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Levelling Up: Institutional investors welcome new infrastructure threshold

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3 Feb 2022

Among the noise and hyperbole surrounding the government’s Levelling Up white paper there are real benefits of substance for investors, finds Andrew Holt.

Levelling Up

Among the noise and hyperbole surrounding the government’s Levelling Up white paper there are real benefits of substance for investors, finds Andrew Holt.

Levelling Up

Much hype has surrounded the unveiling of the government’s flagship Levelling Up white paper, and possibly surprisingly, the reception has been upbeat from investors highlighting the opportunities the strategy offers.

The paper offers up 12 “bold national levelling up missions”, given status in law, which, says the paper, will shift government focus and resources to “Britain’s forgotten communities throughout 2020s”.

Pension opportunities

The standout for institutional investors is the white paper’s announcement of a new 5% minimum target in local investment by council pension schemes. This got a big thumb up from the Impact Investing Institute (III).

“This move will make it easier for pension schemes to consider the real opportunities presented by investing for impact in UK towns, cities and regions,” said III chief executive Sarah Gordon. “By putting their investments to work to address local challenges, pension schemes can achieve appropriate risk-adjusted financial returns that are compatible with their fiduciary duty while enhancing local resilience and improving people’s lives.”

Anna Shiel, head of origination at Big Society Capital, a social impact investor, was also excited with this move.

“We are delighted to see a new target for council pension funds in England to invest at least 5% of their £337bn of combined assets on local areas,” she said. “Over the past decade, we have seen first-hand how connecting private capital to the places that most need it has the potential to reverse the social inequality that is limiting horizons, and which harms our economy.

“We have seen pension funds increasingly supporting social impact in recent years – tackling a wide range of issues including homelessness and education. We look forward to seeing how the new target will further this trajectory,” Shiel added. 

Long-term investors

Tracy Blackwell, chief executive of Pension Insurance Corporation (PIC), was also positive, albeit with some caveats. “We welcome this white paper and agree that the government cannot level up the UK alone, but it will have to work in partnership with the private sector and with long-term investment from the financial services sector,” she said. “We are already seeing billions of pounds being invested into areas like social housing and urban regeneration from long-term investors. 

“However,” she noted, “to enhance this flow the government needs to ensure that financial regulatory reform doesn’t end up slowing or stopping the flow of investment into our cities and towns and draining the life from the levelling up project.”

Here, Blackwell cited PIC’s campaign for changes to be made to Solvency II, a piece of insurance regulation that – if reformed appropriately and with focus, said Blackwell – could free up £20bn of fresh investment in the UK economy this decade.

Ted Frith, chief operating officer at GLIL Infrastructure, is ready to step in where needed to fulfill the Levelling Up agenda. “A fund like GLIL has invested directly into UK infrastructure assets for a number of years and we stand ready to support further projects that can deliver stable, long-term inflation-linked returns for the benefit of our pension fund members,” he said. 

Frith did though add a more cautious and critical note surrounding the government’s approach. “However, we are still waiting to hear how the government plans to replace the financing of projects that used to benefit from Private Finance Initiatives, and how private capital can help rebuild our schools, roads and hospitals across the regions.”

Innovation accelerators

The white paper also revealed plans for three new ‘innovation accelerators’ in Greater Manchester, the West Midlands and Glasgow.

Businesses and research in these areas will be supported with £100m of government funding, adopting an approach that has helped create thriving innovation ecosystems in places like Boston and Silicon Valley.

Chris Oglesby, chief executive of Bruntwood and chair of Innovation Greater Manchester, was understandably enthusiastic. “Through Innovation Greater Manchester we have promoted the idea of place-based innovation deals that will make a transformational impact on our towns and cities – helping direct investment and align with complementary skills and infrastructure strategies. It is great to see that government supports our approach and will invest in innovation accelerators.

“We now need to work quickly to use this momentum opportunity to turn our research and development strengths into more jobs and opportunities across our city-regions, attracting long-term investment from the private sector and setting the course for new high productivity industries across the North and Midlands,” he added.

Empowering regions

The white paper’s emphasis on devolution, and pledge to empower local regions, is also seen as a positive step forward. 

“For regional regeneration to be successful, the voices of the local community must be placed at the heart of all discussions about regeneration. Local knowledge and lived experience are best placed to understand the challenges faced and the opportunities that can be accessed,” Gordon said.  

No net zero

Although James Alexander, chief executive of UKSIF, said it was “very disappointing” not to see a single reference to net zero or sustainability as part of the government white paper.

“Our strong view is that net zero and levelling up can be best achieved as part of the same policy – creating an economy that builds the sustainable industries of the future in the parts of the country that need this investment the most,” Alexander said.

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