The Centre for Policy Studies has called for the Government to take a backseat in infrastructure spending and allow investors to support the burgeoning sector.
With President-elect Donald Trump proposing to invest $550bn in infrastructure and Chancellor of the Exchequer Philip Hammond expected to announce an increase to infrastructure spend in the Autumn Statement next week, the CPS says infrastructure could be “a bad investment” for governments. The think tank points to China where 55 per cent of Chinese infrastructure projects are predicted to “destroy economic value”.
In its latest report the CPS says: “[The] UK Government should focus on improving the quality of infrastructure development, particularly by harnessing private investment, not simply allocating more public funds.”
The CPS notes that while infrastructure investment can drive economic growth and productivity it does not translate to automatic returns, while excessive spending on infrastructure programmes can add to national debt burdens.
“In an ideal world, all infrastructure projects would be funded entirely by private operators, who would assume all risk in a project and who would seek a financial return by providing a service in a competitive marketplace,” the report says.
The CPS caveats that not all infrastructure initiatives generate financial returns and the large-scale projects necessitate Government support, for example where an Act of Parliament or a National Policy Statement is required.
The Government is said to be considering infrastructure bonds, but the CPS has slammed these as potentially adding to the national debt. Instead, the think tank proposes ‘Project Bonds’, vehicles that will allow institutional investors to participate in infrastructure projects through listed, tradable securities, which would keep down debt to GDP ratios.
“The degree of risk taken by the private sector for Project Bonds would, of course, vary on a case by case basis. To avoid private investors receiving excess profits, the Treasury could receive equity warrants that would enable it to share in the profits if the project is refinanced after construction. It would be relatively simple to trial the concept of Project Bonds, both to test investor appetite and their effectiveness in improving infrastructure quality.”
Interest in the infrastructure has ramped up this year, driven by policy proposals and the demand for income in the today’s low yield environment; the Association of Investment Companies says there are eight specialist infrastructure investment trusts in the UK currently offering an average 4.4 per cent yield.
Asset managers have been boosting their infrastructure capabilities: Hermes Investment Management recently hired Robert Wall as an infrastructure partner; Miton has appointed Jim Wright as a manager on its planned infrastructure fund and Legg Mason launched a global infrastructure fund, which already has over £200m in assets under management.