UK - A mutual fund backed by UK local authority pension funds could exist in embryonic form by early next year which will invest in public works such as the latter stages of private finance initiatives (PFI) and public-private partnership (PPP) projects.

A discussion paper containing possible models, as well as governance arrangements, will be presented at the Local Government Association (LGA) Conference at the end of June, and is being seen by officials involved as an opportunity to test the appetite for such a fund.

The initiative comes from the LGA, the New Local Government Network, and Councillor Nick Chard, currently cabinet member for finance at Kent County Council.

"We were looking for a better way of managing councils' short-term deposits, while helping the local community," said Chard.

"The problem is that you're borrowing short and lending long. So while you could use deposits for short-term lending, you also need much longer-term funding, which makes this a potential vehicle for pension fund investment," he argued.

The new fund would be professionally run and be unitised, to provide liquidity. It would exist to finance projects in a specific region - likely to be south-east England - although investment could come from outside the area too.

Chard envisages that up to 10% of the money in the fund could come from pension funds.

The group has already had discussions with banks and accountants, who it is said have been broadly supportive of the principles.

"The Treasury has said it wants to promote funding plans for PFI/PPP projects, but wants an exit strategy, which ties in very well with the post-commissioning phase of projects," continued Chard. "The Treasury would manage the front-end funding, but the post-commissioning phase is generally low-risk, and is something the new fund could release money for."

In recent months, several other councils have launched or suggested similar initiatives.

East Sussex County Council is in discussions over setting up a bank to provide business credit for local SMEs, backed by the council's own pension fund.

A council spokesperson said: "Protecting the pension fund would be at the heart of this proposal. Established rules and safeguards, which determine what the pension fund could invest in, would need to be followed."

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