infrastructure funds

[colin]

So what do you think about the Labor Party's ability to borrow enough money to buy back PFI contracts should they be elected to govern us?

[Alaric]

So what do you think about the Labor Party's ability to borrow enough money to buy back PFI contracts should they be elected to govern us?

It might help reduce stated pension fund deficits as interest rates climb to raise the necessary finance. I never really understood the point of PFI anyway. If the money had to be borrowed from the private sector to build hospitals, schools or whatever, why not have the Government borrow the money in its own name and charge the resulting interest costs to the NHS, education budget etc? Sure it puts up the Public Sector Borrowing Requirement, but if the private sector would have borrowed equivalent amounts, does it make any economic difference?

A rise in interest rates is bad news for holders of government and corporate bonds and mortgage borrowers, even though up to a point it's good for cash savers.

It's not something you would see a Labour government do, but financing hospitals and schools could be done by setting up a partly government owned REIT and selling shares in it to private investors. Perhaps having to pay a REIT like return for the capital raised would be even more expensive than PFI. It would give far greater flexibility if the buildings were no longer required as hospitals or schools as the ownership would remain with the REIT.

[UncleEbenezer]

So what do you think about the Labor Party's ability to borrow enough money to buy back PFI contracts should they be elected to govern us?

It might help reduce stated pension fund deficits as interest rates climb to raise the necessary finance. I never really understood the point of PFI anyway. If the money had to be borrowed from the private sector to build hospitals, schools or whatever, why not have the Government borrow the money in its own name and charge the resulting interest costs to the NHS, education budget etc? Sure it puts up the Public Sector Borrowing Requirement, but if the private sector would have borrowed equivalent amounts, does it make any economic difference?

The original justification was about risk. If the same company that builds a facility takes responsibility for repairs and maintenance all at a predetermined price, they're well-incentivised to do a good job and not just deliver something shoddy that'll cost millions a year in repairs.

Of course it didn't stop there. Ever-growing off-balance-sheet debt was an essential part of Blair Feelgood.

It's not something you would see a Labour government do, but financing hospitals and schools could be done by setting up a partly government owned REIT and selling shares in it to private investors.

Wouldn't that just introduce one more level of management to cream off a slice?

[Alaric]

Wouldn't that just introduce one more level of management to cream off a slice?

It would replace the management of the PFI supplier. The main idea is to raise capital funds for building projects, but with a share issue rather than by direct Government borrowing.

[colin]

I never really understood the point of PFI anyway. If the money had to be borrowed from the private sector to build hospitals, schools or whatever, why not have the Government borrow the money in its own name

was the point of PFI that government did not have to borrow money for infrastructure projects, private capital paid for it, owned it and received rent ?

[Alaric]

was the point of PFI that government did not have to borrow money for infrastructure projects, private capital paid for it, owned it and received rent ?

That was the way it worked, but why wasn't that an expensive way of organising affairs as private capital could well have higher borrowing costs than the government?

I suppose once the principle of unlimited State control is unleashed, the government just nationalises the PFI companies and negotiates contract termination with itself. With PFI being often financed by overseas investors, that helps reduce the UK as a an attractive destination for inward investment.

[Dod1010]

Not much about infrastructure funds on this thread! I was surprised to see the Times this morning still recommending at least holding HICL, although not buying, but that was more because of the premium at which it habitually trades, not for political reasons. I do not think I would want to buy such a fund at the moment because although it seems inconceivable that Corbyn could become PM stranger things have happened.

Dod

[colin]

Not much about infrastructure funds on this thread!

Nothing at all really, quite surprised. HICL and JLIF fell over 3% on the news of Corbins intentions, if Labor buy the contracts back i asume they will do so at NAV, instant 10-15% loss, then there is the complication of what effect the inevitable rising rates will have on NAV calculations ?

[UncleEbenezer]

Not much about infrastructure funds on this thread!

Nothing at all really, quite surprised. HICL and JLIF fell over 3% on the news of Corbins intentions, if Labor buy the contracts back i asume they will do so at NAV, instant 10-15% loss, then there is the complication of what effect the inevitable rising rates will have on NAV calculations ?

All those figures are complicated by the difficulty identifying what's actually changing. If government nationalises the asset, then they presumably also nationalise the liability of servicing, repairing and maintaining that asset. Who is going to value the package? Who, other than the present owners, is going to be contracted to do the work?

Yes, there's lots of scope for nonsense, and we can expect another crop of the corruption magnets that always surround government spending. But the reality might end up being a lot less dramatic than the rhetoric. Perhaps even no real change: nationalisation by payment over the remainder of the original term, with an associated maintenance contract.

[Dod1010]

I think that UE is pretty well on the nail. The sort of nonsense talked by Corbyn and his henchmen obviously has not been thought through but goes down well with his bunch of cronies at their conference.

Meanwhile I must say I am disinclined to buy an infrastructure fund as I have enough in the politically sensitive area of electricity without adding to it. I am not sure I would even if the price fell below NAV in the case of HICL because of the difficulty of valuing it.

Dod

[colin]

John Appleby, chief economist at the Nuffield Trust, a health charity, told the BBC’s World At One that the total cost of buying out all the PFI contracts in the NHS alone could be well over £50bn.
“In the NHS in England, it is paying around £2bn a year in [PFI] repayments, and they will peak in about 2028, 2030. And I suppose if you add those up from now to the end of those contracts – the contracts end at different periods – we could be looking at something like £56bn by 2048,” he said.

