrastructure stimulus plan without pension money and is probably working hard to make sure this happens.
In other words, the old PFI model of financing infrastructure with large amounts of bank debt – already reeling following the 2008 financial crisis – is all but dead now. Not only because the government itself wants to kill it, but because Europe’s banks – the de facto project financiers – are in no condition to provide long-term funding for UK infrastructure now that the Eurozone is threatening to explode spectacularly.
The recent announcement on PFI reform already hints at this, with its call for more pension investment in infrastructure. What it also hints at is that the reform process will take time.
The government plans to ask the private sector to chip in with its views on a revamped procurement model starting December 1 – that’s two days after the Chancellor’s growth speech and perhaps the clearest indication that whatever will be announced on November 29 will be more of a starting shot than a Hallelujah moment.
Let’s just hope the Chancellor has live ammunition rather than dummy rounds.