New Norms

1 June 2017 The sixth annual Financing UK Infrastructure event was held in London, just a week after Prime Minister Theresa May called a General Election. But as Paul Jarvis found out, people are not waiting on Westminster

When Prime Minister Theresa May went on holiday, no-one could have anticipated the massive impact that walking in the Welsh hills would have on the political future of the country.

Having returned from her break to launch a General Election, May left the PPP market in a state of limbo. Just weeks before, the industry had been on the verge of some exciting news with expectations of a new PF2 pipeline before the summer and a new programme of healthcare investment through Community Health Partnerships (CHP) on the table awaiting ministerial sign-off.

With all that now on hold, at least until after 8 June, one would be forgiven for assuming that delegates met in a somewhat gloomy mood.

However, seven years after the taps were turned off on the PFI pipeline, the private sector has become adept at finding its own ways to develop opportunities and help deliver investment in the country’s infrastructure. Perhaps the government has created the ‘environment for investment’ that the Conservatives talked about when first in coalition government back in 2010.

“I am optimistic,” said Darryl Murphy, newly installed head of infrastructure debt at Aviva Investors. “In the next year or two, there will be relatively little greenfield, so the trick is diversification.”

Doing things differently was a key theme of the day. The Thames Tideway project was referenced on more than one occasion as offering a potential signpost to the way ahead. “There are a number of projects that can use a Thames Tideway-type of model,” said Alistair Ray, chief investment officer and partner at Dalmore Capital – one of the investors in the project. “It was of a sufficient size, which helped it.”

Mark Swindell, founding partner of Rock Infrastructure, agreed. “It was a relatively flexible model, compared to the traditional PFI model, which was good at transferring complex construction risks on a value for money basis.”

He continued: “Institutional investors like to invest directly in deals that are ready cooked on initial presentation. That is a different style for the infrastructure market which is based on competitive dialogue processes. It takes a lot of development up front from a developer, which requires a lot of developer high risk capital.”

And this is where central government’s hands-off approach starts to run into difficulties. While local authorities may have some bold plans, experts warned that without some way to fund them, turning ideas into investable projects can be difficult.

“When you’ve got great ideas [at a local level], the question is who is going to fund it,” said Murphy. “The theory is right, but at a local level there is a lack of funding.”

Tony Poulter, chairman of the Pensions Infrastructure Platform, added that much of this will depend on the future devolution settlements, as local populations go to the polls to elect new mayors. But he said: “The will and vision is needed at the centre. At the moment, however good an idea is, it can’t be done without devolved funding and a structure from central government to do that.”

For all the frustration that the election has caused, the bigger question for most in the room was what impact Brexit might have on long-term investment in the UK.

Once again, the response from speakers was upbeat. “People believe there is going to be continued stability,” said Poulter.

Murphy also suggested that fears of receding investment from the European Investment Bank hitting UK projects may be unfounded. “I think the Treasury is expanding the products within the UK Guarantees programme as part of a toolkit given the potential of the EIB to reduce its investment in the UK,” he said.

Healthy picture

Indeed, the good news for many at the event is that government officials and agencies have been far from inactive, even if little can be formally announced during the election period.

At the forefront of the developments has been Community Health Partnerships (CHP), which has been working on its Project Phoenix concept for some time and had been hoping to get sign-off from ministers soon after the Easter break.

Instead, like everyone else they got news of a General Election and a two-month delay. Eugene Prinsloo, developments director at CHP, gave some more details on the plans (subject to ministerial sign-off), building on what his colleague, Graham Spence, had told delegates at the previous day’s roundtables, held at CMS’ offices.

“We have been looking at adopting some of the commercial world’s approaches to increase flexibility,” said Prinsloo. “It is important for commissioners to work with service providers and building owners to drive up utilisation rates.”

However, CHP’s plans are focused on creating long-term joint venture partners that are based on driving up rationalisation, rather than being targeted on new building developments. This again threatens to hit against the problems raised by the likes of Swindell, where private sector partners need deep pockets to do the up-front work before making any money.

“The programme will look to drive rationalisation of existing estate and reconfiguring existing buildings to respond to the needs,” said Prinsloo. “Bringing forward new buildings will be a last option.”

That means those already running similar schemes at health trusts through strategic estates partnerships are likely to be at the front of the queue for the Phoenix proposals, if and when they are published.

While all these plans are still dependent on ministerial sign-off after the election, there is plenty of interest from the market, added Prinsloo, explaining that “there is appetite from existing Lift investors to stay invested in the sector”.

This appetite from investors was reflected in the presentation from Barry White, chief executive of the Scottish Futures Trust. With the non-profit distributing (NPD) programme having been hit by the balance sheet treatment issues, White was at pains to explain that there is a lot going on in Scotland beyond that one approach.

The SFT’s Growth Accelerator model, based on a tax increment financing approach, has borne some fruit here and will continue to do so, according to White. “By investing in city centres, we can unlock growth,” he said.

However, White did not rule out using a more centralised approach in the future. “NPD remains important to us,” he began, “but it is very much part of a toolkit.”

While he admitted that there are no new plans for NPD in the agency’s upcoming business plan, there remains a small amount of headroom in the pot should that be needed. “Of the £3.5bn that was announced for NPD, just over £3bn of that allocation has been made, so there is room to invest a bit more if we decide to go that way.”

He also welcomed the greater clarity on what might count as on or off the government’s balance sheet following last autumn’s guidance from Eurostat – but added the fact that the UK is leaving the EU does not mean the balance sheet treatment issue will go away.

“We are not speculating that there will be easier regulations [in or out of the EU].”

It was ESA10 and its subsequent interpretation by Eurostat that caused havoc in Wales, too. Earlier this year, the Welsh government’s plans re-emerged under the Mutual Investment Model (MIM). Alex Slade, head of social infrastructure at the Welsh government, gave delegates a further run-down of the new approach. He was clear that the model will be recognisable to all those that have been involved in PFI, NPD and other forms of PPP over the years.

However, perhaps the key difference is that the public sector’s investment will be “at the same risk as the private sector”, in other words ensuring the Welsh government will share both the upsides and downsides in any project in the proportion relative to its investment.

Dennis O’Keeffe, infrastructure programme director for the Velindre Cancer Care project – one of the first to be piloted through the MIM approach – was also on hand to highlight another important element: providing community benefits through the model.

“The community benefits of the scheme will enhance what has been done elsewhere,” he insisted.

So there is plenty of activity: from Wales, to Scotland, to the English health estate and at a more local level. Nonetheless, the demands for a more consistent pipeline from Westminster remain.

“There needs to be a new norm of a rolling process,” said Phil Harris, director at Galliford Try Investments. “We want to see a growing and steady pipeline, not a dumping of projects.” Sources at the Infrastructure and Projects Authority have long insisted that this is how they see the market developing. Now it is up to their political masters to decide if that is their wish, too – whoever they may be after 8 June.

This page was last updated on:
3 July 2017.


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