February 23, 2012, 12:58 AM EST
By William Selway and Martin Z. Braun
Feb. 23 (Bloomberg) — Shirley Kimber walked off the production line from her $17.56-an-hour job at a Birds Eye Foods plant in Fulton, New York, for the last time in November.
The new owners, Pinnacle Foods Group LLC, a company held by the private equity firm Blackstone Group LP, closed the factory and fired 270 workers. Kimber, 64, got eight weeks severance for her 12 years on the job and lives with her 37-year-old unemployed daughter in the rust-belt town of about 12,000, northwest of Syracuse.
“They just used us. That’s exactly what they did,” Kimber said. “And then they kicked us to the curb.”
While the closing killed union jobs, it may also help protect the retirement benefits that organized labor bargained for on behalf of public employees.
In addition to Blackstone, the world’s largest buyout firm, New York State’s two public employee pensions and four New York City pensions stand to gain from the drive for higher profits at Pinnacle foods. The retirement funds poured $920 million into the $20 billion Blackstone fund that owns Pinnacle, which took over Birds Eye in 2009.
Public pension funds — seeking to boost returns after failing to secure the 8 percent annual investment earnings needed to pay benefits for teachers, police officers and other civil servants — are the biggest source of cash for private equity firms.
Faster Pace
Companies owned by New York-based Blackstone added jobs at a faster pace than the U.S. economy for the past two years, said Peter Rose, a spokesman for the firm. Private equity’s investment returns “are one of the few ways that pension funds can help keep the promises that they have made to their retirees,” he said.
Pinnacle Foods closed the Fulton plant to cut transportation costs by moving operations closer to suppliers, said Michelle Weese, a spokeswoman for the company.
While firms such as Blackstone and Bain Capital LLC, co- founded by Republican presidential candidate Mitt Romney, have drawn scrutiny for their paring of jobs and the low tax rates enjoyed by executives, the role of taxpayer money in financing their acquisitions has received less notice.
By September 2011, public pensions with at least $1 billion in assets had an average of 11 percent of their money in private equity, more than triple their investments a decade earlier, according to Wilshire Associates, a Santa Monica, California- based consulting firm.
Rising Investment
Such funds have about $400 billion with private equity, 29 percent of the total, according to Prequin Ltd., a London-based private equity research firm. That’s more than twice what was put in by private pension funds, the next biggest investor.
Public pensions “have been the investors that have really fueled private equity’s rise,” said Steven Davidoff, a professor of law and finance at Ohio State University’s Moritz College of Law in Columbus, Ohio. “For those people who complain about private equity, the money is really coming from pension funds.”
Private equity firms buy companies and seek to trim costs, improve operations, boost profits and resell them. The takeovers are typically financed by debt taken on by the purchased companies.
The business has been drawn into the presidential contest as Romney parried attacks from Republican rivals who suggested he built a fortune of as much as $250 million with takeovers that cost workers their jobs. He has disputed this characterization.
Private equity executives, including Blackstone managing director and Pinnacle Foods director Prakash Melwani, have helped stock Romney’s campaign war chests. Melwani declined to comment.
Mayor Objects
Fulton Mayor Ronald Woodward, a Republican, said the Birds Eye takeover has devastated his town, adding that he is troubled to learn that New York pension money helped finance the acquisition.
“Isn’t that a slap in the face to the people in Fulton that are losing their jobs and paying the salaries of those union workers and they’re using their investments there,” Woodward said. “It’s like biting the hand that feeds you.”
Her severance exhausted, Kimber now lives off unemployment benefits of $1,620 a month, plus $100 a month in pension payments, she said. She pays 22 percent of that for health insurance. Her daughter, also named Shirley, has a biology degree but can’t find a job using that specialty. To make a few extra dollars, she babysits and sells books online.
Executive Compensation
Robert Gamgort is chief executive officer of Parsippany, New Jersey-based Pinnacle Foods, which also makes Dunkin Hines cake mix, Vlasic Pickles and Hungry Man frozen dinners.
Gamgort was awarded compensation valued at $5.5 million in 2010 and $11.6 million in 2009. Sara Genster Robling, head of the Birds Eye division, got pay packages worth $1.5 million in 2010 and $2.1 million the previous year. Most of the pay was in company stock. Gamgort and Robling weren’t available for comment, she said.
