By Daniel Hunter
As the International Monetary Fund (IMF) urges the UK to boost growth through a greater emphasis on infrastructure, the CBI is publishing a new report on how to make infrastructure investment too good an offer for investors to refuse.
The Government declared its support for infrastructure investment in the Chancellor’s Autumn Statement last November. However, six months on, little has happened on the ground.
In its new report, An offer they shouldn’t refuse: attracting investment to UK infrastructure, the CBI has recognised that securing up to £250 billion of investment 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 Solvency II doesn’t act as a barrier to private investment
“Infrastructure spending offers the UK the elusive growth boost we are all seeking," John Cridland, CBI Director-General, said.
"Business has been disappointed that we haven’t made more headway in the past six months, and hopes that this report will act as a catalyst.
“As this report makes clear, 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. By underpinning and lifting the credit rating of certain infrastructure assets, it can make them less risky and more attractive to investors.
“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.
“With banks and institutional investors, including pension funds, working together to find new ways to fund infrastructure development, the Government must play its part by removing hurdles, and acting in a more commercial, investment-savvy way. An attractive, professional one-stop shop window for investors must be the right way forward.
“To help make investors an offer they shouldn’t refuse, the Government must enhance the credit rating of brand new projects, extend capital allowances to cover all types of infrastructure, ensure Solvency II doesn’t act as a brake on growth and consider the introduction of a time-limited dividend tax credit for pension funds investing in new projects.”
Given the state of the public finances, much of the £250 billion the Government identified in its National Infrastructure Plan must come from the private sector. However, while foreign investors have invested in UK infrastructure for some time, our 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-). By using contingent liabilities, to enhance 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.
Other CBI proposals include:
· Banks should look to partner with institutional investors to deliver new investment models that allow them to comply with Basel III requirements without jeopardising long-term investment in infrastructure
· Making the public sector’s approach to infrastructure more commercial, by:
o Having a single “shop window” for infrastructure investors
o Appointing a single manager to each project, directly accountable for its delivery
o Using secondees from the private sector
· Having a better pipeline of upcoming green and brownfield infrastructure opportunities, with all projected construction and operation stages of government-commissioned projects
· Ensuring the Solvency II Directive does not deter insurance companies from investing in infrastructure by focusing on making the secondary legislation less prohibitive
· Extending capital allowances to ensure all infrastructure projects are treated equally
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