While there is broad political consensus in the US that as much as $1tn needs to be spent on upgrading the nation’s creaking infrastructure, there is little agreement over who should pay for it.
Democrats favour federal government spending, paid for by increased corporate taxes. Yet President Donald Trump hopes to entice private investors to help foot the bill. It may seem a great idea, but attempts by the UK government to use private funding to pay for infrastructure upgrades show it is easier said than done.
Six years after the UK’s then chancellor, George Osborne, announced a flagship scheme to persuade pension funds to invest billions of pounds in hundreds of new transport and energy projects, there has been little take-up. At the time Mr Osborne said the government had negotiated an agreement with the industry to “unlock” £20bn for that purpose. “We need to put to work the many billions of pounds that British people save, in British pension funds, and get those savings invested in British projects,” he said. “You could call it — British savings for British jobs.”
But a resulting scheme, called the Pensions Infrastructure Platform (PIP), has raised just £1bn. The initiative, set up under the auspices of the Pensions and Lifetime Savings Association, has invested chiefly in secondary projects rather than new rail, road or energy projects envisaged by Mr Osborne.
Although appetite for infrastructure projects remains strong, most investors prefer not to invest in the construction phase.
Institutional investors — which include sovereign wealth funds, pension funds, insurance companies and asset managers — favour built assets such as airports and toll roads that deliver steady income streams. They are usually averse to taking on the risks involved in construction, as cost overruns and delays can reduce or even wipe out investment returns.
Pension funds in particular crave steady returns from proven assets because they are responsible for producing the retirement income of — in some cases — hundreds of thousands of members.
Mike Weston, chief executive of the PIP, says: “Most pension funds believe their obligations are best matched by investing in assets that are already delivering predictable cash flow. This means projects that have an operating track record, or at least predictable payment streams.”
Richard Threlfall, head of infrastructure at KPMG, agrees that pension funds have traditionally shied away from backing new-build projects. “UK pension funds investing in UK infrastructure projects has been touted by politicians for years as an obvious win-win but actual deals are almost non-existent,” he says.
“UK institutional investors find it hard because investing in new-build infrastructure is not a simple financial transaction,” he adds. “It requires an experienced team able to properly analyse and price the risk being taken.”
Nevertheless, there are exceptions. The PIP has invested in the new £4.2bn “super sewer” being built under London’s Thames River via a fund managed by Dalmore Capital. The project has an unusual financing structure — which required fresh government legislation — that entices investors by giving them a return during the construction period.
Around a third of this will be paid for by Thames Water’s customers through an increase to their bills. The government is acting as a guarantor on the scheme, underwriting financial and construction risks.
There are other initiatives involving pensions investment. Local government schemes are increasingly pooling together to increase their capacity to invest in infrastructure. In one example, five of Britain’s biggest local government pension schemes — Lancashire, Merseyside, West Yorkshire, London and Greater Manchester — have pooled £1.3bn.
Although this fund — called the GLIL — will focus on assets that are already up and running, it will take on some short-term construction risks — up to six months in duration, for example. It has already invested a total of £250m in waste-to-energy plants, an onshore wind farm and new rolling stock for the East Anglia rail franchise.
Even after pooling their assets, the UK’s local government schemes are relatively small compared with large international infrastructure investors, says Chris Heathcote, chief executive of the Global Infrastructure Hub, a G20 initiative that provides a database of government projects.
Mr Heathcote says pension funds have been held back from investing because many lack access to the specialist and expensive teams needed to analyse each project. He believes that benchmarks created by Global Infrastructure Hub will enable pension funds to find deals and participate in the debt financing at the very least. “That will bring these complex projects into the reach of the smaller pension funds,” he says.