EUROPE – Pension fund infrastructure investors are refusing to take on construction risk despite a UK parliamentary committee report published on Monday threatening a change in licensing regime that would effectively require them to do so.
In a presentation earlier this week, Rob Gardner, co-chief executive at advisory firm Redington, said pension funds should assume more kinds of risk in investing in infrastructure investment.
"Rightly or wrongly, the majority of trustees don't want exposure to construction risk, which is an aversion the industry will need to address," he said.
"Whether approaching this problem will involve banks assuming the construction risk and pension schemes assuming some operational risk, or whether it involves government guarantees or intervention, is up for debate."
The parliamentary public accounts committee on Monday criticised private sector investors and their pension fund backers for declining to take on construction risk despite the potential for 10% returns on 20-year contracts.
Echoing investors' "general unwillingness" to provide construction finance unless another party took on the risk, the National Audit Office (NAO), a body set up to scrutinise public sector spending on behalf of parliament, said failure to set out a clear government policy could lead private sector lenders to pull out of the UK market.
The government expects investors, including pension schemes, to fund 64% of major infrastructure projects valued at £310bn (€374.9bn) as part of its National Infrastructure Plan announced in December.
In a report published on Wednesday, the NAO raised doubts about the government's ability to raise sufficient finance despite plans to offer investors guarantees against some project risks.
"There will need to be greater certainty in these areas to improve market confidence in the pipeline of investment and contracting opportunities," it said in its report.
Even in sectors such as electricity where reforms currently underway are likely to reassure investors, the NAO warned of a hiatus in investment while those reforms come into effect.
The NAO identified four other risks facing the government's plan, including inaccurate demand forecasting, the increased financial burden on consumers, taxpayer losses as a result of government guarantees and higher-than-forecast delivery costs.
"The full impact of spending on economic infrastructure in the years ahead is unclear," it said.