(July 18, 2012) — Infrastructure investing has received a boost in the United Kingdom as the government announced it would underwrite billions of pounds’ worth of deals and support stalling privately financed projects.
Chancellor George Osborne said the UK Treasury would stand behind up to £40 billion in commitments that would ensure ‘nationally significant’ infrastructure projects were initiated and completed.
Chief Secretary to the Treasury Danny Alexander, said: “The measures we’re announcing today will help work get started on many important infrastructure projects and help our major exporters, providing lasting benefits for thousands of people and a significant boost to the economy.”
The news comes as pension funds and other large institutional investors are taking a greater interest in infrastructure investing. The National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF) are collaborating on a deal worth £2 billion that will invest in infrastructure projects.
Judith Donnelly, partner at law firm Clyde & Co, which is working on the NAPF/PPF deal, told aiCIO: “This is excellent news for pension funds and other institutional investors considering investment in infrastructure. Pension funds are keen to access the benefits of infrastructure investment, such as stable, long-term, inflation-linked returns. However, some have expressed concerns about the degree to which it is appropriate for pension funds to bear construction risk. The Treasury’s proposal will go a long way to alleviating these concerns and should attract more capital to UK infrastructure developments.”
Infrastructure is seen as a good way for investors to match income that rises in inflation, however, allocation remains relatively weak in major markets such as Europe and the United States. Only 4% of assets managed by the top 100 global alternative asset managers were held in infrastructure funds, according to a survey published this month by consultants Tower Watson.
As an indication of the direction of the market, Allianz Global Investors, Europe’s largest fund manager, announced the creation of an infrastructure debt team this month. The firm cited significant demand from insurers, foundations, pension funds and other investors with long-duration liabilities, seeking investments with stable cash flows and risk-adjusted returns that are currently more attractive than government bonds.
Most major European sovereign bonds, which are a staple investment for most large institutions, are barely providing a positive yield over a 10-year term – some are even costing investors to hold them.
Deborah Zurkow, CIO of infrastructure debt at Allianz Global Investors, said: “Whether it be developing economies building new infrastructure for the first time or OECD economies replacing outdated existing infrastructure, the projected capital requirements for infrastructure investment over the course of this decade and next are considerable. In OECD countries alone, annual investment requirements are projected to rise from $700 billion to $1 trillion between now and 2030.”
Click here for the Treasury statement.