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The UK鈥檚 largest construction firms have cast doubt on chancellor George Osborne鈥檚 ambition to attract up to 拢20bn of institutional investment into infrastructure and have called for the government to adopt a more 鈥渞ealistic鈥� approach focused on a reformed private finance initiative.

In the autumn, Osborne said he wanted to raise 拢20bn from pension funds as part of a plan to boost investment in UK infrastructure and has launched talks with institutional investors aimed at realising this.

But in its response to the government鈥檚 consultation on reform of the private finance initiative (PFI), the UK Contractors Group (UKCG) said it was 鈥渉ighly unlikely鈥� that institutional investors, such as pension funds, would invest 鈥渋n large numbers鈥� in infrastructure schemes as the government hoped, owing to the perceived high risk. It said this was despite the reality that 鈥渋n the vast majority of cases assets are built to time and budget鈥�.

UKCG director Stephen Ratcliffe said contractors were calling for a more 鈥渞ealistic and pragmatic approach鈥� that recognised that there was 鈥渜uite a bit of work to do to convince institutional investors that construction is a reasonable risk鈥�.

鈥淭he view is that going from near zero to a massive amount of investment is probably unrealistic,鈥� he said.

Ratcliffe said pension funds 鈥渓ack people who have a good understanding of the construction aspect of projects鈥�.

He said UKCG, which represents more than 30 of the UK鈥檚 largest contractors, had met with the Treasury as part of its continuing talks with pension funds and the next step was to get contractors, pensions funds and the Treasury around the same table.

锘緾lear decisions are needed on the future of PFI to provide direction to the market

UKCG response

But he said that he doubted sufficient progress would be made by next month for any announcement to be made in the chancellor鈥檚 budget. 鈥淭hree to six months is a more reasonable timetable,鈥� he said.

In its response to the Treasury鈥檚 consultation, the UKCG said a more 鈥渞ealistic shorter term option鈥� to investment in the construction phase of infrastructure projects, which is perceived to be more risky, would be for institutional investors to focus on the operational phase of a PFI asset.

鈥淭he goal should be to enable investors to invest once the construction phase has been completed and any operational defects have been addressed - this is probably five to seven years into most projects.

鈥淚f such a market could be created, project sponsors would be able to borrow funds on shorter terms from commercial banks before the investment could flip to the pension funds. This may reduce the cost of borrowing, and will ensure a wider pool of funding sources for infrastructure projects.鈥�

The UKCG also called for a more balanced assessment of the cost and benefits of PFI and warned that uncertainty around the future of PFI risked delaying infrastructure investment.

鈥淐lear decisions are now needed on the future of PFI to provide greater direction to the market - the danger is that the current uncertainty will lead to a hiatus in procurement decisions while people await decisions on PFI鈥檚 future,鈥� the response said.

The UKCG also warned that, with PFI now replicated around the world, the lack of clarity around the future of the initiative in the UK - and moves to cap equity returns for investors - could see the UK losing investment and expertise to the international market.

鈥淏ecause PFI is now an international market there is also a danger of losing capacity in the UK unless government makes a clear policy statement soon on how it intends to take forward the PFI model,鈥� the response said.