Governments should rely more heavily on borrowing, rather than private capital, if they wish to see large infrastructure projects materialise, thereby addressing the lack of new long-dated sovereign debt for pension investors, according to the head of Santander’s UK pension fund.
Antony Barker argued that certain infrastructure projects – such as the construction of a nuclear power plant in the UK, which has attracted funding from EDF and Chinese backers – should not be pursued by public/private partnerships (PPPs) or similar arrangements.
“We take what is a fairly simple thesis – something that could arguably be funded very, very cheaply using long-term government debt – and find a way of making it very, very complicated and tripling the costs of the project,” he said.
Barker – who, in addition to his role as chief pensions officer at Santander UK, sits on the board of the body scrutinising the decommissioning of the UK’s current generation of nuclear plants – said there was ultimately an acceptance that such projects would fall back into public ownership, as the orderly wind-down of a station and its waste took several generations.
Speaking at the joint IPE/IP Real Estate Real Assets & Infrastructure conference in London, Barker also cited the construction of a new high-speed rail link, known as HS2, as a further project the government should simply fund itself, dealing with operating leases at a later time.
“If there is a genuine advantage to the nation to have it, then let us accept that maybe we need to be a little bit more indebted, borrow more – basically solve the pensions and insurance crisis at the same time, by actually providing debt instruments in the form they want,” he said.
His comments were not warmly received by some in the audience, with Julia Prescot, chief strategy officer at PPP investor Meridiam, admitting to “some disbelief” over hearing Barker’s suggestion the government should directly fund projects.
“Isn’t it better we try and actually utilise some of the private capital we have available, come up with structures that make it better rather than trying to put that sort of funding just onto the government balance sheet?” she asked.
During a later presentation on sustainability in the real asset sector, Prescot further defended PPPs but accepted that the sector’s “greatest problem”, at least in the UK, was that the reputation of PPPs and Private Finance Initiatives was so damaged they were sometimes being terminated for reasons other than economic concerns.
“If we had been able to [establish] a better reputational position for PPPs in the market, there’s a possibility this wouldn’t happen,” she said.
Despite Prescot’s challenge that the UK government could not continue borrowing, Barker argued that investors would benefit from an expansion of the long-dated Gilt market.
“If you de-risk your pension scheme environment, you reduce the impact on UK [companies] of managing its pension and insurance obligations, and you’ve created £500bn (€681bn) that goes straight into infrastructure projects,” he said.
“We could have had these things built five or six years ago, and they could have been contributing to the economy now.”