Why investors want the economy re-balanced more than anyone else.
Should you feel better about your retirement knowing that the government is cajoling your pension fund manager into investing your hard earned savings in their pet infrastructure projects? Well, yes, maybe.
For national infrastructure in general, and “green” infrastructure (wind farms and the like) in particular, the chatter in recent years has revolved around how the vast new projects required to maintain and replace our national infrastructure will be financed. Policy-makers and financiers alike have expounded the virtues of direct investment in these projects by “institutional investors”, who are largely pension funds, insurance companies and sovereign wealth funds. In 2011 the Treasury issued a National Infrastructure Plan which targeted exactly these sources of capital, and there are no end of initiatives to encourage such investment flows.
So is it a good thing; can it be done; or will it mean we will all have to work even longer as our savings are squandered on white elephant projects?
The first thing to note is that money is not the problem, and to look to institutional investors and sovereign wealth funds for money is not particularly insightful. The savings of the world tend to reside in one of two places: where we have put away funds for our old-age and in the national treasuries of export and resource rich economies. This, as any good bank robber would observe, is simply where the money is.
If money is not the problem, it must be the conduit for the money that is lacking, and that should be a concern to financiers and policy-makers alike.
There is the risk that as citizens we commit in three different ways to this new infrastructure: we invest through our pension funds; we pay for investment through our energy bills; or our taxes are used directly (the National Infrastructure Plan talks about the use of government guarantees to encourage these new investors, for instance).
Ideally we want the conduit for investment to be capable of executing the construction and operation of this new infrastructure as efficiently as possible, while managing the risks of doing so. This will increase the returns to our pension savings, while keeping our energy bills as low as possible and socialising as little risk as possible among current and future tax-payers.
“Choose your conduit well” should be inscribed above the door of all pension funds, because this is largely what they do. No manager of a large pension fund or sovereign wealth fund wants to be handed a shovel and told to go build something, or be called in the middle of the night to hear that there is a problem with the wind farm. These custodians of our future wealth invest either through companies or specialist investment funds (like those of my colleagues and clients) whose job it is to manage the risk of the investments on their behalf. Backing skilled and competent management of companies or investment managers makes sure money is channelled into investment opportunities via organisations which specialise in those particular assets.
Creating efficient conduits for capital investment in green infrastructure is the real challenge, and it could be done the wrong way or the right way.
The wrong way will come as a consequence of political impatience and financial laziness. Politicians always like to have quick wins, and there is nothing investors like better than a good, low risk return (like one underwritten by the UK government, for instance). Hence there is every reason to fear that we will miss out the bit where we create robust and efficient companies for executing the investments and managing their risks, and instead go straight to a system where the government guarantees returns to investors on poorly conceived projects in order to appear to have registered some successes. You can rest assured that people from the City take every opportunity to tell government that if only the tax-payer would underwrite most of the risk then they would happily invest. Why change such a well-proven model, I suppose.
Don’t get me wrong. It is not that we will be able to renew our national infrastructure or play our part in mitigating climate change without government involvement. Initiatives such as the government’s Electricity Market Reform or the formation of a Green Investment Bank are potentially useful interventions. The main instrument of EMR for instance is a government contract for new power stations which is intended to socialise the macroeconomic risks of the global energy market among the energy consuming public, rather than have those risks reside with the companies building clean energy power stations of various forms.
Believe it or not, this is the right thing to do. The truth is that we as energy consumers are inherently exposed to those risks anyway and there is no company in the world able to control and manage the risk of the global oil price, gas price, inflation and so on over the 20-50 years that these highly capital intensive investments will last for. Hence it is alright for you, me and the nation collectively to take those risks. Building and operating power stations however requires specific skills which you, me and most other people don’t have, and hence it is imperative, if these investments are to be done efficiently, that the obligation and incentive to develop and deploy those skills remains with the companies that are the conduit for the investment.
No risk in the real economy was ever managed in a Whitehall policy paper, or a document written by a City of London lawyer for that matter. Risks are managed most efficiently by collections of skilled individuals in well-managed organisations, and given the scale of the capital needed to develop our green infrastructure we will need vastly more of those individuals and organisations than we have today.
This is where all parties might become aligned on the right solution. Investors are not oblivious to the investment opportunity presented by good quality green infrastructure in one of the most creditworthy and reliable countries in the world. They simply haven’t had sufficient well-constructed conduits through which to channel those investment funds to date. Whether we are pensioners with money in the custody of investors, tax-payers or energy consumers, we would all rather see our infrastructure developed by companies with the requisite skills and organisation to manage those investments efficiently.
And so we find that with a little patience and fore-thought policy-makers may find the much maligned financial sector being the biggest advocates of a rebalancing of the economy towards the skills required to build our new green infrastructure, because it is only with the build up of the required skills and expertise that we will have the conduits through which investors can deploy capital in a way which is fair to investors, consumers and tax-payers alike.
These are real world problems whose solutions lie in the real economy.
Ian Temperton is Head of the Advisory practice at Climate Change Capital.
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