Rethinking the Economics of Pensions II KTN Conference The Corn Exchange, London, March 2014 Investing in Infrastructure: perceptions and experiences of European pension funds Bernard H Casey Institute for Employment Research University of Warwick, UK

Investing in Infrastructure Outline of presentation Why invest in infrastructure? Who is doing what? Recent initiatives Governance issues Issues arising

Investing in Infrastructure Why invest in infrastructure? Conventional arguments -stable flow of income, inflation protection, long-term asset, illiquidity premium Newer arguments - QE and search for yield - infrastructure as contributor to growth + fiscal rules -Basel III and restrictions on bank lending “Infrastructure Financing Gap” -WEF, G20, European LTI discussion -National Infrastructure Plans (UK, Australia)

Investing in Infrastructure Who is doing what? Problem “what is infrastructure?” -physical and social infrastructure + green investments + innovation -“between real estate and private equity” Best estimates (OECD, EIB) -Australia does more (5-8% of assets) mainly domestic -Canada (4% of assets) much NAm / Weu -UK low (1% of assets) USS does most -Netherlands (toe in water) Denmark (renewable energy) Preference for large, mature assets -brownfield not greenfield

Investing in Infrastructure UK pension funds’ exposure (2012) 1) property includes infrastructure 2) property includes infrastructure and hedge funds 3) property only (no "infrastructure") Source: fund reports, PPF Purple Book, NAPF annual Survey (special tabulations), ABI (special tabulation)

Investing in Infrastructure Australian pension funds’ exposure (2012) 1) alternatives includes property, infrastructure, private equity, hedge funds and assets not included in any other categories except in the case of CBus where as reported Source: APRA and CBus report

Investing in Infrastructure Recent initiatives Platforms -aggregation of capital and of expertise (IFM) -PIP, Infrastructure Round Table [NL], joint working group on PPP [DK] -P20 (investor not business voice) Recycling -avoiding involvement in construction -political sensitivities? Partnerships with domestic investors -facilitating internationalisation -reducing political risk

Investing in Infrastructure Recent initiatives (2) Stimulants -EC-EIB Project Bond Initiative (transport, energy, high- speed broadband) -UK Guarantee Scheme (“UK Guarantees”) -in practice? -“moral hazard”

Investing in Infrastructure Governance issues Opacity -RiskMetrics criticism of “Macquarie model” Charges -fee structures (2-20 basis) Competence -advisors as asset managers -project- or facilities-managers or even “shadow bankers” Self-investment -inadequate diversification -the case of Cbus, etc

Cbus Newsletter Cbus Annual Report

Investing in Infrastructure Governance issues (2) Illiquidity -problem for DC and right to switch investments -reliance on inertia Valuation -discounted cash flow models + terminal value -“10% a science and 90% an art” (Royal Mail, Australian toll roads, HS1) -oligopolies, “Chinese walls”, principals and agents, information asymmetries -distributional conflicts (CDC debate in NL)

Investing in Infrastructure Issues arising “Dragooning” -beyond National Infrastructure Plans (Poland and high- speed broadband, Croatia and highways, Ireland and the “transformed” NPRF, Cyprus [past and future] and Nigeria) Rule changes -“inflation compensation” removed in NL Supply constraints -overvaluation (Edinburgh airport) Mismatches -what is the gap? (quality not just quantity)

Investing in Infrastructure Issues arising (2) Solvency II -cost of holding long-term assets -insurance industry attitudes IORP II -UK, NL (and Irish) pension fund reservations -Solvency II terms? -postponement until 2022