After the collapse of 1990s Internet bubble left pensions reeling from investment losses, state and local government funds poured money into private equity firms. The financial crisis of 2008 and subsequent recession left U.S. state public pensions $694.2 billion short of having enough assets to pay future benefits by the end of their 2010 budget years, according to data compiled by Bloomberg.
Higher Returns
Private equity deals promised higher returns than stocks and bonds. The 15-year median return on stocks for public pension funds with more than $1 billion assets, before fees, is 5.5 percent annualized as of Dec. 31, 2011, while the median return for private equity in that time period is 9.8 percent, according to the Wilshire Trust Universe Comparison Service.
The deals have served pensions well. New York state’s teachers pension’s private equity investments delivered an annual rate of return of 11.8 percent as of June 30, 2011. New York City’s private equity investments in four of its five pension funds have returns ranging from 9.2 percent to 11.1 percent.
That helps save taxpayers money. For workers and the acquired companies, the benefits can be harder to discern.
A study led by the University of Chicago’s Steven Davis, based on 3,200 private equity deals from 1980 to 2005 and published in September, sought to quantify the impact. It found that employment at acquired companies dropped 6 percent in the next five years relative to stand-alone peers as they shuttered lagging businesses.
‘Creative Destruction’
Still, the companies also added workers by opening new business lines and through acquisitions. The study concluded that such deals accelerated the “creative destruction” of jobs, with a “modest” impact on total payrolls.
“Private equity investors are remorseless in their perspective on business,” said Robert Bruner, the dean of the University of Virginia’s Darden School of Business. “That is a manifestation of the rigors of the capitalist system,” he said. “It accelerates the process.”
Rose Pitcher, 50, experienced that first-hand. After working 25 years at the Birds Eye plant in Fulton, she wrapped up her last shift in November, with eight weeks severance, as Pinnacle moved the plant’s jobs to Wisconsin and Minnesota. Other employers in the area, like an apple-packing plant in Oswego, pay less than half the $17 an hour she was making overseeing the machine sealing packages of Voila! ready-made meals at Birds Eye.
“There just doesn’t seem to be anything out there,” she said.
Portfolio Companies
Blackstone says it has a record of boosting employment overall. In 2011, Blackstone’s portfolio companies added 4.6 percent to their payrolls by creating new jobs, rather than through acquisitions, and increased them 3 percent in 2010, said Rose, the company spokesman. That outpaced job growth in the economy, he said.
“Private equity is a vital source of capital to grow and strengthen companies where public capital cannot or is unwilling to invest,” said Rose.
New York Comptroller Thomas DiNapoli, the sole trustee of New York’s $140 billion retirement fund, declined to comment. New York City Comptroller John Liu declined to comment. John Cardillo, a spokesman for New York state’s Teachers’ Retirement System, declined to comment.
Drivers coming into Fulton are greeted by the red-brick Nestle chocolate factory, where for 103 years the company made condensed milk, semi-sweet morsels and Crunch Bars. It shut down in 2003.
The Nestle factory employed 1,500 people at its height. In 1994, Miller Brewing also shut down a plant just outside of town, putting 900 people out of work.
Taking Down Signs
A couple of years after Miller shut its operations, city officials took down signs on Routes 481, 48 and 3, the thoroughfares entering Fulton, that read: “City with a Future.”
It’s a far cry from the 1930s, when the New York Sun wrote a story about Fulton entitled “The Mystery of Fulton, N.Y., the City the Depression Missed.” Then, factories powered by electricity generated by the Oswego River, which bisects the town, churned out knives, textiles and shotguns. The Fort Stanwix Canning Co. opened a plant in Fulton in 1902. In 1938 it began packaging Birds Eye vegetables.
Two Decades
The Birds Eye plant had survived during the past two decades as it passed from General Foods Corp. to Philip Morris Cos. to Dean Foods Inc. In 1998, Dean Foods sold it to Agrilink Foods Inc. for $400 million. In 2002, Agrilink sold a majority stake in the company for $175 million to Vestar Capital Partners, a private equity firm where Melwani was a managing director. Melwani is now at Blackstone.
