Be bold on greenfield, Treasury tells schemes
Schemes should get over their aversion to construction risk in infrastructure investment, a senior Treasury official has warned.
Geoffrey Spence, chief executive of Infrastructure UK – the Treasury division responsible for funding UK infrastructure projects – said he would “happily” argue with any schemes put off by greenfield investments.
Pip: the story so far
Speaking at an infrastructure investment conference for local government pension schemes, NAPF chief executive Joanne Segars laid out the plans for Pip so far:
- It aims to be an initial fund of £2bn;
- This will approximately double the volume of infrastructure investment by UK pension schemes;
- It will be able to gear up to 50%;
- It will invest mostly in UK assets but will have a limited remit for overseas projects;
- There are no existing plans for a second Pip fund but given the government estimates a demand for £500bn more in infrastructure spending by 2030 it is likely to expand if successful.
But another speaker, Trevor Butcher, a partner at law firm DLA piper, warned against underestimating construction risk.
A frequent concern of schemes looking at the ongoing Pensions Infrastructure Platform (Pip) is the possibility greenfield projects could be cancelled before they have been built and started returning money.
Pip is a joint Pension Protection Fund and National Association of Pension Funds, with cash pledges so far from the PPF and Strathclyde Pension Fund.
Speaking to PW after addressing the conference, Spence said: “For large projects like the Olympics or the London sewer, the construction risk is large, hence the government offers specific guarantees.
“But for small or medium-sized projects like a school, for example, the contracts are tough on contractors. Historically in the UK they’ve proved safe.
“So the risk becomes a question of whether the construction contractor will honour their contract and if they don’t you can sue them.”
Butcher said: “Construction risk is real. Various projects have suffered from problems in construction and survived. Others, including some high profile projects, have failed.
“For example, nuclear is an area where many high profile projects are continuing to struggle, some deals in the waste sector are suffering with technology risk and some of the early offshore windfarms have had significant problems.”
He went on to claim these examples represent “a small proportion of the overall number of projects procured,” adding: “If a deal is well structured and has an appropriate performance security package covering the construction phase, it should be able, by and large, to overcome the majority of problems that are likely to arise.”
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