The above was extracted from a Guardian article and offers some figures, to me the figures do not look as dramatic as Labor seem to be making out, is saving £6bn over a 30 year period worth the consequences of the extra borrowing and the loss of confidence in government/private sector partnerships?
Thanks for your insightful thoughts

[77ss]

....
The above was extracted from a Guardian article and offers some figures, to me the figures do not look as dramatic as Labor seem to be making out, is saving £6bn over a 30 year period worth the consequences of the extra borrowing and the loss of confidence in government/private sector partnerships?
Thanks for your insightful thoughts

I have no particular opinion of Labour's plans, but I query your 'loss of confidence in government/private sector partnerships'. I am not sure that any such confidence is justified.

Its a few years old now, and matters may have improved, but a 2011 Select Committee report stated that:

The Committee concluded that Private Finance Initiative (PFI) funding for new infrastructure, such as schools and hospitals, does not provide taxpayers with good value for money and stricter criteria should be introduced to govern its use.

http://www.parliament.uk/business/commi ... itiative-/

[Alaric]

is saving £6bn over a 30 year period worth the consequences of the extra borrowing and the loss of confidence in government/private sector partnerships?
Thanks for your insightful thoughts

How much can be saved is determined by the price you pay to buy out the capital element, in other words to own the buildings and how much it costs to substitute in house maintenance of the asset. At the very least you don't pay up front for the profits the PFI provider might have made.

Here and there are Government bodies paying out on PFI contracts for facilities and services they no longer require?

[colin]

I have no particular opinion of Labour's plans, but I query your 'loss of confidence in government/private sector partnerships

Well they have dented my confidence already, and they must have dented the confidence of many other investors who sold infrastructure funds on hearing the news of Labour's intentions. Why would anyone buy an investment under the risk of that investment being taken away and swapped for government bonds at an unknown price unless that risk was reflected in the price?

[richfool]

There is often an over-reaction to such pronouncements, and it can be quite another matter if they ever come to pass, or come to pass in the shape or form initially announced. We had a similar situation with the utilities (electric & gas) a while back, firstly when the labour party made pronouncements, and then later when it appeared the conservatives might do a watered down version of the same. In the event neither happened and the dust, in the main, settled again. I have taken a similar view over the current PFI infrastructure scare, doubting that it will come to pass, and have taken the opportunity to top up/round up one of my holdings (JLIF).

[colin]

I don't think Mark Carney did infrastructure funds any good this morning either.

[ermintrade]

I recently switched out of HICL into 3i Infrastructure, mainly because of the 3i's superior capital gain over 1, 3 and 5 years. However the 3i dividend is lower than HICL's. In view of the concerns about Labour Party plans, it is interesting to note that of the 3i portfolio only 43% is in the UK, whereas for HICL it is about 80%.
Regards
ermintrade

[Dod1010]

I have no particular opinion of Labour's plans

That comment surprises me because I think every investor should be keeping a weather eye open for politicians' plans and ought to form an opinion on them. Personally I am horrified that any opposition with at least a reasonable chance of being elected as a government should be considering the sort of nationalisation issues the current Labour Party seem intent on, whether this includes buying out PFI contracts or not.

As I have said, I will not be buying into infrastructure funds any time soon, at least not until matters are a bit more settled on the political front.

Dod

[richfool]

An article in the latest Investment Trust Insider: "Are infrastructure funds a buy or sell after McDonnell’s PFI threat?"
http://citywire.co.uk/investment-trust- ... der+Weekly

The threat by John McDonnell, Labour shadow chancellor, to cancel hundreds of private finance initiatives (PFI) underpinning many hospitals, schools and roads in the UK has left investors divided on prospects for listed infrastructure funds.

While the veteran left winger’s speech to Labour’s annual conference this week can be dismissed as playing to the gallery – a press release from the party later clarified the number of PFI deals taken ‘in-house’ would in fact be limited – the episode has raised the spectre of political risk for investors in the funds that have bought up many of the contracts.

Entry or warning?
The moves have not gone unnoticed by investors, who previously were drawn to the asset class because its returns were not linked to share prices and offered attractive yields. Their challenge is to work out whether Labour poses a real threat to the sector. Do the lower premiums represent an entry point or are they a warning sign of trouble ahead?

For Moore, political danger is not what investors should focus on. The bigger risk is the prospect of higher interest rates in the UK and US, which will make infrastructure fund yields less attractive, a fact that has already done much to weaken the premiums on their shares.
‘It is bond yield sensitivity that investors should prioritise,’ Moore added, pointing out that as interest rates rise, the prices of bonds and other predictable income-generators will fall.

I did note the comment about the implications of rising interest rates. I am also conscious that all that is spoken of, or threatened, whilst in opposition, doesn't or wouldn't necessarily come to pass, if or when in power.

[77ss]

I have no particular opinion of Labour's plans

That comment surprises me because I think every investor should be keeping a weather eye open for politicians' plans and ought to form an opinion on them. Personally I am horrified that any opposition with at least a reasonable chance of being elected as a government should be considering the sort of nationalisation issues the current Labour Party seem intent on, whether this includes buying out PFI contracts or not.

As I have said, I will not be buying into infrastructure funds any time soon, at least not until matters are a bit more settled on the political front.

Dod

I think we have a lot more to worry about than Labour's ideas about PFI contracts. They may or may not be good ideas, they may or may not be set in stone, and, of course, Labour may not win the next election.

Worry about the consequences of Brexit, if you must worry about imponderable political risks. I expect that in the long term these will be far more significant.

If you read my post more carefully, you will appreciate that I was actually taking issue with the alleged benefits of PFI contracts. Looking at it from the taxpayer's point of view.