Vestar transformed the company. In 2006, it shifted focus to brand-named foods and developing new product lines. It announced that it would jettison most of its non-brand frozen food businesses, affecting five facilities, including three in western New York, that employed about 740. In 2007, Birds Eye borrowed money to pay Vestar and Agrilink a one-time $298.2 million dividend, according to corporate filings.
Vestar turned Birds Eye into a smaller, profitable company. By 2009, Birds Eye earned $54 million on sales of $936 million, compared with a $131 million loss and sales of $1 billion in 2002. Its workforce had shrunk to 1,700 from 4,000, filings show.
In November 2009, Pinnacle Foods, owned by Blackstone, agreed to buy Birds Eye for $1.3 billion. The purchase was financed by $1.15 billion of debt. Blackstone contributed $260 million in equity. Carol Makovich, a Vestar spokeswoman, declined to comment.
$17 Million
Blackstone affiliates were paid $17 million in acquisition fees for arranging the Birds Eye deal. Pinnacle has also paid Blackstone at least $15.5 million in management fees since it was taken over by the firm in 2007, according to company filings.
Under Blackstone, Birds Eye’s sales and profits have risen. In the quarter that ended in September, sales were $248 million, an 11.2 percent increase from the year earlier. The growth was driven by expanded distribution and demand for new products, in addition to lower new product distribution expenses, the company said in a filing.
Charles Murphy, 66, had worked at the Birds Eye plant in Fulton through a series of owners for 22 years before retiring at the end of 2010. He said employees were optimistic that the factory would survive.
Schumer Press Conference
In January 2010, U.S. Senator Charles Schumer, the New York Democrat, held a press conference with workers in Fulton, saying he would keep pressuring the company until all the jobs were safe. Schumer said he called Stephen Schwarzman, Blackstone’s chairman and co-founder, and asked him to spare the factory.
“No one expected that place to close,” said Murphy.
Then Pinnacle started cutting jobs. In mid-2010, it began closing down the Rochester, New York headquarters where 200 worked. That December it announced the closure of a Tacoma, Washington, plant that employed 160 and would shift production to Iowa.
On April 13, 2011, a Wednesday, employees coming to work at the Fulton plant saw a makeshift sign taped to a window: A mandatory meeting for all employees would be held at the Fulton War Memorial, the town’s exhibition hall and gymnasium on the 15th.
A Birds Eye lawyer told those gathered that the company would close the Fulton plant and move some of the jobs to Wisconsin and Minnesota.
Paul Robinson, a 59 year-old who ran packing machines remembered asking managers, “What can we do to keep the plant open?”
‘Minds Made Up’
Nothing, he said Pinnacle managers replied. “They had their minds made up.”
Wisconsin had offered Pinnacle $1.3 million in incentives to shift production to the state. Worker’s compensation costs were also lower — an average of $1,100 per employee in Wisconsin compared with $12,000 in New York, Mayor Woodward said.
While new jobs were added elsewhere, the closures cut the Birds Eye’s payroll by about 300, or 17 percent, as it eliminated more jobs than were added elsewhere, according to Weese, the Pinnacle spokeswoman. She said such costs are common after corporate mergers.
“Synergies are true with every deal. It’s not unique to this particular deal,” Weese said. “It’s less expensive to run one company than two.”
Not all public pensions have stood by as a private equity firms managing their money announced job cuts.
Hugo Boss
In 2010, after hearing that clothing-company Hugo Boss AG was planning to close a factory in a Cleveland suburb where it manufactured suits, threatening the jobs of 300 workers, Ohio’s public employee pension fund contacted Hugo Boss’s owner, London-based private equity firm Permira Advisers LLP.
Ohio’s Public Employees Retirement System had invested $80 million in the Permira fund that owned Hugo Boss. After writing to Permira and not getting a response, the pension fund followed up with another letter saying it would “think long and hard” about investing any more money with Permira, said Hugh Quill, a former Ohio pension trustees. The plant was never closed.
“These guys could have cared less about a plant in Cleveland, Ohio, but they did care about not having institutional investors for their next $500 million offering,” Quill said. “I think it was the right thing to do, given the amount of pain and suffering that was going on in the state.”
