Seven questions about Osborne’s infrastructure plan?
As I’ve already set out, I’m not averse to major infrastructure projects being brought forward through the use of pension funds, as is now being announced by the government. Indeed, I was arguing the case in March 2010.
The excellent Jim Pickard of the FT points out that Australian and Canadian pension funds put 8-15% of their funds respectively into infrastructure investments, while in the UK it’s only 1%. I’d much rather see pension funds invested in bricks, mortar, railways and green technology than in asset bubbles.
But all this only really matters if it actually happens, and I have increasing doubts whether this latest announcement, to be confirmed in Osborne’s statement tomorrow, is anything more than a delaying tactic while the government continues to scratch its head about how to meet its key political imperative of keeping capital investment ‘off balance sheet’ at all costs.
If I were on the Labour frontbenches tomorrow (and of course by rights I should be), I’d be looking to ask the following questions.
1) How does the proposed investment, in the next parliament, of around around £25bn of the total £30bn annnounced, help us deal with the economic flatlining/recession right now?
2) How much of this year’s announcement is actually a repeat of the National Infrastructure Plan published on 25th October 2010, in which the government states:
We plan for UK infrastructure investment to be some £200 billion over the next five years. We will help make that happen through smarter use of public funding, improving private sector investment models, encouraging new sources of private capital and addressing the regulatory failures that stand in the way of greater private sector investment in our country’s infrastructure (p.3-4).
3) An essential factor in bringing forward pension fund investment is to establish exactly how pension funds get a return on their investment.
In 2010 the National Infrastructure Plan noted that the Regulatory Asset Base (RAB) model for investment, currently used by regulated utilities companies to generate investment, for example, might be extended to other areas of capital investment. The plan stated:
The guarantee that the regulated company’s investment will be remunerated over time by consumers, at such a level that the regulated company is able to meet its financing commitments, contributes towards making investment in the regulated utilities an attractive, low risk proposition and is typically associated with a lower cost of capital. Extending the RAB model to assets and/or sectors which are not currently the subject of economic regulation may create a similarly lower risk environment to which investors are attracted to commit funds and may result in a lower cost of capital relative to alternative financing models (para 3.18)
Why has no mention been made of the need to pass on costs to the consumer through this model, and what implications does this have e.g. for road tolling?
4) The 2010 National Infrastructure Plan also said:
[T]he Government will conduct an internal review, supported by external experts, to consider extending the use of the regulatory asset base model. The review will report in spring 2011 (para 3.20)
Why was this review never carried out/published?
5) The Treasury Select Committee recommended in July 2011 (para 121):
The Treasury should consult on the possibility of using other financing models, including the Regulatory Asset Base (RAB) and Local Asset Backed Vehicles (LABV), as a way of financing capital projects in competition or in preference to PFI.
Why is the government announcing with such confidence that pension funds will be used to deliver capital projects BEFORE any such consultation takes place? Is this is why the main infrastructure invesment is put back into the next parliament?
6) According to the FT, four pension funds institutions have signed a ‘memorandum of understanding’ about the proposed investment.
What commitment to invest does a memorandum of understanding involve?
7) Danny Alexander tells us:
We’re putting in place a new arrangement with private pension funds – which is the first time this has been done in this country – to try and unlock pension fund money to go into infrastructure.”
Many of the pension funds being asked to invest are associated with public sector workers (e.g. two signatures to the memorandum of understanding are the Greater Manchester Pension Fund and the London Pensions Fund).
Why are these pensions deemed to be a matter of public spending when public sector workers defend their pension rights, but become ‘private’ when the government seeks to use them?