UK infrastructure plan to include railways

[John Ashworth]

Pension funds back George Osborne's infrastructure plan with £4bn

Chancellor's vision of building recovery with private cash for roads, high-speed railways and power stations a step closer

Dan Milmo, industrial editor
guardian.co.uk, Sunday 4 March 2012 16.02 GMT

British pension funds aim to launch a multibillion-pound infrastructure fund next year that will invest up to £4bn in government projects from roads and high-speed rail lines to power stations.

The Pension Protection Fund and the National Association of Pension Funds are in discussions with 20 others to create a vehicle that will consider investing in the projects outlined by the chancellor, George Osborne, in last year's national infrastructure plan. That shortlist will be whittled down to between 10 and 12 contributors, who are expected to put in starter capital – to fund staff hires – and a further cash injection to launch the investment fund. The NAPF and PPF are aiming to raise between £1bn and £2bn in an initial fundraising drive that could rise to between £3bn and £4bn with leverage, as they target a launch date of January 2013.

Alan Rubenstein, chief executive of the PPF, said: "Our focus is building a core of something like 10 to 12 funds who will put up development capital to take us forward to formal launch in January 2013. We are making good progress."

Rubenstein expects the founder funds to contribute about £1bn, with a further £1bn raised by subscriptions from other investors.

The fund could follow the example of Australia's Industry Funds Management, an investment vehicle whose infrastructure interests, which include Anglian Water in the UK, are worth A$10bn (£6.8bn). The PPF envisages that the fund will be a not-for-profit entity, with any surplus reinvested in further projects, although initial earnings will be used to pay off the startup capital and loans. "One thing pension funds have told us is they don't like unnecessarily costly fee structures, so we are looking to set the platform up as a not-for-profit vehicle," said Rubenstein.

Another model the fund could follow is Borealis in Canada, which takes a significant stake in deals and is co-owner of a 30-year concession to operate the High Speed One rail line between London and the Channel Tunnel.

It is understood that the NAPF and PPF have not ruled out sharing management of the fund with a leading infrastructure investor. The PPF's bullishness is in contrast to scepticism over whether the government will be able to secure the £20bn in investment it is seeking from pension funds and the insurance community. KPMG warned last week that British funds do not have the skill set to invest in infrastructure, while new solvency regulations for insurers could impede putting such projects on their balance sheets.

The infrastructure fund is the product of a memorandum of understanding signed by the NAPF and PPF with the government last November, in which the groups pledged to develop an investment vehicle for big projects.

According to the national infrastructure plan published in Osborne's autumn statement last year, the government needs £200bn of investment in transport, power and telecoms projects over the next five years and the majority of the funding will come from the private sector.

The PPF has about £10bn under management and was launched in 2005 to run the pension assets and liabilities of companies that have folded with underfunded defined-benefit schemes, covering about 12 million members. The NAPF represents 1,200 pension funds who hold assets worth £800bn.

Investors are believed to be mulling some outstanding issues with the fund, such as insuring against the construction risk inherent in new-build or "greenfield" projects, from high-speed rail lines to power stations. Investors are traditionally nervous of underwriting construction projects that could, for a variety of reasons, run over budget or suffer from serious technical problems once launched.

Investors are discussing whether the government can provide a guarantee for construction risk or whether state-controlled banks could get involved, possibly through issuing convertible bonds that transform into equity upon completion of the project.