UK drawing up plans for infrastructure bonds for large projects

Posted on November 14, 2016

Downing Street and the Treasury are drawing up proposals to raise billions of pounds through new “infrastructure bonds” despite resistance from civil servants and industry experts.

A plan could be announced in the Autumn Statement later this month as part of a wider package including a programme of new infrastructure spending worth several billion pounds a year.

Philip Hammond, the chancellor, is understood to be “very very interested” in the policy as a way to match private investors and pension funds with new transport and energy schemes.

One idea being discussed at a senior level in government is for National Savings to offer the new infrastructure bonds to private investors.

There have also been talks about setting up a new infrastructure bank which could be modelled on the state-owned British Business Bank. In theory this could help fill the gap left when, post-Brexit, the UK may no longer have access to the European Investment Bank.


Chancellor of the Exchequer Philip Hammond enters 10 Downing Street © Reuters

Experts say that the new infrastructure bank would be more likely to invest in “operating assets” that had already been built and need to be refinanced. But it could in theory also help fund new construction projects because it would diversify the risk for investors.

“It would be a way to make a real statement about the government’s intentions, it would have a big presentational effect,” said one proponent. “It would be a striking statement in the vein of Gordon Brown’s ‘golden rule’.”

The Treasury and National Savings both refused to comment.

Theresa May, the prime minister, said in the summer that she wanted to boost infrastructure spending to help build an economy “that works for everyone”. She promised to launch new Treasury-backed bonds to fund infrastructure projects but has not since given any details of how the plan might work.

Infrastructure will be a central theme in the Autumn Statement along with “productivity” and “the future world of work” in what is expected to be a low-key event devoid of flashy giveaways.

The Institute for Fiscal Studies recently warned Mr Hammond that he faced a £25bn hole in the public finances.

Ministers have not been deterred by the sluggish progress of George Osborne’s attempt to funnel pension fund money into infrastructure: the former chancellor’s “Pensions Infrastructure Platform” raised just £1bn against a target of £20bn.

It is not clear whether ministers have worked up the plans to a sufficient level to announce the details later this month.

“What happened with infrastructure bonds was that the PM used the term loosely and the Treasury was surprised by [the announcement] and started work from scratch, but they do not really know what she might have meant,” said one industry figure.

The Infrastructure Projects Authority, the relevant quango, has been sounding out the industry on how the new bonds might work in practice.

The plans have not been greeted with wholesale enthusiasm within the Treasury: “The machine is really against the idea, the civil servants don’t like it,” said one senior figure in the department.

The main argument made against the idea is that “infrastructure bonds” would have to pay a higher coupon than ordinary government gilts.

“I’m sceptical, we can’t work out what advantage the infrastructure bonds would have over issuing gilts, it seems to be more about branding than anything else,” said one infrastructure expert. “This involves a lot of smoke and mirrors.”

But a group called The Infrastructure Forum has urged the government to issue up to £100bn of infrastructure bonds to cover major new projects: “This would help compensate for any future removal of European Investment Bank funds for infrastructure schemes,” it said.

Britain is a 16 per cent shareholder in the EIB, which in the past decade has lent more than £42bn at low rates to hospitals, wind farms, bridges, the Crossrail train line, and many other projects.

Last year the Luxembourg-based bank lent a record £5.6bn to the UK, including a £200m loan for an upgrade of the University of Oxford’s teaching facilities as well as funding for London’s new sewer.

It is unclear whether the UK would remain a shareholder after it leaves the EU: the EIB recently told the FT that it could not expect lending levels to remain as high as they have been after Brexit.

The Canadian government announced plans last week for its own National Infrastructure Bank aimed at attracting private capital into public infrastructure.

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