September 29, 2011 11:52 pm

Treasury courts pension funds

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The Treasury has entered exploratory talks with pension funds and other institutional investors to see if it can assist in creating structures that would let them put serious money into the £200bn worth of infrastructure investment that the UK needs over the coming decade.

The move comes as a serious “funding gap” for economic infrastructure such as energy, transport and telecoms is emerging in the wake of the financial crisis, as it also is for private finance initiative projects including hospitals, schools and waste disposal plants.

Stressed banks, which are the traditional source of finance, are facing mounting capital requirements and have either pulled out of funding the 30-year projects, or are prepared to lend only for much shorter periods and at much higher interest rates than in the past.

Pension funds and insurers, with their need for long-term investments to match their long-term liabilities, are an obvious substitute source for such finance, and larger ones play a significant role in the US and Canada for example.

UK pension funds, however, while between them holding many hundreds of billions of pounds of assets, are individually smaller. Very few have developed the skills needed to assess the risks in projects and invest at a relatively early stage, with the Treasury now discussing what might be done to encourage or enable them to do that, either separately or collectively.

A Treasury spokesman said: “We are talking to the pension funds to see if there is anything we might be able to do to help. It is something we are looking into. But it is early days.”

A report last year from the European PPP Expertise think tank, said pension funds and other capital market players are an obvious source of funds. It added, however, that it is likely to require a “public sector push” to make that happen.

Each of the interests in the area - from banks and advisers to the institutional investors themselves - tend to look to others to come up with the solution. And private players are “looking to the public sector to create the right incentives or support mechanisms.”

The move comes as a study by the credit rating agency Moody’s says European governments plan to continue to rely on the private finance initiative and on public/private partnerships to fund big capital projects.

Concerns about Irish, Portuguese and Spanish debt has seen the credit rating for a small number of projects reduced, it says. But the binding contractual commitments by the public sector to pay out on projects means PFIs and PPPs continue in general “to be well insulated from the financial crisis”.

Even the UK government’s drive to get £1.5bn of savings out of deals that are already up and running has not produced any change in credit rating, the agency says, chiefly because the reduction in payments will come from reducing the scope of projects or the public sector taking back risks it had passed to the private sector.

It too, however, identifies a funding gap emerging for future projects as banks ability and willingness to lend is reduced.

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