Britain’s Missing Infrastructure Billions Blamed on Government
The U.K.’s biggest investors want to put billions of pounds into British infrastructure, creating jobs and growth in an economy that is still smaller than it was in 2009. The government is preventing them, they say.
Legal & General Group Plc (LGEN) would invest more than 5 billion pounds ($7.5 billion) to build houses, airports and toll roads if the government committed to long-term projects and eased regulation, Chief Executive Officer Nigel Wilson said. Prudential Plc (PRU), Standard Life Plc (SL/) and the London Pension Fund Authority also want to invest more in U.K. infrastructure.
“We would like to own less international financial assets and more U.K. physical assets,” Wilson, 56, said in an interview last month at the Economist Insurance Summit in London. “We are able to put pounds behind our convictions. We just need regulatory, planning and tax certainty.”
U.K. Chancellor George Osborne is under pressure to come up with new ideas or reverse his austerity plan to revive the economy after the country’s Aaa credit rating was downgraded by Moody’s Investors Service Feb. 22 as weak economic growth caused a rising debt burden. While Osborne says he wants to encourage private investment in the country’s infrastructure, investors say a lack of government policy, planning approvals and regulation are preventing them from doing so.
“Planning and regulatory decisions have not been made,” Wilson said. “After the war the Labour government built many houses in the U.K. despite the country’s problems, and in the 1960s new town expansion and building in the North East were hugely successful. We don’t have any of that anymore.”
‘A Lot More’
Legal & General, the biggest manager of U.K. pension assets, has earmarked about 5 billion pounds currently held in U.S. and European corporate bonds for infrastructure, Wilson said. That figure could increase by “a lot more” in the future if even a small portion of the 250 billion pounds of assets the insurer manages for clients follows, he said.
With 5 billion pounds, Legal & General could build 42,500 new homes, according to London-based real estate consulting firm Davis Langdon, or about 40 percent of the total built in the U.K. in 2011. That sum would also build nine hospitals, based on the 545 million-pound cost of the Queen Elizabeth hospital, which opened in Birmingham in 2010.
Prudential, the U.K.’s largest insurer, and Standard Life, Scotland’s biggest insurer, say they would like to invest more in U.K. infrastructure if the regulatory and political conditions were right. Prudential manages 273 billion pounds of assets and Standard Life administers 212 billion pounds.
“By building the project you increase employment and then it delivers future economic benefits,” Prudential CEO Tidjane Thiam, 50, said in answer to a question at the insurance summit. “That means the case for infrastructure is easy to make.”
Public sector gross investment was 69 billion pounds in 2009 to 2010, the last year of Gordon Brown’s government, and dropped 30 percent to 47.8 billion pounds in 2011 to 2012, according to the U.K.’s Office for Budget Responsibility.
“Capital spending was cut too far and too fast, and our economy’s recovery was choked off,” Rachel Reeves, an economic spokeswoman for the opposition Labour Party, said in an e-mail. “From energy and transport policy to school building and planning reform, we have seen indecision, dither, uncertainty and delay.”
Only 1.2 percent of the 576 projects highlighted in the government’s National Infrastructure Plan have been completed or are operational, the Labour party said.
The government’s infrastructure plan “is working” and investment has risen since 2010, when it came into power, a Treasury spokeswoman said in a statement. “For the first time we have set out government priorities in the National Infrastructure Plan to provide certainty for industry, we’re sweeping away red tape, radically improving public private partnerships,” she said.
The government has supported the National Association of Pension Funds in its plan to raise 2 billion pounds for infrastructure investment, it said. The NAPF has raised half its target from funds including the London Pensions Fund Authority, British Airways Pension Scheme, BAE Systems Pension Funds and BT Pension Scheme. It is seeking investment returns of 2 percent to 5 percent above the retail price index, a measure of inflation.
Prime Minister David Cameron’s government last year put off a decision on whether to expand London’s Heathrow airport by commissioning a study into the best place for aviation expansion, which will published by the summer of 2015 after the next general election. The government last year approved plans to build a high-speed rail link from London to Birmingham, which is scheduled to open in 2026.
Legal & General worked on a bid to buy Stansted, an airport north of London, because it could be a viable alternative to Heathrow for expansion, Wilson said. The firm may “revisit” the plan after the government’s study, he said.
“In all these projects, there a sheer inability to just make a decision,” Edmund Truell, chairman of the LPFA, which administers 4 billion pounds for London’s local government workers, said in an interview. “They need to just do it.”
The failure to build new infrastructure is weighing on growth in an economy that is still 3.2 percent below its peak at the start of 2009, according to gross domestic product data from the Office for National Statistics. The economy contracted in the fourth quarter, leaving it on the brink of an unprecedented triple-dip recession.
The U.K. lost its top credit rating from Moody’s last month, increasing political pressure on Osborne, who previously said maintaining the rating was one of his key economic goals.
“The best thing government can do is invest in the infrastructure of the country, invest in roads, rail, housing in particular because that can be done in the shorter term,” said John Cridland, director-general of the Confederation of British Industry, the country’s largest business lobby group.
Canada is a model of how best to match private capital with infrastructure projects, according Truell of the LPFA. Canadian pension funds typically invest 4.9 percent of their assets in infrastructure compared with 3.6 percent in the U.K., according to London-based researcher Preqin Ltd.
The Ontario Municipal Employees Retirement System and the Ontario Teachers’ Pension Plan bought a 30-year contract to run the rail route linking the Channel Tunnel with central London for 2.1 billion pounds in 2010.
One of the major concerns facing infrastructure projects in the U.K. is the country’s planning laws, which fail to adequately compensate people affected by new building, meaning projects face greater political opposition than in other countries, according to Truell.
“In this country we have a winner takes all planning system and the losers just lose,” he said. “In any project someone will lose out, therefore, people are very vociferous in their objections.”
Another hurdle to infrastructure investing is how insurance companies and pension funds are regulated. The amount of capital insurance companies need to set in reserve in case long-term investments in airports, housing and toll roads fail is the same as the capital required to be held against equities, which are higher risk, according to Robert Talbut, chairman of the Association of British Insurers’ investment committee.
Wilson of Legal & General agrees. “We want to invest more in the U.K. and that partly depends on the regulatory treatment we get,” he said. “We bought some 20, 30, 40-year assets but we do it piecemeal with approval from the FSA transaction by transaction. That’s not a very efficient or constructive way of dealing with it.”
The risk of political and regulatory changes are preventing Standard Life from investing in infrastructure, according to Brian Simmons, a spokesman.
“To date certain risks which include lack of clarity about project information, possible political interference, complex funding structures, potential changes to the way that the retail price index is calculated and how bonds are classified, have all been seen as impediments to investing,” he said in an e-mail.
Insurers and pension funds like investing in infrastructure because the long-term return period matches their liabilities, such as paying pensions, which can stretch out for 40 years, Prudential’s Thiam said.
For Legal & General, the return on infrastructure investments would be about 1.5 percent higher a year than what the firm is earning from U.S. and European corporate bonds, Wilson said. The returns are often linked to inflation, he said.
“Compounded over 20, 30, 40 years, that would make a big impact for everyone,” Wilson said.
With a stalling economy and an election in two years, the government is likely to come up with some new measures to boost growth, according to the ABI’s Talbut, who is also chief investment officer at Royal London Asset Management Ltd. Osborne will deliver his fourth budget statement to the House of Commons on March 20.
“Everybody understands that it would be a good thing if we were spending more on our infrastructure in the U.K.,” Talbut said. “Going into the next election with a narrative which is purely about austerity is not going to work for them. The message will have to change, and I think it will be a good thing if it does change.”
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