Traditional bond financing by governments have given way to PFI/PPP projects on a global scale, the refinancing of the banks has put a big question mark over further bond issues for public sector infrastructure in the UK.
Pension funds are increasingly moving into new asset classes in a search for returns. Infrastructure is one type of investment being frequently discussed, given its potential to match long-term pension assets and provide risk management, i.e. not putting all of your eggs in one basket.
Previously pension fund exposure to infrastructure has been via listed companies (such as utilities), or via real estate portfolios. The Local Government Pension Scheme has estimated assets of £6.1bn in energy companies, water companies and companies providing public services and PFI finance, some funds have bought into private equity PFI infrastructure funds on top of this.
However, some larger funds globally are beginning to invest via private-equity funds, or, occasionally, even directly. Australian, Canadian and Dutch pension funds may be considered as leaders in this field. There is no question that pension funds of UNISON members could invest substantially in the UK’s infrastructure and other countries as well.
The question for UNISON members is who this money is placed and what conditions could be attached to the investment. Typical PFI projects have high administration costs and the fund managers charge high fees, sometimes reaching 20% of the investment required.
Dedicated infrastructure funds were first set up in the mid-1990s in Australia, and the local superannuation plans in the USA were early investors in them. Some bigger Canadian plans also pioneered this field. Australian financial institutions started to promote such funds more widely to pension funds and other investors earlier this decade. Since 2005, several (mostly big) European and US pension plans have made their first concrete steps while many more seem to be contemplating them.
There is potential in this process to create a specialised investment fund that would take placements by public sector funds and create a low transaction low fee fund that would adopt labour friendly investment policies. This would entirely match modern pension fund responsible investment strategies, making sure that the investments had no adverse effects on the environment, workers and their unions and the overall governance of the projects.
Of course another way a government could invest in public sector infrastructure could be through creating money electronically or quantitative easing to pay investment returns to pension funds for the assets they have created in the first place. In practical terms, the central bank would purchases the assets, from investors using money it has created out of nothing...
This process is called quantitative easing, this is currently being used to recapitalise some of the UK’s banks. Given that the banks are still refusing to lend despite the increase in their deposits by the government, it would be more beneficial to build new schools and hospitals this way.
Further reading:
AFSCME resource paper: http://www.afscmeinfocenter.org/2009/02/pension-fund-investment-in-infrastructure-a-resource-paper.htm
OECD Pension Fund Investment in Infrastructure: http://www.oecd.org/dataoecd/41/9/42052208.pdf
SEIU Recommendations on Public Infrastructure Investments: http://www.seiu.org/a/publicservices/recommendations-on-public-infrastructure-investments.php