Out-Law News 2 min. read
14 Nov 2011, 1:58 pm
Industry publication Partnerships Bulletin said that Infrastructure UK, the Treasury unit responsible for focussing on the country's long-term infrastructure priorities, was developing a model in which traditional funders such as banks would provide the development finance for a project. Pension funds could then come on board to fund the less risky operational phase once construction is complete.
The public sector would likely bear the risk of that refinancing, the publication said.
The NIP was initially published in October 2010. It outlines the scale of the challenges currently facing UK infrastructure and the major investment that is needed to underpin sustainable growth in the UK.
The plan also gives clarity on the Government's role in specifying what infrastructure the UK needs and outlines how it can remove barriers to encourage both private and public sector investment.
The private finance initiative (PFI) model is one of the most common ways for public bodies to procure funding for major public infrastructure projects such as roads, prisons and schools. In a PFI agreement, upfront costs are paid by the private sector and are typically repaid by the taxpayer over a 30 year period.
Infrastructure law expert Barry Francis of Pinsent Masons, the law firm behind Out-Law.com, said that the Government had been examining various alternative methods of funding projects since the liquidity crisis in 2008 made it harder to obtain funding from banks.
"Pension funds seem an ideal solution to give themselves up to investment for certain longer-term, more risk-stable projects – pension funds need long-term investment opportunities, and projects such as roads come with a steady flow of funds once they reach operation phase," he said. "The question is whether sufficient detail can be given to the proposals to excite interest from suitable pension funds."
Francis explained that PFI projects are traditionally split into the 'construction' and 'operation' phases. Projects are traditionally funded by the private sector putting together a financial package to fund the construction phase. They will then need to be refinanced during the operation phase both because interest rates, and therefore the overall cost of the project, will likely have changed but also because the project's risk profile will also have changed as a project becomes reality. Again, this will affect price.
However inviting pension funds to invest when the opportunity to refinance a project arises would not affect the amount of the initial investment needed to "kick start" infrastructure projects, he warned.
"If the Government is not able to make more money available up front, at the construction phase of a project, they could perhaps provide guarantees allowing pension funds to provide the money at the start of a project without taking on the risk," he said.
"Pension funds could always be encouraged to take on the financing role of the private sector at the refinancing stage, but the private sector won't necessarily be interested in recycling that money back into infrastructure."
A recent report in the Financial Times suggested that the Treasury was discussing with larger pension funds what could be done to encourage or enable them to invest in infrastructure. Pension funds in the UK lack the risk management processes which would allow them to assess how best to invest in infrastructure projects, the report said.
A spokeswoman confirmed to Out-Law.com that the Treasury was "talking to the pension funds to see if there is anything we might be able to do to help", but added that it was "early days.
Trustees of pension schemes are legally obliged to make any investment decisions with the interests of the schemes' beneficiaries in mind, and may be liable for damages if they do not do so.
