UK Report Advises Gov't to Step Up Commitment to Infrastructure

(April 15, 2011) — Government incentives would help encourage investment in infrastructure by pension funds, a report by the Business Infrastructure Commission states.

“The financing of infrastructure has never been an easy process and the credit crunch made it harder. But there are options available for plugging the country’s infrastructure funding gap, including the application of the Regulated Asset Base model and encouraging pension funds to invest more in the sector, to ensure Britain has the infrastructure it needs and deserves,” Richard Abel, Managing Director at Macquarie Infrastructure and Real Assets, says in the report.

According to a paper titled “Tacking the Infrastructure Puzzle,” the UK suffers from some of the most congested and problematic infrastructure in the developed world. “We have the most congested roads, rail and airports in Europe. Much of our energy generating capacity needs urgent replacement, and the need for investment in high-speed broadband is vital to businesses in all areas of the country,” the report states, asserting that the government could save between £2 billion and £3 billion a year on infrastructure procurement. “We must take action now to avoid significant long-term damage to our economy and our environment.”

Professor David Begg, chairman of the Business Infrastructure Commission, urges in the report that the government should focus on piecing together the so-called infrastructure puzzle by concentrating on a detailed long-term infrastructure strategy and on procurement reform and improvements to the planning system for major projects. Additionally, the report advises focusing on attracting private finance by enabling the pension and insurance industry to increase levels of investment in infrastructure by introducing a stable regulatory framework and appropriate incentives.

As an investment, infrastructure is not yet as ‘mature’ or well-understood and well-known by investors, compared with, government debt, the report explains. Therefore, there is growing opportunity for institutional investment in the sector to grow further and attract greater volumes of equity. In the UK the level of infrastructure investments is estimated to be under 1% of pension fund assets (total UK pension assets in 2009 were estimated to be worth around £1 trillion) compared with 8-15% in Australia or Canada. Consequently, plugging the infrastructure funding gap involves mobilizing these large pools of ‘institutional’ money.

A recent Deloitte survey of more than 30 fund managers across Europe acknowledges the burgeoning popularity of infrastructure investment, concluding that the sector has gained sufficient influence to be seen as a separate and distinct asset class within the alternatives space. The survey reveals that over the last 12 months, more than €20 billion ($29 billion) of private sector investment in infrastructure assets have been completed in Europe. According to Deloitte, infrastructure funds have become better able to raise new capital and invest existing committed capital, due to the growing number of fund managers entering the infrastructure market coupled with the changing approach of pension fund investors. Meanwhile, specialist funds will continue to lead the way on renewables and public private partnerships (PPP) and private finance initiative (PFI) infrastructure assets, the survey notes.

Pensions are generally leading the charge for infrastructure investment due to their steady cash returns. Building off existing, if informal, cooperation with other Canadian funds, the $53 billion Ontario Municipal Employees’ Retirement System (OMERS) has suggested that a global alliance of infrastructure investors would help pensions further build up their portfolios. Infrastructure has been a staple of OMERS’ portfolio for years through its Borealis subsidiary, but is gaining momentum elsewhere as funds grow in size and are thus able to allocate more capital to these often illiquid investments.