The California Public Employees’ Retirement System and public pensions from Maryland and Pennsylvania, which invested in Permira, also lobbied the firm. So did New York City’s pension funds.
Liu’s Letter
“New York’s pension funds do not wish to be investing in job loss or in a global ‘race to the bottom,’” New York City Comptroller Liu wrote in a letter to Permira.
Chris Davison, director of communications for Permira, declined to comment.
In Fulton, Charles Murphy’s wife, Donna, had been out on medical leave since October 2010 when the Birds Eye closure was announced. Still struggling with lung cancer, she lost her job when she couldn’t return to work for the factory’s last two months. That meant she didn’t get any severance pay. She worked there for 25 years.
Pinnacle’s Weese said details about medical leave and severance pay were worked out in negotiations with the employees’ union, Workers United Local 1822.
‘Devoting Your Life’
“You spend that many years devoting your life to the company, coming in to work every day, and they think nothing of you,” said Murphy, who lives in nearby Oswego. “This hurt a lot of people’s livelihoods.”
Fulton mayor Woodward, who was a maintenance supervisor with Nestle when the plant shut in 2003, said his story is another sign of the times.
“What you’re doing by doing that — you are systematically eliminating the middle class,” he said. “You’re going to be rich or you’re going to be poor. There’s no in between.”
–Editors: Jeffrey Taylor, Larry Edelman
To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; Martin Braun in New York at mbraun6@bloomberg.net.
To contact the editor responsible for this story: Jeffrey Taylor at Jtaylor48@bloomberg.net
http://tourism9.com/ http://vkins.com/
2012年2月19日星期日
City fund to invest in business startups and expansions
Anchorage city government is creating a fund that will invest in private businesses — specifically, local start-ups and existing operations that are expanding.
The investment money comes from a $13.2 million federal allocation. Anchorage is the first city in the U.S. to receive an allocation from the Treasury Department’s state small business credit initiative, according to the mayor’s office. Elsewhere, states are operating such funds.
The Anchorage fund, called the 49th State Angel Fund, will loan money or take an ownership interest of up to 10 percent of the value of enterprises it invests in, said Allan Johnston, a former investment firm manager who is helping the city put the fund together. He is married to Assembly member Jennifer Johnston.
The fund’s purpose is to spur economic development, create jobs and promote entrepreneurship, city Chief Financial Officer Lucinda Mahoney said in a written presentation.
Exactly how the program will work is still being developed, Allan Johnston said. Eventually, he said he thinks the best system would be for private “angel funds” to be established and for the city money to go through them.
But in the initial version, the mayor and the city’s chief financial officer will make decisions on which businesses to invest in based on recommendations from an advisory committee of financial experts.
The Anchorage Assembly unanimously approved the plan last week.
Anchorage Assemblyman and mayor candidate Paul Honeman sent out a campaign statement critical of the way the fund management is set up. He thinks the Assembly should have a role in confirming advisory committee members and maybe confirm who gets loans.
But he said Friday that he voted for it without proposing any changes because he didn’t want to jeopardize Anchorage getting the money.
He noted the city has 90 days to set up the program and says there’s time within that period to make changes.
Assembly member Patrick Flynn, in his blog, questioned whether it would be a good idea for the Assembly to be more involved. “We want to substitute our political judgment for the fiscal judgment of financial professionals?” he asked.
Bill Popp, president and CEO of the Anchorage Economic Development Corp., said his group supports the city’s move.
“Angel funds” such as this one fill gaps in the financing of a new or expanding business, Popp said. Such funds tend to be small and community based, he said.
“AEDC is pretty excited this fund is coming into being,” he said.
Popp told the Assembly it “fills a role the private sector has not been willing to take on to this point.”
Strings attached to the federal funds:
• There has to be a 10-to-1 match for the federal money. A $1 investment from the 49th State Angel Fund must lead to at least $10 of private funding, the city news release said.
So the $13.2 million in federal money could generate $140 million or more in economic activity, Popp said.
• The target investment is a firm with 500 or fewer employees. Seven hundred fifty employees is the upper limit.
