Directions(Q61-70): Read the following passage and answer the questions. Some words are given in bold which will help you in answering the questions.
Infrastructure projects take a long time to build but then deliver cashflows over an extended period. Pension funds have liabilities thats stretch over several decades. Why not get the latter to finance the former? A new report from the Organisation for Economic Co-oporation and Development (OECD)estimates that global pension funds havejust 0.9° ovoftheir portfolios in pure infrastructure. In part that is due to the OECD’s decision to define infrastructure assets as unlisted debt and equity. But pension funds have significant exposure to listed shares and bonds ofpowcr companies and the like. From the point of view of public policy, however, the OECD‘s definition is the correct one. The utility shares Owned by pension funds are those of power companies that were privatised in the 1980's and 1990's; the infrastructure they operate was the result of Govt spending in previous decades. Governments would like to see more infrastructure get built, though at the moment public finances are very tight. They would rather not bear the whole burden. The difficult bit about infrastructure projects apart from the original decision to commission them is the cost ofconstruction. That is where governments would like pension funds, and the rest ofthe private sector to open their wallets.
Risk is clearly one important factor. Pension funds want reliable cashflows that can be used to pay retirees, not the uncertainties that are associated with projects. As the OECD report points out, there is a lack of objective high-quality data on infrastructure investments. This makes it difficult for funds to calculate how infrastructure would fit into their portfolios. Another problem is that small pension funds may lack the expertise to get involved in such large projects. They have to invest via an infrastructure fund and pay a management fee for the privilege. The biggest infrastructure investors so far have been the giant Australian and Canadian pension funds, which can benefit from economies of scale. Britain is trying to achieve the same effect by setting up Pensions Investment Platform which will pool infrastructure investments. However, the scheme has been slow to get going and not been sufficient to fund Britain’s highest-profile project, a proposed high
speed rail-line. Additional problems include the lack of political certainty. Capital spending is often the first item to be cut when governments run into budget difficulties and tough decisions are put off to suit electoralcycles. One possible solution is for governments to borrow a separate sum to finance infrastructure spending with the stated intention of selling assets to the likes of pension funds over a number of years. Such debt could be recorded separately in the national accounts. An alternative option could be a National InveStment Bank along the lines of the European Investment Bank. It would borrow from the market and use its capital to guarantee the equity portion of infrastructure projects. That would allow pension funds to buy the more secure debt elements of the project’s funding. The need is clear. Among the G-7 countries, only Italy is recorded as having worse infrastructure. There is no shortage of potential funding Britain’s pension assets are equal to 112% of GDP. Clearly they can be put together. The Olympics showed that Britain can build projects on time when the country puts its mind to it.
Infrastructure projects take a long time to build but then deliver cashflows over an extended period. Pension funds have liabilities thats stretch over several decades. Why not get the latter to finance the former? A new report from the Organisation for Economic Co-oporation and Development (OECD)estimates that global pension funds havejust 0.9° ovoftheir portfolios in pure infrastructure. In part that is due to the OECD’s decision to define infrastructure assets as unlisted debt and equity. But pension funds have significant exposure to listed shares and bonds ofpowcr companies and the like. From the point of view of public policy, however, the OECD‘s definition is the correct one. The utility shares OWned by pension funds are those of power companies that were privatised in the 19805 and 19905; the infrastructure they operate was the result of Govt spending in previous decades. Governments would like to see more infrastructure get built, though at the moment public finances are very tight. They would rather not bear the whole burden. The difficult bit about infrastructure projects apart from the original decision to commission them is the cost ofconstruction. That is where governments would like pension funds, and the rest ofthe private sector to open their wallets.
Risk is clearly one important factor. Pension funds want reliable cashflows that can be used to pay retirees, not the uncertainties that are associated with projects. As the OECD report points out, there is a lack of objective high-quality data on infrastructure investments. This makes it difficult for funds to calculate how infrastructure would fit into their portfolios. Another problem is that small pension funds may lack the expertise to get involved in such large projects. They have to invest via an infrastructure fund and pay a management fee for the privilege. The biggest infrastructure investors so far have been the giant Australian and Canadian pension funds, which can benefit from economies of scale. Britain is trying to achieve the same effect by setting up Pensions Investment Platform which will pool infrastructure investments. However, the scheme has been slow to get going and not been sufficient to fund Britain’s highest-profile project, a proposed high
speed rail-line. Additional problems include the lack of political certainty. Capital spending is often the first item to be cut when governments run into budget difficulties and tough decisions are put off to suit electoralcycles. One possible solution is for governments to borrow a separate sum to finance infrastructure spending with the stated intention of selling assets to the likes of pension funds over a number of years. Such debt could be recorded separately in the national accounts. An alternative option could be a National InveStment Bank along the lines of the European Investment Bank. It would borrow from the market and use its capital to guarantee the equity portion of infrastructure projects. That would allow pension funds to buy the more secure debt elements of the project’s funding. The need is clear. Among the G-7 countries, only Italy is recorded as having worse infrastructure. There is no shortage of potential funding Britain’s pension assets are equal to 112% of GDP. Clearly they can be put together. The Olympics showed that Britain can build projects on time when the country puts its mind to it.
European Investment Bank. It would borrow from the market and use its capital to guarantee the equity portion of infrastructure projects. That would allow pension funds to buy the more secure debt elements of the project’s funding. The need is clear. Among the G-7 countries, only Italy is recorded as having worse infrastructure. There is no shortage of potential funding ~ Britain’s pension assets are equal to 112% of GDP. Clearly they can be put together. The Olympics showed that Britain can build projects on time when the country puts its mind to it.
