Let’s cut straight to the chase: the UK’s decade-plus, £250 billion (€293 billion; $390 billion) National Infrastructure Plan is good news – as are official plans to engage institutional investors in becoming its main funding source. But there are significant question marks around its feasibility. In the short to medium term, a list of priority projects will test the government’s wish to see almost two-thirds of infrastructure spending between 2011 and 2015 funded by the private sector.
Without further ado, here are our five key takeaways from Tuesday's announcement:
1) It really is the Pension Finance Initiative – There’s no two ways about it: whatever framework the government comes up with will have to offer pensions and other institutional investors the same level of standardisation as the much-maligned Private Finance Initiative (PFI). Developers and banks liked PFI because it offered predictable returns. Pensions will expect nothing less. So no point complaining down the line that these contracts are too rigid.
2) It will be cheaper; not cheap – It became fashionable in parliamentary committees this year to point out that PFI bank debt now costs around 8 percent in interest repayments – whilst forgetting that the bulk of PFI projects were actually priced much lower than that. Institutional money can and should be cheaper than bank debt nowadays, but it’s still more expensive than gilts. Also, its cost will vary according to the type of project and the stage at which the money is required (i.e. greenfield money will cost more).
3) Better coordination is needed – “We need to put to work the many billions of pounds in British pension funds and get those savings invested in British projects,” thundered Chancellor George Osborne on Tuesday. OK George, but do we really need British project bonds too? The government’s engagement with the Association of British Insurers (ABI) is good news. The latter’s announcement that they are seeking to create a new class of infrastructure bonds is not – at least not if the ABI and government go at it alone. It’ll be hard enough to get the capital markets to fund many of the projects in the UK’s infrastructure plan. Ignoring initiatives like the EIB’s project bonds will only make it harder and potentially costlier for the government.
4) Regulatory headwinds must be acknowledged – Tuesday's announcement showed the Chancellor is well acquainted with Basel III. But is he equally familiar with Solvency II and the European Commission’s (EC) plans to bring pension regulations in line with Solvency II? As Karsten Langer, chairman of the European Private Equity & Venture Capital Association pointed out in a letter to the Financial Times, if the EC has its way “it would significantly reduce the supply of [pension] investment to capital projects”. We don’t want to be the party poopers, but it won’t be much of a party if the guests of honour can’t attend.
5) It’s (very) early days – Requests for more details from some of the institutional investors and fund managers that have pledged their support to the government’s initiative prompted a series of polite rebuffs. One stakeholder – somewhat worryingly – even went as far as saying that he would be happy to elaborate “if and when” there was something to talk about. If and when? Make that “when”, the stakeholder hastily corrected, but his comment gave us a good indication of how preliminary these conversations really are.