With these requirements, it won’t be for mom-and-pop retail outfits, Popp said. The start-up or expanding business venture would have to have a sizable investment, he said. Asked what kinds of businesses might qualify, he said a company making high-value electronics might, or an information technology firm with significant reach.
Lance Ahern, now a city employee, testified at the Assembly that when he started Internet Alaska Inc. in 1994 investment money was scarce. The company was the first local and statewide Internet service provider in Alaska, Ahern said.
He wasn’t able to get bank loans. “When I started my first company the investors were me, Visa and Mastercard,” he said. “This program is really good.”
Reach Rosemary Shinohara at rshinohara@adn.com or 257-4340.
http://tourism9.cm/ http://vkins.com/
The Anchorage fund, called the 49th State Angel Fund, will loan money or take an ownership interest of up to 10 percent of the value of enterprises it invests in, said Allan Johnston, a former investment firm manager who is helping the city put the fund together. He is married to Assembly member Jennifer Johnston.
The fund’s purpose is to spur economic development, create jobs and promote entrepreneurship, city Chief Financial Officer Lucinda Mahoney said in a written presentation.
Exactly how the program will work is still being developed, Allan Johnston said. Eventually, he said he thinks the best system would be for private “angel funds” to be established and for the city money to go through them.
But in the initial version, the mayor and the city’s chief financial officer will make decisions on which businesses to invest in based on recommendations from an advisory committee of financial experts.
The Anchorage Assembly unanimously approved the plan last week.
Anchorage Assemblyman and mayor candidate Paul Honeman sent out a campaign statement critical of the way the fund management is set up. He thinks the Assembly should have a role in confirming advisory committee members and maybe confirm who gets loans.
But he said Friday that he voted for it without proposing any changes because he didn’t want to jeopardize Anchorage getting the money.
He noted the city has 90 days to set up the program and says there’s time within that period to make changes.
Assembly member Patrick Flynn, in his blog, questioned whether it would be a good idea for the Assembly to be more involved. “We want to substitute our political judgment for the fiscal judgment of financial professionals?” he asked.
Bill Popp, president and CEO of the Anchorage Economic Development Corp., said his group supports the city’s move.
“Angel funds” such as this one fill gaps in the financing of a new or expanding business, Popp said. Such funds tend to be small and community based, he said.
“AEDC is pretty excited this fund is coming into being,” he said.
Popp told the Assembly it “fills a role the private sector has not been willing to take on to this point.”
Strings attached to the federal funds:
• There has to be a 10-to-1 match for the federal money. A $1 investment from the 49th State Angel Fund must lead to at least $10 of private funding, the city news release said.
So the $13.2 million in federal money could generate $140 million or more in economic activity, Popp said.
• The target investment is a firm with 500 or fewer employees. Seven hundred fifty employees is the upper limit.
With these requirements, it won’t be for mom-and-pop retail outfits, Popp said. The start-up or expanding business venture would have to have a sizable investment, he said. Asked what kinds of businesses might qualify, he said a company making high-value electronics might, or an information technology firm with significant reach.
Lance Ahern, now a city employee, testified at the Assembly that when he started Internet Alaska Inc. in 1994 investment money was scarce. The company was the first local and statewide Internet service provider in Alaska, Ahern said.
He wasn’t able to get bank loans. “When I started my first company the investors were me, Visa and Mastercard,” he said. “This program is really good.”
Reach Rosemary Shinohara at rshinohara@adn.com or 257-4340.
2012年1月2日星期一
George Osborne’s airport hint has Thames estuary in a spin
Dan Milmo and
Patrick Collinson
Patrick Collinson
The Thames hub as envisaged by Norman Foster’s design company. Photograph: Foster & Partners/PA
There is a geometric beauty to the view from Kent’s Isle of Grain, as alignments of mudflat, estuary and sky dominate a horizon that, in the wake of this week’s autumn statement, could soon be scarred by dozens of airliners in the cause of economic prosperity.
George Osborne dropped the clearest hint yet that the government is warming to the notion of an airport on the Thames estuary, possibly built on this peninsula, as he pledged to “explore all options for maintaining the UK’s aviation hub status”. For residents of Grain village, it was confirmation that kickstarting the British economy poses a threat to their homes. “It’s ridiculous,” says Jackie Jones, a housewife and Grain resident of 21 years, walking her two dogs on the shoreline. “The economy has gone downhill so much that something has to happen. But I am not sure that pouring billions of pounds into this is the way forward.”
