VITAL infrastructure projects could be given the lift they need to get off the ground if the government uses small, targeted amounts of cash to reduce risks at the star of a project, according to a report out today from the Confederation of British Industry.
The business group believes private investors such as pension funds do want to invest in projects such as road building, but are put off by risks around lengthy construction times.
By putting relatively small amounts of money into the early phases of projects, the group hopes the government could efficiently attract private cash to fund most of the facilities.
Problems with long-term construction include the political and regulatory regime which may change mid-way through building, cost overruns, long gaps between bidding for contracts and starting construction, and cash-flow worries as investors may be unwilling to wait many years before they start to see any income from their investment.
As a result, greenfield projects rarely receive investment-grade credit ratings, and so the CBI wants the government to step in with guarantees, mitigating these risks and enticing more private investors to take part.
The government has already committed a total of £50bn to infrastructure construction, which the CBI says should be used to leverage private spending rather than fully funding single large projects.
“If we want to see the billions of pounds needed to upgrade our ageing infrastructure and secure jobs and growth for the long-term, the government must make smarter use of limited public finances,” said CBI boss John Cridland.
“If we can capture just a fraction of the £1.5 trillion of capital held in UK pension funds, and invest a further two per cent of their total assets in infrastructure, this would make a huge contribution to renewing our infrastructure.”
The report also calls for the government to put further effort into setting up a Pension Infrastructure Platform (PIP) to encourage funds to pool resources.
Currently the market is highly fragmented relative to some other countries’ pension industries, which limits the funds’ ability to invest in major projects.
Were these to be combined in a specific infrastructure pool, the CBI hopes funds of all sizes could combine resources and access the specialist skills needed to invest in the sector.
“Pension managers are eager to get more involved with bricks and mortar, but often find it difficult to do so,” said Joanne Segars from the National Association of Pension Funds.
“It’s good to see clear support from business leaders for the PIP. Many of the CBI’s concerns about skills, scale, and investment viability are well known to pension funds, and the PIP will help address them.”