Bond financing to boost infrastructure

Helia Ebrahimi and Alistair Osborne, 6:04, Monday 28 November 2011
The Treasury is planning to use an innovative form of bond financing to galvanise a planned £200bn of infrastructure investment in the five years to 2015.
It is seeking to access the capital markets to fund greenfield projects, where the risk of construction cost overruns has traditionally deterred bond investors.
The initiative comes alongside a memorandum of understanding signed with the Government by the National Association of Pension Funds and Pension Protection Fund to develop a “new pension infrastructure platform” that encourages retirement funds to invest directly in infrastructure.
Pension funds hold more than £1 trillion in assets but only about 2pc of that is invested in such projects. Yesterday China Investment Corporation, the country’s main sovereign wealth fund, said it would look at investing some of its $410bn (£265bn) fund in UK infrastructure.
Funders of UK infrastructure projects have historically relied on bank finance throughout the construction phase. But that has dried up since the banking crisis, forcing the Government to explore alternative sources of finance.
Acknowledging that both pension funds and bond investors would balk at substantial construction risk, they are expected initially only to be involved in simpler projects, such as schools and prisons that are largely modular in design, or such things as road upgrades and street lighting.
Even so, infrastructure experts question how the Government can attract such investors without offering some sort of “guarantee” against construction risk.
Nick Prior, Deloitte’s infrastructure head, said: “This is going to be highly challenging. They want low risk, stable assets not taking on the major project risk through the build phase. But if you underwrite that risk, it becomes a contingent liability for the Government and an issue for the national debt.”
Another challenge for the Treasury is to create an alternative to the monoline insurance market, which packaged up infrastructure project debt into bonds that were “wrapped” and insured as AAA-rated. That market went with the credit crunch.
The Government, which wants 70pc of the planned £200bn investment to come from the private sector, is seeking to replace the discredited PFI and PPP models. It is today expected to unveil a list of 40 “priority” schemes though Richard Threlfall, KPMG’s head of infrastructure, said: “It seems unlikely that there will be any surprise entries on that list”.
Mr Prior said the Government needed to “find a new pipeline of assets. If you want infrastructure to be a generator of economic growth, you need to start digging now. We need to see shovels in the ground.”