After the Shipwreck

1 March 2012 Giles Frost tells Paul Jarvis about leading Amber Infrastructure out of the ashes of Babcock and Brown
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Few people will look back fondly at 2011, but Giles Frost can. Over the past 12 months, Amber Infrastructure and International Public Partnerships (INPP), the fund it advises, have been at the forefront of developing new PPP markets, and have done rather well out of it.

In 2011, Amber-led consortia were given three regeneration-focused funds to manage, with money coming from Europe to fund schemes. Meanwhile, INPP signed three of the Offshore Transmission Owner (OFTO) contracts on which it is preferred bidder. “We’re seen as the leading provider of offshore transmission in the UK, so that’s quite a good place to be,” he says.

Such has been the rate of success at the organisations over the past 12 months that Frost initially forgets to mention one of INPP’s biggest acquisitions of 2011 – that of Building Schools for the Future Investments.

The £60m purchase, agreed in August, saw INPP take control of 100% of the Department of Education’s share in the BSF programme, giving the fund a minority stake in every local education partnership (LEP) in the country. At the time, it did not seem to be a particularly shrewd move by the firm, with many commentators wondering what could be done with these vehicles now the programme they were created for had been cancelled.

Frost and his partners, however, saw an opportunity. “I think that was an ideal deal for us,” he says. “What we’re trying to do is turn the local education partnerships up and down the country into local infrastructure partnerships.

“We’ve got some traction with a lot of them now, and what we will try to do is take the good working relationships we’ve got and develop them in social housing, or health, or whatever it may be.”

He bats away concerns about the LEPs’ original OJEU notices preventing them from being used for such purposes. “I don’t think the issue of OJEU is really relevant because at this stage what we’re talking about is taking the spirit of the partnership locally and seeing what more can be done.”

Frost goes as far as to say some of the projects could be completely private schemes, so wouldn’t even need a public procurement.

With so much going on, it’s no surprise Frost has a fairly positive view of 2012. During the economic crisis of recent years, he insists infrastructure has been a “winner”, despite the fact many construction companies might disagree – particularly in the UK.

“Governments around the world are focusing on delivering additional infrastructure assets as ways to stimulate their economies,” points out Frost. “So for example there’s the National Infrastructure Plan [in the UK], and around the world – Australia in particular – governments are looking to have more assets developed.

“That is supportive for growth in the future because internationally, in 2012-13, you’d expect to see a number of quite significant deals coming forward.”

He’s confident the UK will have a significant role to play in that future, too. The apparent view of the UK as a safe haven – especially compared to its European neighbours – gives Frost reason for his optimism. “The UK is in pretty good shape, in my personal view, relative to most other places. The strength of sterling and the appetite for gilts illustrate that there is a level of belief in what’s happening here.

“All in all, I think it’s quite a good time for infrastructure – particularly if you are of the glass half full rather than half empty persuasion. I can’t think of a sector I’d rather be in right now other than infrastructure.”

Manning the lifeboat
Frost is certainly a glass half full man. Having been at Babcock and Brown when the company fell apart, he has managed to come out unscathed and, with a close team around him, build a prosperous new company from the ashes of the old.

“I was at Babcock for almost 10 years,” he reflects. “In that time the global Babcock business went from a small privately held partnership that was run along conservative lines, to becoming a bit bloated, and it eventually followed a fairly well-trodden path of taking on a lot of debt and not being able to repay it.”

Frost insists that the reason he and his team were able to leave that “shipwreck” was because his division was run along more conservative lines than many other parts of the business. “I’m quite proud of the fact that we managed our business at Babcock effectively so that when things went wrong we were able to detach ourselves without damage to that business.”

It helped that he and his team had built up a strong reputation in the partnerships and infrastructure world, and managed to maintain relationships even as things went wrong and the firm was forced into liquidation in 2009.

“That transition was absolutely vital to where we are now and the fact that we retained good relationships through that period was critical,” he explains. “People underestimate the importance of relationships in business. What we took away from that period is, hopefully, that we’re quite good at supporting and nurturing relationships.”

Frost’s background no doubt helped him pick his way through the wreckage of Babcock and Brown. Having read law at Oxford, Frost moved into the profession on leaving education, but at first had no thirst for infrastructure projects.

“I worked as a real estate lawyer,” he says. “I did a lot of work in real estate finance in the 1980s and 90s.”

