LGPS could be at “defining moment” for local infrastructure investment

Photo by CHUTTERSNAP on Unsplash

Infrastructure investment is important, particularly from a local government perspective argues Ted Frith who describes the areas GLIL targets for investment.

I expect the next stages of the government’s Covid-19 roadmap are firmly fixed into many people’s diaries—17 May and 21 June etched in pen with exclamation points—or even when their friends and loved ones might be called up for a vaccination. But, for local government leaders, the feeling and perspective will be a little different.

Not only have they had to do battle with the pandemic, but their duties also demand an eye on the future. That means, amid the personal tragedies and economic disruption they must remain steadfast and continue planning, investing and building the infrastructure needed to support their communities many years from now as the world evolves. No doubt that challenge has become harder with budget cuts and with limited capital at their disposal.

14 July 2021
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New era

Fortunately, there is tangible excitement in the infrastructure sector that we are entering a new era. After years of lip-service being paid to “infrastructure ambitions”—typically around election season—we’re seeing real progress. The chancellor’s announcement to launch a new National Infrastructure Bank is the most encouraging evidence of that sea change.

For me, the announcement could be a defining moment in how local infrastructure projects are funded and developed. That is because the bank has an exceptionally broad remit: it will be able to fund large complex infrastructure initiatives, but also regional projects.

Crucially, its objectives go beyond providing finance. The bank aims to foster mutually beneficial collaboration between the public and private sector so that public money can be used ever more efficiently, and smartly, to the benefit of the taxpayer.

The expectation is that the public sector can offload its risk to institutional investors and recycle or free up capital for new projects, creating a sustainable funding source for generations to come.

In turn, this relationship would help create more opportunities for pension funds to invest directly into infrastructure, which means more stable, long-term returns for millions of private and public sector pensioners. A boost for the colleagues of local government leaders that lead pension funds and are hunting stable returns in assets that also support our communities.

First hand

For GLIL, we are already witnessing first-hand the growing interest in infrastructure. Since the start of the year, we have secured an extra £500m commitment from our local government pension fund members who see infrastructure as an important and well-aligned part of their investment strategy.

We have also agreed a new partnership with Nest, the government-established defined contribution scheme. The latter’s £150m initial commitment is the start of a multi-year collaboration and is further evidence of the widening interest in infrastructure as pension funds mobilise to help fund the UK’s economic recovery.

Put simply, this is about helping to meet a triangle of interdependent needs: those of local communities, government and our nation of taxpayers, and pension savers.

Long-term needs

So, if there is a hunger and readiness to deploy capital, where should that money be invested and where is it needed?

The answers are the two sides of the same coin as investment decisions should reflect the needs of the economy. Quite frankly, for pension funds and other like-minded investors, if an “investment opportunity” doesn’t fulfil long-term needs then it isn’t much of an opportunity.

The profile of our liabilities— the need to pay pensions well into the future—ensures that we must take a more enduring approach that isn’t distracted by short-term gains and fleeting trends. It is about the stewardship of assets and steady returns.

With that in mind, examples of our priority areas for investment, and ones we closely monitor, are the energy transition, digital infrastructure and utilities. These are three sectors that are persistent and driven by long-standing underlying trends.

Firstly, the investment to support the transition to renewable energy makes environmental sense as the battle to reduce fossil fuel use intensifies with little sign of accelerating energy demand abating, not least because of the rising electric vehicle market— another part of the transition story.

It also makes economic sense for funds like ours. Right across the renewable energy supply chain there are exciting opportunities being created that require investment. We want to be there to provide the patient capital they need to grow.

Well before the pandemic, digital infrastructure was important, both in demand for connectivity but also in the political determination to connect everybody beyond major urban areas.

The pandemic has simply accelerated this trend as digital economic services proliferate. We expect infrastructure funds to focus heavily on this area in the coming years as the economy gears up for a better-connected world.

Lastly, we’re also interested in “old fashioned” regulated utilities. This isn’t driven by recent events, but the fact that utilities are perpetual in life: our society will always need some form of utility infrastructure, from water to electricity.

They typically require a significant amount of capital investment and their inflation-linked cashflows and investment horizons match well with pension and insurance funds, which have begun to shape the investor profile of the sector away from the more short-term funds of previous decades.

But, while we can identify our investment targets, and the government is able to map out its infrastructure agenda, we believe that the most pressing question for the country is how to finance those projects and use capital more effectively.

As focus shifts from epidemiology to the economy, those conversations will need to be had within local and central government to ensure that the country can build the infrastructure it needs. Encouragingly, we believe that the National Infrastructure Bank will provide a platform for greater dialogue.

We’ve all seen through the pandemic the impressive feats of the public sector and the ability of the private sector to mobilise in support. Great things have been achieved. Infrastructure could learn from that spirit of collaboration and use this defining moment, and the significant capital now available, to turn the UK’s infrastructure ambitions into reality.

Ted Frith is chief operating officer of the £2.5bn infrastructure fund GLIL Infrastructure.

Photo by CHUTTERSNAP on Unsplash

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