Create pension “superfunds” to back infrastructure

The Social Market Foundation also said that ministers preparing for a ‘green recovery’ from coronavirus should be ready to take more risks and spend public money up front to support innovative ‘pathfinder’ infrastructure projects and new renewable energy markets in their early stages.

Building new roads, power sources and communications networks could create much-needed jobs and make Britain’s economy more productive and resilient, the cross-party think-tank said. Priority should be given to “shovel-ready” projects that support domestic supply chains and employment.

In a new report, the SMF identified pension reform as the key to financing and funding new infrastructure.

Ministers should encourage UK pension funds to merge into fewer, larger funds able to invest large sums in big long-term projects, the SMF said. In Australia and Canada, such funds have successfully delivered major infrastructure investments.

The government launched consultations on pension consolidation and the creation of “superfunds” in 2018 and 2019 but despite Boris Johnson’s previous support for the plans (See Notes), ministers have yet to announce decisions.

The SMF said that the need to support an economic recovery with infrastructure projects meant “urgent action” is now needed on pension reform.

Investment rules should also be reformed to allow the new funds to pay the management fees often involved in running big infrastructure projects, the SMF said in a report setting out how to get more private money into big UK projects.

The SMF report was sponsored by Tidal Power Limited, which is pursuing plans to build a fleet of new tidal lagoons to generate power for the UK grid. The SMF retained full editorial independence and takes no view on whether the lagoons plan should go ahead.

The report draws on a roundtable discussion among parliamentarians, former officials, investors and academics. Based on that event, the SMF concluded that politicians must offer much greater certainty and financial clarity to investors about the profits they can make from funding infrastructure projects.

Such profits should be energetically explained to voters as a necessary condition of private financing of public infrastructure, the SMF said.  Political pressure to eliminate profits from private finance deals helps deter investment in infrastructure, the report found.

Politicians’ determination to minimise taxpayer costs by asking the market to fund new projects is also limiting Britain’s ability to build new infrastructure projects, the SMF said.

To support the economic recovery, government should be prepared to take more risks by spending directly to support new “pathfinder” projects that would then be replicated by private investors if they succeed. (See Notes)

The SMF also said:

• A cross-party commission with an independent chair should be created to establish a “strategic vision” of the UK’s infrastructure needs over at least the next decade. Parties taking part in the commission should give public commitments to ensure financial and regulatory support for the projects identified in the vision.
• An urgent review of planning regulations should be undertaken with the aim of reducing planning risk for investors. This could include narrowing the scope for Judicial Review of projects identified as top priorities by the new cross-party commission.

Richard Hyde, Senior Researcher at the SMF said:

“The best way to support the infrastructure the country urgently needs in the long-run is to make better use of the billions of pounds held in pension funds that could be profitably invested in helping Britain on its way to a green recovery. Ministers should move quickly to encourage the creation of pension superfunds like those in Australia and Canada.”

“In the short-term, ministers looking to get infrastructure projects up and running and providing jobs should be prepared to spend directly to support pathfinders that can prove to investors that it is safe to invest in similar projects. That means taxpayers bearing more of the risk, but the long-term rewards justify that risk.”

Mark Shorrock from Tidal Power PLC said:

“The government’s commitment to supporting a ‘green recovery’ is hugely welcome, but it is clear that if this commitment is to turn into something meaningful Ministers will have to be bold in both thought and deed. They will have to overturn years of Whitehall orthodoxy and throw their weight behind innovative projects that can create jobs, support local supply chains and contribute to the UK’s net zero target.

“If they do so, the opportunity is significant and major infrastructure investors and developers like those behind Swansea Bay Tidal Lagoon stand ready to play their part in powering the recovery and renewal agenda – helping to generate employment and contributing to the ambition to level-up the country.”

[ENDS]

Contact:

• James Kirkup, SMF Director, James@smf.co.uk and 07815 706 601
• For a full embargoed copy of the report, Linus Pardoe, SMF Impact Officer, linus@smf.co.uk and 07402 576995

About the project:

The SMF report, entitled Investing in Britain’s Future, is published at https://www.smf.co.uk.  The project was sponsored by Tidal Power Ltd.  The SMF retains full editorial independence, takes no view on tidal power, and publishes the names of all its financial contributors.

Notes:

1. The outstanding government consultations on pension reform are here: 2019 and 2018
2. Boris Johnson supported pension fund consolidation for infrastructure investment in October 2014 – here
3. One participant in the SMF roundtable said that the determination to reduce public costs is holding back development: “…Government wants to be there, at the forefront of the innovation. It wants to be an early adopter. But also wants to have the cheapest option. And you can’t have both…if you’re an early adopter, by definition you haven’t got the economies of scale, you haven’t got the technology breakthroughs that will come in due course, and you’re going to be paying more in order to be at the front of the queue.

Full list of SMF recommendations is below:

1. Government needs to reduce the uncertainty and risk associated with infrastructure policy and projects in the UK in order to attract more private capital into such projects. Doing so will require a significant shake-up in how infrastructure policy is organised and how projects are delivered.
2. A cross-party commission with an independent chair should be created to establish a “strategic vision” of the UK’s infrastructure needs over at least the next decade. Parties taking part in the commission should give public commitments to ensure financial and regulatory support for the projects identified in the vision.
3. Politicians seeking to attract more private investment in infrastructure need to do more to shape public opinion, on two points in particular: planning and profit. Stronger arguments for the local benefit of infrastructure – and a public willingness to take on local doubts – would help allay investors’ concerns about risk.  Ministers should also explain why private profit from public infrastructure is not a flaw of policy but a necessary condition of investment – and, indeed, a benefit to pension scheme members.
4. The Infrastructure and Projects Authority should be reviewed with a commitment to re-establishing the Major Projects Authority if the current arrangements are found to be inferior to previous structures.
5. An urgent review of planning regulations should be undertaken with the aim of reducing planning risk for investors. This could include narrowing the scope for Judicial Review of projects identified as top priorities by the new cross-party commission.
6. Any attempt to use infrastructure projects as an instrument of short-term economic stimulus should focus on those areas of infrastructure that are most are labour intensive. This means i) traditional transportation infrastructure, which could utilise domestic supply chains to boost employment in-directly through the ‘multiplier effect’ and ii)  “green initiatives” which could soak-up labour relatively quickly such as home insulation programmes iii) clean energy projects that can support domestic supply chains
7. New funding models are needed to allow private investors to take on the task of operating infrastructure projects. PPP and PFI were controversial and flawed, but they have not been adequately replaced with coherent funding models that offer investors adequate confidence of future returns.
8. Government should be ready to use public money to provide “development capital” for innovative infrastructure projects which look to utilise new technologies. This public spending should be administered by a new a new UK institution to replace the European Investment Bank, as recommended by the House of Lords European Union Committee. Support for domestic supply chains should be a significant factor in deciding which projects to back.
9. Urgent pension reforms should be undertaken to give Britain fewer and larger pension funds with the scale required to make major infrastructure investments. Learning from Australia and Canada, the UK should pursue a strategy of creating large “superfunds” able to invest in large illiquid assets. Pension scheme charging rules should be reformed to allow funds of sufficient size to pay management fees for infrastructure investments.
10. Drawing on the Canadian example, the UK should seek to establish a robust “project bond” market where firms undertaking infrastructure investment would sell bonds. This approach, previously recommended by the OECD, would also require Government work to develop an insurance market for project bonds, in order to encourage their issuance.