UK - The UK government will be unlikely to attract many pension funds to its infrastructure project unless it agrees to take on the construction risk attached to greenfield projects, according to infrastructure fund managers.

Speaking at an Association of Investment Companies meeting in London, Giles Frost, director of International Public Partnerships' listed infrastructure fund, said pension funds were still attracted by infrastructure's risk/reward profile and core characteristics.

These he listed as long-term, predictable, inflation-linked income; low cyclicality; capital growth; low correlation to equities and other investment strategies; and strong government commitment to the sector.

However, Frost also said pension funds were reluctant to take on the construction risk attached to some infrastructure projects.

"It will be difficult to convince UK local pension schemes to invest in projects such as the High Speed Rail 2 - running between London and the Midlands - for instance," he said. "We are a long way from finding a resolution on that topic".

Earlier this month, Alan Rubenstein, chief executive at the Pension Protection Fund (PPF), said the government's infrastructure platform would aim to avoid exposing investors to construction risk. 

"We are aware of the issue," he said, "and we will be structuring things so pension funds are not taking construction risk, which they are frankly not well placed to understand or manage."

According to Frost, the government has a number of options to mitigate construction risk, including taking it on itself.

"In that case, pension funds might become more comfortable with the idea of taking part of the plan and invest in the assets once the construction is completed," he said. 

Frost conceded, however, that some past experiences along those lines had "proved to be disastrous".

"A number of projects for which previous governments in the UK decided to take on the construction risk went badly wrong in terms of time and cost," he said.

Tony Roper, investment adviser at the HICL Infrastructure fund, said UK pension funds might consider adopting the Canadian model.

"Under the Canadian model, pension funds get construction finance debt throughout the construction phase, before getting an automatic refinancing," he said. "Pension funds' money then comes into the projects only once they are fully operational."

Both Frost and Roper pointed out a number of other problems the government might face in convincing local pension schemes to invest in infrastructure projects.

Earlier this month, Rubenstein said the infrastructure platform would seek opportunities across the whole of the capital structure, so it may use leverage.

"We've indicated thus far that we think, in terms of leveraging it up, it would be 50/50 equity and debt per project," he said.

But Roper argued that, on the debt side, the chief hurdle for local pension schemes was their lack of expertise.

"Since the listing of our fund in 2006, we have had eight local authority pension funds in the UK as investors, but they are only involved in the equity side," he added.

"Several debt structures have proved to be catastrophic in the past."

Roper referred to the models used in the early 1990s, when unwrapped project bonds funded a number of infrastructure projects.

"Then we got into an era of monoline insurance, where we had monoline-wrapped, AAA-rated bonds," he said. "Most of those bonds went to pension funds before the monoline industry imploded."

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