28.12.16
Picking up the infrastructure investment gauntlet
Source: PSE Dec/Jan 17
Cllr Kieran Quinn, leader of Tameside Borough Council and chair of the Local Authority Pension Fund Forum (LAPFF), outlines the social value benefits and commercial returns that can be achieved by LGPS funds investing in infrastructure.
Britain is suffering from chronic underinvestment in infrastructure. From housing to communications, highways to machinery, too little is being spent on the building blocks of the strong economy that those of all political persuasions desire.
To any readers who commute by rail it will come as no surprise that, as a percentage of GDP, in 2014 (the latest figures) Britain ranked bottom of 34 countries in the OECD for investment in transport infrastructure.
Much has been made by the government of the need to restrain government spending and bring the public finances under control. However I, and I’m not alone, would argue that we are now past the point where the failure to invest in infrastructure has become a hindrance to meeting that objective.
Relaxing fiscal restraint
There are signs that the government has begun to acknowledge this. In the wake of the Brexit vote, and more recently a Trump election victory, there have been moves to relax the fiscal restraint adhered to in recent years. In the chancellor’s Autumn Statement we’ve seen announcements for some limited infrastructure spending on roads and railways, though in my view it’s still not enough.
A paltry £1.1bn for roads, including a new expressway from Oxford to Cambridge via Milton Keynes, is hardly going to reignite growth at a level that we require, is it? Such a low level of investment is barely enough to meet the needs of the Greater Manchester road network, let alone that of the entire country. This lack of ambition is even more damning when one considers that only one in five infrastructure projects announced since 2010 are actually on site as I write this.
Commercial return and delivering social value
Clearly, for political reasons, the chancellor remains unwilling to increase borrowing to provide the stimulus the economy needs. In response to this reluctance, I offer a solution: the dozens of LGPS funds with combined assets of more than £200bn.
The £19bn Greater Manchester Pension Fund (GMPF), which I chair, has the core purpose of delivering low, stable employer contribution rates whilst maintaining the solvency of the fund. To achieve this aim we have long operated with the twin objectives of commercial return and social value. Clearly, as a fund that has a fiduciary duty to our more than 350,000 members, there is a balance to be struck between the two, though I am confident that I can point to a string of investments where I believe we have got that balance absolutely right.
Take the railways as an example. Working with the London Pension Fund Authority (LPFA), the GMPF recently provided 49% of the equity to enable Abellio East Anglia to procure 387 new train carriages and increase capacity on their Norfolk and Suffolk services by up to 78%. As a resident in the east of Greater Manchester, whose local station is served by the hated ‘Pacer’ units, which are long overdue for replacement, I would be only too delighted to support more railway investments like this if given the opportunity.
To the north, again in partnership, we have purchased a 22% stake in a South Lanarkshire onshore wind farm. The wind farm currently has a generating capacity of 350 megawatts and, following this investment, is set to expand that capacity by a further 173 megawatts. This is an example of how we also aim to secure social value in the form of environmental benefits and follows in the footsteps of our successful £9m investment in the Leeming Biomass plant in North Yorkshire.
Infrastructure investment opportunities
Recognising our location in Greater Manchester, the city-region that is arguably the economic powerhouse of the north west of England, we have made several investments much closer to home too. Given that the overwhelming majority of scheme members live in Greater Manchester, the social benefit of these investments is likely to be experienced directly by those whose retirement savings are also being protected. Our investment in One St. Peter’s kick-started the regeneration of a tired part of Manchester city centre and led to new restaurants, office space, a tram interchange and memorial garden being constructed. The redevelopment of First Street that we have enabled has been billed as “one of Manchester’s most important sustainable development and regeneration opportunities”.
In my view though, one of the key achievements of the fund in delivering a social benefit is that of our Matrix Homes programme. Working with Manchester City Council and the Homes and Communities Agency, we have built more than 250 new homes both for rent and sale across three sites in Manchester. Under a purely commercial model, many of these homes arguably wouldn’t have been built as two of the sites are unlikely to have been commercially viable. However, by packaging the three sites together the overall scheme was a sound investment and delivers strong regular cash flow and strong collateral through security on property. Pension funds like the GMPF could well be part of the solution to the nation’s housing crisis.
To enable the greater involvement of pension funds in infrastructure investments, a central infrastructure clearinghouse could provide the ideal ‘one stop shop’ solution. This would allow authorities around the UK to seek financing for specific projects that are desperately needed in their areas. A pent-up supply of long-term capital could efficiently and effectively dovetail with demand for a pipeline of shovel-ready projects.
And so, if the numbers stack up, if the solvency of the fund and the commercial return that we require can be achieved, I will happily give consideration to any invitations to invest in future infrastructure projects.
If the chancellor is looking for finance to construct the new trans-pennine tunnel, to invest in housebuilding on the scale that we need or to finally get started on expanding our high-speed rail network in the north, for example, all he has to do is pick up the phone. If we can provide the capital alone we will, though if we need to collaborate with others to achieve the scale required our existing partnerships with the LPFA show that we are more than willing to do so too. I look forward to hearing from him.
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