The UK infra plan: What the industry thinks

We report on how the industry reacted to yesterday’s announcement of a National Infrastructure Plan and the role of pensions in providing finance. Among the responses were a claim that regulations could stymie the plan as well as a call for forced pension contributions

It has been a recurring theme for longer than anyone in the infrastructure asset class cares to remember: how to find a way of effectively channelling pension fund capital into the long-term financing of infrastructure? 

It is unsurprising, therefore, that a blizzard of written responses from industry professionals followed yesterday’s Autumn Statement by UK Chancellor George Osborne. In the statement, he outlined a multi-billion pound infrastructure spending programme – and how he expected UK pensions to contribute a significant portion of that amount.    

Below, we gather a selection of views from those on the frontline. They reflect both appreciation that the government has opted to wrestle with the issue, as well as warnings of the practical issues that could yet block the way to a happy ending. 

One of the more strident views came from Karsten Langer, chairman of the European Private Equity & Venture Capital Association, in a letter to the Financial Times. In it, he pointed out that asking pension funds to commit long-term capital is challenging when the regulatory environment seems increasingly opposed to any such development: 

Karsten Langer

“In their efforts to minimise systemic risk, regulators are in danger of negating the stabilising effect of long-term investors in global financial markets and reducing the ability of institutions to provide capital for long-term assets and projects…It is our hope that sense will prevail. If not, George Osborne and Europe’s other finance ministers will have to look elsewhere to finance their infrastructure projects.”

Hans Meissner, managing partner at fund manager EISER Infrastructure, offered a radical suggestion to, as he put it, “effect a significant shift”: 

Hans Meissner

“The government should introduce legislation which would both compel employees to contribute to a pension scheme and require these schemes to aim for a 5% allocation to infrastructure.”    

In Australia, such forced contributions and high allocations already exist, Sally Capp, agent-general for the State of Victoria in the UK, pointed out. She said: 

Sally Capp

“The success of infrastructure projects in the state of Victoria, Australia, is as a result of large-scale pension-fund investment supported by transparent and efficient processes, as well as constructive relationships between business and government. It has proved to be a winning investment strategy for us.”

Giles Frost, director at fund manager Amber Infrastructure Group, applauded the move but hinted there was still a long way to go before the government achieves its objectives: 

Giles Frost

“The Chancellor’s announcement of the new National Infrastructure Programme marks the moment that infrastructure ‘comes of age’ as an investment class…However, the plan still needs to be developed and the key issue for investors will be to fully understand the risks. Pension funds should not be expected to take up all of the slack left by a reduction in bank financing and the government needs to work closely with the pension fund industry by making investment easier: there is a great deal of education to be carried out before most pension funds will want to invest.”

‘Leverage’ may be a dirty word these days, but Boe Pahari, head of infrastructure Europe at fund manager AMP Capital, suggested a role for leverage that needs to be taken into account: 

Boe Pahari

“Whilst pension funds may look at unlevered options, it is worthwhile adding low levels of leverage that create capital efficiencies without detracting from the low risk investment profile. We must remember that the real risk in these investments predominantly lie in the operations, irrespective of leverage.” 

Nick Prior, head of infrastructure and capital programmes at business advisory firm Deloitte, put the spotlight on investment in the early stages of projects: 

Nick Prior

“…The devil will be in the detail. There remains a challenge to finance the earlier construction and development stages of infrastructure projects. If they can secure pension fund investment in these riskier stages, it will be a significant achievement for the Treasury.”    

Nick Bliss, co-head of the global infrastructure and transport group at law firm Freshfields, took up the theme of pension funds’ risk appetite, suggesting that they will be most attracted to the regulated industry space: 

Nick Bliss

“To entice the market to commit to major greenfield capital projects like road or rail, which carry both construction and farebox risk, it is imperative that attractive alternative structures are developed, and these would come in the shape of an alternative to the monoline and PFI models.”