UK schemes back government infrastructure project

UK - UK pension funds will begin investing in new infrastructure at the start of 2013, according to the chief secretary to the Treasury Danny Alexander.

At a recent speech in the City of London, Alexander said the government had received written confirmation from seven UK pension funds to fund start-up costs, and soft commitments for initial capital allocations.

The National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF) are developing the pension infrastructure investment platform to make it easier for UK pension funds to invest directly in UK infrastructure assets and projects.

The plan is to attract £20bn (€25bn) of pension fund capital to address a funding shortfall for around 500 proposed infrastructure projects over the next decade.

The initiative is part of the ongoing National Infrastructure Plan, the ultimate aim being to provide an environment conducive to business and stimulate growth.

The total cost over the next five years will be £200bn.

The Treasury, NAPF and PPF signed a memorandum of understanding last November. Since then, the Treasury has been working with the NAPF to find appropriate investors, and the platform is expected to raise £2bn by January.

Investment is open to all UK pension schemes.

In connection with encouraging this investment, the Parliamentary Bill designed to set up the UK Infrastructure Guarantee Scheme, offering as much as £40bn for infrastructure investors, had its first reading on 5 September.

The UK government is also seeking investment from sovereign wealth funds and institutional investors overseas.

But Toby Buscombe, principal and senior infrastructure specialist at Mercer, said: "There's not a lot of new information in what Danny Alexander said, and we have been a bit frustrated by the lack of detail from the government to date.

"It's good to see the UK infrastructure guarantee scheme will be enshrined in law, but the lack of detail around the guarantee scheme is striking."
 
He added: "We believe in infrastructure as an asset class, and our clients are increasingly becoming attracted to it. There is a creaking infrastructure asset base across much of the UK and Europe, and many of the traditional financial sponsors of such assets and projects have not got much left on the credit card to spend.

"So there is clearly a need for alternative forms of finance, and finding ways of mobilising more pension scheme capital into these assets makes a lot of sense."
 
From an investor's point of view, Buscombe says the turmoil across Europe in traditional risk assets means clients are looking for alternatives, and that infrastructure offers the potential for stability of returns, together with diversification and attractive yields.
 
"The big risk is assuming that all infrastructure projects are the same, whereas the asset class is very diverse, and the devil can be in the detail on specific projects," he said.

"So the risk is that people don't take the time upfront to understand the asset class and to work out what they are looking to achieve from it, and to understand a specific project and its own characteristics and risks."

He added that the asset class offered a range of project types with different risk profiles, appropriate for different risk appetites.