The chancellor begs to differ. He is sold on the idea that infrastructure investment can boost the UK by providing economic links for business and unlocking cash from British pension funds. He also unveiled a memorandum of understanding with the National Association of Pension Funds and the Pension Protection Fund to invest up to £20bn in projects such as power stations and high-speed rail lines, as well as the four-runway airport that would be built right over a quiet village in north Kent. A national infrastructure plan published this week mentioned 500 projects. All they need now is the money.
The Thames airport, unthinkable even a year ago, is becoming ever more feasible. Boris Johnson has campaigned for a new London hub airport in the face of increasingly weak opposition from the Conservative party. Tuesday saw the government come close to conceding that London’s mayor has given them a get-out from opposing new runways at Heathrow, Gatwick and Stansted.
Johnson’s main lobbyist on a new airport is Daniel Moylan, deputy chairman of Transport for London, which runs the capital’s tubes and buses. He says: “I welcome the fact that the chancellor has said Britain must have a modern hub airport, and confirmed that there will be no expansion at Heathrow. This gives impetus to the search for a new location and the mayor is keen that it should be to the east of London. An urgent debate needs to take place.” Johnson has pushed his own idea of a floating airport – dubbed “Boris Island” – situated opposite Grain and off the Isle of Sheppey.
The renowned architect Lord Foster made an arresting contribution last month with proposals for a £50bn hub on Grain, in a project drawn up by his Foster & Partners, economics consultancy Volterra and planning specialist Halcrow. As well as an airport carrying 150 million passengers a year, it includes a new Thames flood barrier and a high-speed rail line that will connect to the High Speed One and High Speed Two routes. The plans are suitably futuristic but £50bn is a towering bill, dwarfing even the £32bn needed to build the HS2 route from London to Birmingham, Manchester and Leeds. For all the infrastructure headlines in the wake of Osborne’s statement, it was only a sketch of complex planning and funding needs.
There is, however, optimism about funding. Ben Hamer, an executive director at Halcrow, says initial discussions about the project have already taken place with sovereign wealth funds – the investment arms of rich states – and major banks. The issue for Halcrow is getting cross-party political backing. That, in turn, will help secure the seed funding to get the project up and running, followed by the multibillion-pound investment in constructing the site.
“If the government says it would love a Thames hub airport that would be a very strong market signal to investors that the risk of getting this through planning are going to be acceptable,” Hamer says, adding that there has been strong interest from Asia in the project. “They are looking for flagship projects.”
He also says that general interest from the financial sector appeared to be strong, and will be further bolstered by the chancellor’s announcement of a pension-fund-backed infrastructure programme. “We are having discussions with finance houses and we have invested a lot of our own time and energy on preparing the ground for funding.”
One scenario could involve the government taking the financial risk out of building the airport by paying a construction firm an agreed sum, plus costs, to put it together. Underwritten by the state, this would keep the cost of capital low. The asset would be handed over to the state on completion and sold to UK pension funds on a 30-year-lease – rather like High Speed One, the lease for which has been sold for £1.4bn to a Canadian grouping of the investment firm Borealis Infrastructure and the Ontario Teachers’ Pension Plan fund. The new airport owner would pay off its multibillion-pound investment by pocketing the revenues over the ensuing three decades.
The issue with this plan is the involvement of the government at the beginning. In the absence of public money – a fair assumption under current spending constraints – construction of a Thames hub would rely on loans raised from the banking sector. But with beleaguered banks determined to shrink their balance sheets – and warned this week by Bank of England governor Mervyn King to put aside even more capital – the proposal could remain stuck in the mud.
One possible solution lies in the national infrastructure plan. Osborne pledged just £5bn in new government cash for infrastructure projects but indicated that UK pension funds were ripe with untapped financial potential.
“We need to put to work the many billions of pounds that British people save in British pension funds, and get those savings invested in British projects. You could call it British savings for British jobs,” he said in the autumn statement, adding that the government was exploring guarantees and ways of letting city mayors borrow against future tax receipts in an echo of the vast municipally funded works that built Britain’s water, sewerage and road network in the Victorian era, as well as hospitals and schools.
