Treasury could bring about investment spree by pension funds without adding to nation’s debts, says CBI report
Britain’s largest business lobby group has urged the government to act as a financial backstop for multibillion-pound infrastructure projects in order to unlock up to £20bn of private-sector investment in transport, telecoms and energy.
The CBI said the Treasury could kickstart an investment spree by pension funds without adding to the nation’s debts. In a report on attracting infrastructure investment, it said private-sector involvement in greenfield projects – brand-new proposals such as a high-speed rail route – could be feasible if the government guaranteed 10% of the funding.
If the project got into trouble, the taxpayer would become liable for that share of the funding, but according to the CBI, the overall effect would be to raise the asset’s credit rating from BBB- to BBB+, making it attractive to private investors.
Covering construction risk, or the consequences of a multibillion-pound project going wrong before it launches, is a major concern among pension funds considering infrastructure investments.
Other measures recommended by the lobby group included seconding infrastructure experts from the private sector to government departments and pooling pension fund resources. The CBI is targeting the £1.5tn held by UK pension funds and believes that diverting 2% of that capital could create a £20bn war chest. “We are looking for a small slice of their asset base, just a bit bigger than they have been willing to put in in the past,” said the CBI. “I do feel that we are pushing on an open door.”
Infrastructure spending was cut by a quarter under the government’s austerity programme, hitting the building of schools, roads and large-scale civil engineering projects.
In November, the Treasury signed a memorandum of understanding with the National Association of Pension Funds and the Pension Protection Fund to support £20bn of investment spending, though schemes backed by pension funds are not expected to get the go-ahead until 2013.
The NAPF said the big occupational retirement scheme funds want to move more quickly to support mainstream infrastructure projects and are working hard to educate fund managers in the opportunities available.
Joanne Segars, NAPF chief executive, said: “Britain’s infrastructure is becoming an embarrassment and a bottleneck, and desperately needs a revamp. Pension fund money could be a key part of any solution.
“Pension managers are eager to get more involved with bricks and mortar, but often find it difficult to do so. Skills gaps, small fund sizes, investment fees, and fears over construction risk are all obstacles at the moment.”
She said a new pension infrastructure platform that brings “pension funds large and small to the table” will overcome their traditional reluctance to accept some of the risks that have undermined confidence in infrastructure investment over recent years.
The CBI director-general, John Cridland, said that while the CBI recognised the importance of infrastructure in boosting the UK economy, it did not sanction signing blank cheques to fund it.
“We stick with the government on the need for the public spending reductions,” he said. “This will be off-balance sheet funding. We are not asking the government to take the risk, we are asking them to facilitate the private sector taking the risk.”