Pensioning off PFIs?


With the recent announcement that Amey is preferred bidder for a £2bn private-finance initiative (PFI) highways contract with Sheffield City Council, one could easily forget PFIs are not flavour of the month.

In theory, the Treasury is still trying to reform the funding model into something which ‘takes advantage of private sector expertise, but at a lower cost to the taxpayer’.

However, it has yet to publish its review to that effect, despite the department collecting all evidence submissions by February this year. A spokeswoman said the Government would report back ‘in due course’.

On recent evidence it would appear councils still have some use for the former model when it comes to transport infrastructure, and the Treasury, in dire need of capital for infrastructure projects, has little room for manoeuvre. Nevertheless, the Highways Agency has not awarded a Design Build Finance and Operate (DBFO) contract – its equivalent to a PFI – since 2009, and has no current plans to procure any others.

One option which appears to have been considered as at least a partial alternative is using pension fund capital. Around the time the Treasury announced its PFI review, the Government signed a memorandum of understanding with the UK’s National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF) to create a new investment platform.

Chancellor George Osborne claimed to have negotiated an agreement with the two pension funds, ‘to unlock an additional £20bn of private investment in modern infrastructure’. ‘You could call it “British savings for British jobs,”’ he said in his Autumn Statement.

However, pension funds are not famous for their infrastructure investment. A 2011 Organisation for Economic Co-operation and Development (OECD) report said: ‘It has been estimated less than 1% of pension funds worldwide are invested in infrastructure projects excluding indirect investment in infrastructure via the equity of listed utility companies and infrastructure companies’.

Mike Taylor, chief executive of the London Pensions Fund Authority (LPFA), recently spoke to Surveyor after the LPFA proposed pooling London’s different local government pension funds in order to save management fees.

It was suggested the scheme could generate around £2bn towards local infrastructure projects.

But Mr Taylor said this was based on an average – across the 34 or so different pension pots which could potentially be involved – of a 5% investment in global infrastructure.

The LPFA invests this much, but by no means all of it goes on local infrastructure, for which Mr Taylor conceded there was no specific allocation.

The 2011 OECD report, while highlighting the importance of pension fund investment in infrastructure, stated: ‘High upfront cost, lack of liquidity and long asset life of the projects require significant scale and dedicated resources to understand the risks involved, resources which many investors are lacking.

‘These characteristics imply infrastructure investment – at least in the forms it is currently offered – may not be a suitable proposition for all investors.’

And so far, the market has remained quiet on the Government’s attempts to woo pensions funds.

In March, prior to the Budget, PM David Cameron announced ‘the first wave of £2bn of investment by 2013’ would come from the pensions platform established under the chancellor’s memorandum of understanding.

Not only does this represent a mere one-10th of the Government’s initial aims, but also no specific projects have been earmarked for investment yet.

The question of how one could tempt more pension capital to focus on transport infrastructure leads back to road tolling, as this appears the most obvious way of giving private investors the kind of returns needed.

After Amey’s successful bid in Sheffield, its chief executive, Mel Ewell, told Surveyor it was important to keep ‘an open mind’ about how best the private and public sectors could work together.

But, as far as road tolling is concerned, the public appear unready, as Mr Cameron tacitly acknowledged in March by saying only new roads could be tolled.

The past may be a different country but so is the future.

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