Pension funds, which face the challenge of paying out fixed incomes to retirees when investment returns are at historic lows, like the concept of projects with reliable long-term income streams, such as toll roads and bridges. Airport landing fees and rentals from retail premises and parking could form an attractive income. Last week saw the creation of the Insurers’ Infrastructure Investment Forum, a joint initiative between the Association of British Insurers and the government, whose first task will be to create A-grade “infrastructure bonds” that will be attractive to pension funds.
But relying on pension funds for financing airport construction is still a remote prospect. Richard Abadie, infrastructure partner at PricewaterhouseCoopers, and a one-time Treasury official overseeing public-private partnerships, says: “You have to ask: why isn’t pension fund investment in infrastructure happening already? They don’t believe the returns are high enough, and they don’t want to take construction risk. It’s banks that traditionally take on project finance risk and only after that will pension funds and insurers invest in the long-term cash flow to match their liability profiles. But the banks are under huge pressure to reduce their balance sheets.” He cited RBS’s recent decision to sell £5bn of its project finance loans to Mitsubishi, and new ‘Basel III’ bank capital requirements that will further constrain lending.
An alternative is for Britain to create a state infrastructure bank to channel loans into major projects. It could be structured along the lines of the European Investment Bank or state banks that are behind huge construction projects in Brazil, India, Mexico and some US states.
Until then, Lord Foster’s island airport may remain on the drawing board. Decades ago, the original estuary airport project was opposite Grain, on the north bank of the Thames at Maplin Sands. It was conceived in the boom years of the early 1970s, and in 1973 an act paving the way for construction was passed in parliament. But the project was one of the earliest casualties of the 1973-4 oil crisis and subsequent recession. As a new credit crunch beckons, proponents of the scheme will be hoping that history does not repeat itself – although the residents of Grain will not agree.
http://tourism9.com/George Osborne dropped the clearest hint yet that the government is warming to the notion of an airport on the Thames estuary, possibly built on this peninsula, as he pledged to “explore all options for maintaining the UK’s aviation hub status”. For residents of Grain village, it was confirmation that kickstarting the British economy poses a threat to their homes. “It’s ridiculous,” says Jackie Jones, a housewife and Grain resident of 21 years, walking her two dogs on the shoreline. “The economy has gone downhill so much that something has to happen. But I am not sure that pouring billions of pounds into this is the way forward.”
The chancellor begs to differ. He is sold on the idea that infrastructure investment can boost the UK by providing economic links for business and unlocking cash from British pension funds. He also unveiled a memorandum of understanding with the National Association of Pension Funds and the Pension Protection Fund to invest up to £20bn in projects such as power stations and high-speed rail lines, as well as the four-runway airport that would be built right over a quiet village in north Kent. A national infrastructure plan published this week mentioned 500 projects. All they need now is the money.
The Thames airport, unthinkable even a year ago, is becoming ever more feasible. Boris Johnson has campaigned for a new London hub airport in the face of increasingly weak opposition from the Conservative party. Tuesday saw the government come close to conceding that London’s mayor has given them a get-out from opposing new runways at Heathrow, Gatwick and Stansted.
Johnson’s main lobbyist on a new airport is Daniel Moylan, deputy chairman of Transport for London, which runs the capital’s tubes and buses. He says: “I welcome the fact that the chancellor has said Britain must have a modern hub airport, and confirmed that there will be no expansion at Heathrow. This gives impetus to the search for a new location and the mayor is keen that it should be to the east of London. An urgent debate needs to take place.” Johnson has pushed his own idea of a floating airport – dubbed “Boris Island” – situated opposite Grain and off the Isle of Sheppey.
The renowned architect Lord Foster made an arresting contribution last month with proposals for a £50bn hub on Grain, in a project drawn up by his Foster & Partners, economics consultancy Volterra and planning specialist Halcrow. As well as an airport carrying 150 million passengers a year, it includes a new Thames flood barrier and a high-speed rail line that will connect to the High Speed One and High Speed Two routes. The plans are suitably futuristic but £50bn is a towering bill, dwarfing even the £32bn needed to build the HS2 route from London to Birmingham, Manchester and Leeds. For all the infrastructure headlines in the wake of Osborne’s statement, it was only a sketch of complex planning and funding needs.
