Infrastructure who? Peeling back the paper from a former budget darling

March 26, 2014 Categories: Investment Strategy

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Should the lack of focus in the budget mean an end to interest in infrastructure investment?

This year’s budget focused on different aspects for pensions and savers – skipping the headline infrastructure announcements and initiatives of previous years. However, the lack of action and progress with these plans had long since made the budget all but irrelevant to pension funds looking for infrastructure investments.

From a UK plc point of view, this government started well by developing a National Infrastructure Plan. However, this has not made much impact on the amount of government investment. Whilst there has been a modest rise in annual spending (£45 billion in this parliament vs £41 billion previously), this extra £4 billion a year is barely 1% of the £375 billion infrastructure plan. When talking hundreds of billions, this year’s budget announcements – £270 million guarantee for the Mersey Bridge, £140 for flood defences and £200 for road repairs – are clearly very modest.

To be fair, the Treasury’s National Infrastructure Plan Finance Update (March 2014) provides a good outline of where the financing of the Plan is likely to come from. It identifies a number of projects which could attract investor’s capital. It also avows the benefits of investment into existing infrastructure projects which can free up capital for new developments. Still, I find it notable that the only reference to UK pension funds, and the Pension Infrastructure Platform is the £500 million currently committed to the Dalmore Capital Fund – £500m million is 0.1% of the £375 billion plan.

But pension funds need not be unduly concerned nor deterred by this. The government announcements were not the projects that are most suited to pension fund needs. These are typically new, development projects and not the stable, predictable cashflows that best reflect pension funds long term needs. There are also significant concentrations in large “mega” projects rather than a well diversified set of opportunities.

Infrastructure is a potentially attractive asset class as it can offer long term cashflows, often inflation linked but critically these characteristics can come with low dependence on economic and investment markets. So infrastructure offers sources of return that are distinct from the rest of an investor’s portfolio – a significant benefit in an increasingly correlated and co-dependent investment world.

To gain the benefits, pension funds need to consider the type of infrastructure they require to fit into their total portfolio. The “preferred” infrastructure assets mostly lie outside of the government sponsored development initiatives and are in more mature, developed infrastructure assets. And whilst prices have risen sharply for large, less complex assets there are still a wide range of opportunities in small/mid size projects.

In particular, I find opportunities assets, those requiring operational expertise and specific sectors such as North American energy infrastructure and European renewable the most attractive.

So the potential for infrastructure and benefits within a total portfolio remains just as strong – so don’t worry about what the budget didn’t say! The benefits of infrastructure investment are not dependent on government initiatives!

Nick Spencer – Director, Client Strategy & Research

 

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