NETHERLANDS - Finance minister Jan Kees de Jager will initiate a pilot project for financing Dutch infrastructure by institutional investors against an inflation-linked return.

In a letter to parliament, the minister said the pilot must clarify how the benefits of an index-linked return for institutional investors would relate to the inflation risk for the government.

De Jager was responding to the findings of a working group comprising representatives from the government and institutional investors. The working group was appointed to examine the recommendation of the 'Ruding Committee' to establish an infrastructure investment fund for institutional investors.

According to the minister, pension funds can already invest in leveraged infrastructure, but they currently do not because of the small number of projects, the limited market for these loans and the relatively low returns.

However, he noted that the new government coalition had agreed to start a "large number" of public/private projects, adding that sufficient Design Build Finance Maintain (DBFM) projects in Europe also need financing.

DBFM projects are carried out by a consortium of private parties in a long-term partnership to build and maintain roads or railroads.

According to De Jager, large asset managers such as APG, PGGM and Mn Services prefer direct participation rather than an investment fund, as this allows them to keep a better grip on their investments.

They have also made clear that they need a continuous flow of investments of at least €3bn a year, the minister said.

He also said the working group had concluded that investments in infrastructure are not cost-effective for smaller institutional investors, as they need to set up a management organisation.

The pilot involves a tender for the reconstruction of a secondary road, which was budgeted at €152m in 2007, and is meant to compare the costs of regular bank finance and index-linked payment as an inflation-linked component on top of a base rate, according to De Jager.

"The tender must show the institutional investors' demands for a real return from the inflation-linked part of the financing," he added.

Harmen Geers, spokesman at APG, said: "We are pleased with this pilot, as it might open doors to more index-linked investments, such as index-linked bonds. So far, the government hasn't been interested in issuing inflation-linked bonds."

According to Geers, APG will offer all tendering construction companies a finance option.

The spokesman said he could not provide details on APG's requirements on returns.