Business lobby group the CBI has called on government to fundamentally change the way it uses cash set aside for capital projects, fully funding less schemes and instead pump-priming a far wider range of projects.
The up-front government cash, which would be the first to get swallowed up should the project go wrong, would encourage private investors to weigh in with the remaining money, the CBI believes. It believes the move would be enough to lift the credit rating of typical infrastructure projects from junk status to investment grade BBB-.
Finding private cash
In its new report, An offer they shouldn’t refuse: attracting investment to UK infrastructure, the CBI recognises that securing the £250bn of investment the government has identified that is needed to repair the UK’s creaking infrastructure will be tough, and has identified four transformational changes which could make a real difference.
- Targeting specific projects to enhance their credit rating and make them more attractive to investors
- Pooling pension funds beyond the Pension Infrastructure Platform (PIP) and building up in-house skills
- Commercialising the public sector’s approach to infrastructure and creating a single, attractive shop window for would-be investors
- Ensuring that new European legislation on risk management doesn’t act as a barrier to private investment
“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 director general John Cridland. “The government must enhance the credit rating of brand new projects.
“By underpinning and lifting the credit rating of certain infrastructure assets, it can make them less risky and more attractive to investors,” he said. “If we can capture just a fraction of the £1.5 trillion of capital held in UK pension funds, and invest a further 2% of their total assets in infrastructure, this would make a huge contribution to renewing our energy, transport and other infrastructure,” he added.
Much of the £250bn the government has identified as needed in its National Infrastructure Plan must come from the private sector. However, while foreign investors have invested in UK infrastructure for some time, the UK’s own institutional investors, such as pension funds, have barely entered the market.
Despite the fundamentals of infrastructure being ideally suited to long-term investors, like pension funds, many institutional investors do not find them attractive, especially brand new, so-called “greenfield” projects, which have a riskier construction phase.
The CBI proposes that the government lifts the credit rating for these projects to above investment grade (BBB-). Using its capital wisely and enhancing the credit rating of several projects at a time rather than fully funding individual ones, the government can help infrastructure to compete with other asset classes.
The CBI also recommends that the Government explores other ways to incentivise pension funds to invest in infrastructure, including by looking at establishing a dividend tax credit targeted purely at new projects would also make infrastructure more attractive to defined benefit pension funds. The tax credit would be designed to attract new investment by UK pension funds and could be taken up over a five-year period and would last the lifetime of the investment.
Pooling Defined Benefit pension schemes’ assets would allow many schemes whose assets are insufficient to invest in infrastructure to enter the market. The PIP is a step in the right direction, but the CBI says more should also be done at a local level, as local authorities in London and Greater Manchester are already demonstrating.
In the long-run, the larger pension schemes will need to build up their capabilities, and partner with others to develop their in-house skills.
How much money is needed?
£250bn is the money needed to fund the 500 projects in the government’s pipeline; total public money committed so far is upwards of £50bn. Particular projects include:
o £16.3bn - cost of the first stage of High Speed 2 from London to Birmingham on current estimates. Including the second phase, expanding this beyond Birmingham to Manchester and Leeds, is estimated to push the total cost of the project to £32.7bn.
o £4.1bn – the Thames tunnel, a crucial addition to the sewer market in the UK, is estimated to cost over four billion.
o £1bn investment committed by government to the first Carbon Capture and Storage schemes, with several billion more required to launch a full set of pilots.
o £22bn Ofwat and the water industry are implementing £22 billion programme of investment in water infrastructure between 2010 and 2015.