There is, however, optimism about funding. Ben Hamer, an executive director at Halcrow, says initial discussions about the project have already taken place with sovereign wealth funds – the investment arms of rich states – and major banks. The issue for Halcrow is getting cross-party political backing. That, in turn, will help secure the seed funding to get the project up and running, followed by the multibillion-pound investment in constructing the site.
“If the government says it would love a Thames hub airport that would be a very strong market signal to investors that the risk of getting this through planning are going to be acceptable,” Hamer says, adding that there has been strong interest from Asia in the project. “They are looking for flagship projects.”
He also says that general interest from the financial sector appeared to be strong, and will be further bolstered by the chancellor’s announcement of a pension-fund-backed infrastructure programme. “We are having discussions with finance houses and we have invested a lot of our own time and energy on preparing the ground for funding.”
One scenario could involve the government taking the financial risk out of building the airport by paying a construction firm an agreed sum, plus costs, to put it together. Underwritten by the state, this would keep the cost of capital low. The asset would be handed over to the state on completion and sold to UK pension funds on a 30-year-lease – rather like High Speed One, the lease for which has been sold for £1.4bn to a Canadian grouping of the investment firm Borealis Infrastructure and the Ontario Teachers’ Pension Plan fund. The new airport owner would pay off its multibillion-pound investment by pocketing the revenues over the ensuing three decades.
The issue with this plan is the involvement of the government at the beginning. In the absence of public money – a fair assumption under current spending constraints – construction of a Thames hub would rely on loans raised from the banking sector. But with beleaguered banks determined to shrink their balance sheets – and warned this week by Bank of England governor Mervyn King to put aside even more capital – the proposal could remain stuck in the mud.
One possible solution lies in the national infrastructure plan. Osborne pledged just £5bn in new government cash for infrastructure projects but indicated that UK pension funds were ripe with untapped financial potential.
“We need to put to work the many billions of pounds that British people save in British pension funds, and get those savings invested in British projects. You could call it British savings for British jobs,” he said in the autumn statement, adding that the government was exploring guarantees and ways of letting city mayors borrow against future tax receipts in an echo of the vast municipally funded works that built Britain’s water, sewerage and road network in the Victorian era, as well as hospitals and schools.
Pension funds, which face the challenge of paying out fixed incomes to retirees when investment returns are at historic lows, like the concept of projects with reliable long-term income streams, such as toll roads and bridges. Airport landing fees and rentals from retail premises and parking could form an attractive income. Last week saw the creation of the Insurers’ Infrastructure Investment Forum, a joint initiative between the Association of British Insurers and the government, whose first task will be to create A-grade “infrastructure bonds” that will be attractive to pension funds.
But relying on pension funds for financing airport construction is still a remote prospect. Richard Abadie, infrastructure partner at PricewaterhouseCoopers, and a one-time Treasury official overseeing public-private partnerships, says: “You have to ask: why isn’t pension fund investment in infrastructure happening already? They don’t believe the returns are high enough, and they don’t want to take construction risk. It’s banks that traditionally take on project finance risk and only after that will pension funds and insurers invest in the long-term cash flow to match their liability profiles. But the banks are under huge pressure to reduce their balance sheets.” He cited RBS’s recent decision to sell £5bn of its project finance loans to Mitsubishi, and new ‘Basel III’ bank capital requirements that will further constrain lending.
An alternative is for Britain to create a state infrastructure bank to channel loans into major projects. It could be structured along the lines of the European Investment Bank or state banks that are behind huge construction projects in Brazil, India, Mexico and some US states.
Until then, Lord Foster’s island airport may remain on the drawing board. Decades ago, the original estuary airport project was opposite Grain, on the north bank of the Thames at Maplin Sands. It was conceived in the boom years of the early 1970s, and in 1973 an act paving the way for construction was passed in parliament. But the project was one of the earliest casualties of the 1973-4 oil crisis and subsequent recession. As a new credit crunch beckons, proponents of the scheme will be hoping that history does not repeat itself – although the residents of Grain will not agree.
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