(July 17, 2013) — Pension Insurance Corporation has urged the British government to rethink how it is selling infrastructure investment opportunities, and has urged it to set up an investment bank to help.
A report produced by the specialist pension insurance specialist Pension Insurance Corporation and economic advisors Llewellyn Consulting came up with three key objectives which must be met if pension funds and other long-term investors are to be encouraged into the sector.
These are:
1) To create of a National Investment Bank or Fund
2) The reanimation of the Private Finance Initiative and
3) “Invest and Sell” asset transfers
On the first point, the government has already said it is working on an initiative through the National Infrastructure Plan, devised in 2010, with policies incrementally added to each year since.
The plan though, is still more theoretical than practical-something which has hitherto left investors feeling nervous.
The most comprehensive, as well as potentially controversial, option would be the creation of a National Investment Bank (NIB) or fund. The report claimed the idea of a new bank or fund has a forerunner in the form of the writings of John Maynard Keynes in the 1930s and 1940s.
Keynes’s concern at the time was of an extended period of underemployment, if not quasi-secular stagnation, when monetary policy was compromised, and private sector spending was hamstrung by balance-sheet adjustments.
Keynes’ solution was a stable, long term, investment programme, both private and public in origin that would sustain aggregate demand and boost confidence.
“A NIB could in principal be used to offset some of the short-termism of industry and politicians, encourage the rebalancing of the economy via a focus on competitiveness, help to foster green investment (perhaps by taking over the existing Green Investment Bank, created last year), help small and medium sized businesses, and be an important mechanism to tap pension and insurance funding,” the report said.
In the report’s view, a NIB would provide a partial or full guarantee to support the initial equity cost of project finance where the private sector is reluctant to invest, or a partial or full guarantee on the repayment of bonds issued directly by investment projects themselves.
In this way it would assume some or all of the risks of projects, especially in their early stages, and reduce funding costs, and lend to finance investment projects.
It would also raise funds for lending from the capital markets by issuing “national investment bonds” which could be expected to carry a modest premium over the interest rate on government securities.
“These would be attractive fixed income investment instruments for pension schemes, both large and small, and offer a set of benchmark interest rates for infrastructure,” the report continued, adding it would also provide some much-needed stability and confidence for the sector.
On the two other points, the report fully believes that reinvigorating a national Private Finance Initiative (PFI) is a must-have.
“The key consideration with the PFI is the need for government to be willing to shoulder more equity risk in the early phase of a project’s lifespan,” the report said.
“The UK Guarantees Scheme was announced in July 2012 with a view to providing backing for around £40bn of infrastructure projects that have struggled to access private finance because of adverse credit conditions. However, thus far the tangible results have been few, with just two contracts signed.
“Industry players consider that this initiative needs to go further in order to overcome market risk, with perhaps less stringent conditions attached to the structure of the guarantees, and a willingness to extend it to projects that are not entirely dependent on a guarantee.”
And the government should also be willing to put the initial money into projects first, in what the report calls “invest and sell asset transfers”.
The proposal is that the government should borrow an additional sum, say in the region of £15 billion to £30 billion (some 1% to 2% of GDP) to directly finance investment expenditure in projects such as railway lines; sea ports; airports; bridges; toll roads; perhaps even social housing.
The expectation, based on evidence from abroad, such as France’s network of high speed trains (TGV) is that such schemes would, in due course, induce the private sector to spend more.
And if the Treasury is concerned about the potential market and/or rating agency concern at near-term increases in public borrowing, the borrowing could be be re-presented such that they make clear the fundamental distinction between public debt that is backed by saleable assets, and general public debt that is not.
The idea was initially suggested to the UK government by John Llewellyn and Gerry Holtham in 2009 but was rejected on the grounds that there weren’t enough shovel-ready projects and that if there was demand for such investments the private sector would have already stepped up.
The report argues that quantitative easing, low rates, and a poor yielding environment combined with the lack of business confidence means it’s time for the government to reconsider this argument.
What’s on offer if the government completes all three tasks? The report believes encouraging institutional investors in this way could lead to a huge boost to GDP of more than £400 billion.
Mark Gull, co-head of Asset and Liability Management at Pension Insurance Corporation, said: “Risk free yields have been explicitly forced down by policy, pushing up pension liabilities. The government should now seek to increase the supply of suitable risk assets to help trustees support their pension liabilities.
“Ultimately, what is required is a major shift in the government’s understanding of investors’ requirements. This study will help them bridge that gap.”
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