We do not know what is replacing the private finance initiatives (PFI) to pay for new schools and hospitals.
The UK Investment Bank should be able to provide locally elected officials with access to a new source of capital. There will be areas where the government will need to underwrite or de-risk some proposals, but there will be many projects for which there are willing investors. Farquhar: You cannot look backwards when making assump- tions about long-term returns from markets and private infra- structure. So much is changing. Return to normal will be a new normal, that will need to factor in changes from carbon transition, as well as what is socially acceptable and what is sustainable for the planet. That is quite a challenge. Frith: We need guidance from government in terms of broad policy. This is something that will be quite dramatic once it gets moving. Halfon: On the pension side, one of the main UK retailers wanted to securitise their network of shops and the pension fund of another UK retailer bought their bonds. They are doubling the risk on their retail exposure, but at the same time are transforming long leases into something differ- ent from their sponsor.
There are possibilities to do this in a decentralised way. Frith: Airports are a good example. Twenty years ago, nobody was looking at airports beyond the odd Australian and Canadian pension fund. They were historically owned by governments or local authorities. You knew airport valuations were getting toppy when pre-pan- demic there were Eastern European cities you may never have heard of trying to sell their airports on very high multiples. That serves as a good example of what could happen in other areas of infrastructure. Halfon: Airports are not airports anymore. The way they are sold now is one part is a transport hub and the other is a commer- cial hub. Terminal 5 at Heathrow, for example, is a shopping centre similar to Westfield.
It has dozens of shops and is a place people commute through, so they could potentially buy something expensive at Terminal 5.
In practice, the idea of hubs, outside of airports and a limited number of train stations, has not been optimised. It will be interesting to see what happens with gas stations when we move out of petrol and into electricity. You may have a 45-min- ute stay while your car is recharging, but people could poten- tially do that at home. Farquhar: If you follow Lord Bamford at JCB into green hydro- gen, then you repurpose. Halfon: Exactly. You can grocery shop while filling up. Frith: It was not long ago that a different gas came down your
12 Dec-Jan 2022 portfolio institutional roundtable: Build Back Better
pipes into your kitchen. The gas works in the town once pro- duced coal-gas. Subsequently, we switched everything over to North Sea Gas, which is methane, which is where we are today. So, it is quite feasible that we may switch over the infrastruc- ture to deliver another gas in the future, perhaps Hydrogen. I have a question. A nascent municipal bond market is appar- ently emerging in the UK. I can see that playing a role along- side what the UK Infrastructure Bank might do, but is there much going on in that regard? Sumpster: Not at the moment, but it is, to a certain degree, bringing community funds into play. For the large infrastructure projects there are billions of pounds available from bigger investors. But where can local communities put their money to work? Is the pipeline of opportunities there for them to invest in? It is not as clear as it could be, but the two could work hand in hand. Can we go back to what replaces PFI? PFI fell away because it hurt the public and private sectors in the pocket and reputation- ally, partly because it was fixed contracts for far too long. Excep- tional profits were being made by the private sector, but equally private sector construction companies were going bust. They shared too much of the pain as the risk allocation wasn’t fair. In the changing world we have today with urbanisation, an aging population, climate change and technology all playing a part, more flexibility is needed in how we finance new develop- ments. Pension capital like ours seeks a stable return with a conservative risk profile.
The larger ambition I have as an investor acting for Phoenix is looking at regeneration projects more broadly than just infra- structure. A local authority or city may take a land mass and think about its infrastructure and real estate requirements, such as developing social housing, commercial buildings and improved transportation links. Historically these would be individual financing opportunities, but why not procure under one big regeneration plan where local communities and other stakeholders can buy into the ambition and improve local com- munities. This could invigorate the private sector’s involve- ment alongside development banks, the UK Infrastructure Bank, Homes England and other public sector bodies all play- ing a part.
The difficulty in the past has been that the public and private sectors have had conflicting needs. Yet there is an opportunity for long-term institutional capital to sit in partnership with the public sector. We do not invest for exceptional profit. We are here to invest pension fund money for a reasonable return whilst taking con- servative risks. Farquhar: You do not need to leap straight to public market bonds. Good managers may also be good at managing portfolios of private bond placements, for example.
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