Politics

The dangerous centre of politics

December 04, 2013
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In a ministerial statement today, the Chief Secretary to the Treasury, Danny Alexander, gave a flavour of what is to come from George Osborne in tomorrow's Autumn Statement.

One of the more ear-catching points made by Alexander, as he set out the therms of the National Infrastructure Plan, was that the Government had struck an agreement with the insurance industry. Insurers will invest £25bn in national infrastructure projects over the coming five years, a sum equivalent to roughly 1 per cent of UK GDP. Insurance firms already invest in Britain's infrastructure, though not on this scale. But why this new large investment? And how will it be done?

The first question—why?—is perhaps the more straight forward. Warren Buffet, the most successful investor of all time, says he likes the insurance business because when it comes to cash flow, you get your money up front. As a consequence, insurance firms tend to find themselves sitting on large stocks of cash, which they then invest. But now that interest rates are so low, and are forecast to remain so for some time, the kind of assets that are deemed safe enough for insurance companies to own are yielding very low interest rates.

A willingness on the part of the industry to look elsewhere for better returns on their investments—to search for yield—is perhaps reasonable. The coming of more excessive regulation, in the guise of Solvency II, will only make the industry keener to maximise its returns and branch out into other forms of non-conventional investment. Like British infrastructure.

But the industry should tread carefully. As the energy companies have learned, political risk is now at intense levels, and the possibility of reputational catastrophe increases as a company moves closer to the centre of political activity. If money from insurers were to be invested in a project that under-performed, this could rebound nastily on the industry.

Which brings in the "how" of those questions—will insurance firms hand money to the Government and walk away? If so, what will be the terms? Or will insurers have influence over how the money is spent, overseeing the investments and directing their cash towards projects that would benefit their standing?

The details of the industry's involvement are not clear. But what is clear is that, in a search for yield, some successful City institutions are entering the public sphere with the intention of investing. In doing so, they are taking a very substantial risk.

But, if results are good might other organisations, both financial and otherwise, domestic and international, decide to follow suit?

George Osborne will deliver his Autumn Statement in the House of Commons tomorrow morning.