His experience in real estate finance meant he was well placed to help develop the emerging PFI sector in the early 1990s. “When it started there weren’t people who were experts in PPP finance because it didn’t exist – so as a real estate financier I got involved in some of the PFI stuff back in 1992/3. So I was a relatively early adoptee of PFI.”

But while this could have provided a perfectly profitable career, Frost admits he never felt totally comfortable as a lawyer. “I think some people are natural advisers, and some people would like to be advised. As an adviser, you’re always in a position where you’re saying ‘you can do this, or you can do that, it’s your choice’.

“I think I’m probably more of a mindset of somebody who likes to have that advice and then make their own decisions.”

Hence, he joined Babcock and Brown in 1999 as part of the company’s relatively new investment arm. It was a time when there was no “template” for these projects, and gave Frost the opportunity to innovate.

Lost opportunities
That innovation is something Frost, like many others, believes has been lost over the years, as central government has issued more and more documentation on how to deliver and run projects. It’s certainly something he hopes will be addressed by the Treasury’s PFI review.

“In the interim between producing PFI in the 1990s and where we are now, there has been a ‘Dark Ages’ period when we lost some of the drive to innovate. PFI became very much a process-driven, reactive procurement where people were being asked to bid against a fairly defined specification and the ability for the private sector to innovate was largely lost.”

He suggests a “more dispassionate approach” to using PFI could pave the way for improvements here. “When you look at what happens in other countries, there’s a much more reasoned decision taken by government about ‘should we conventionally procure this or should we use PPP?’

“We’ve tended until recently to go ‘all PPP’, which means some schemes have actually not really been good schemes. I think a more deliberate choice for PPP would mean you can showcase some of the innovation that the private sector can bring.”

Having submitted his response to the review, Frost suggests that the model has been bogged down in the balance sheet issue. He’s also concerned with the reputation PFI has gained in recent times.

“My personal view is that PFI has had a bad press and there have been too few people defending the good aspects of what PFI has done, so I’d like to see that change going forward.”

In particular, greater appreciation of the fact these deals are for the 25-year lifetime of a contract would be helpful, he suggests. “The long-term benefit that you get out of these assets will determine how much value for money is accrued.”

Despite its problems, Frost remains committed to the partnership model and insists it’s one of the best markets to be in. “It’s exciting because there aren’t many jobs in life where you can be a generalist these days – everyone’s more and more specialist. Working in infrastructure covers absolutely everything. You learn an awful lot.”

The problem, of course, is that today being a PFI professional is almost as bad as being a banker in some people’s view. Frost, of course, need not mention PFI when discussing his work these days. Both Amber and INPP have diversified their businesses to be at the sharp end of some of the newer partnerships models being developed.

He is, though, supportive of the idea of encouraging pension funds and other institutional investors into the market. “As a representative of long-term investors, including quite a lot of pension funds, who invest into the listed fund, then the more we can do to encourage pension funds to invest, the better.”

But as a replacement for banks? “I think the jury’s out on that a little bit,” says Frost. Although there is clearly interest from overseas pension funds in UK infrastructure – as shown by the High Speed One deal, which involved Canadian funds Borealis Infrastructure and the Ontario Teachers’ Pension Plan – Frost doubts similar levels of investment can be leveraged from UK funds.

“The unspoken hypothesis is that there is some sort of sleeping giant around [UK] pension funds, which can be prodded into action somehow and which will rise and replace the role of the banks.

“I think the difficulty there is that it doesn’t exist because we don’t have the same size of pension funds industry that exist elsewhere.”

The difference, he explains, is that the UK has not traditionally had funded public sector pensions, so there is no big pot of cash waiting to pay out to pensions in the future that can be invested in infrastructure in the meantime.

While he’s sure the Treasury is aware of the issues, Frost suggests the excitement around pension funds may have got slightly out of proportion.

“The commentary around this suggests the pension funds are going to come in and undercut the banks. I don’t think that’s going to happen at all.”

Frost has been focusing on other sources of finance in recent months, anyway. In particular, Amber has been successful in winning bids to manage European Investment Bank (EIB) cash through the Jessica fund.

This programme is aimed at improving social outcomes through regeneration. But unlike the local asset-backed vehicle model, for example, Jessica funding prefers to focus on smaller projects that can deliver some quick wins.

In 2011, Amber was appointed – as part of consortia – to manage a £55m regeneration fund in Wales, the £50m Scottish Partnership for Regeneration of Urban Centres fund, and the £100m London Energy Efficiency Fund.

“We’ve become a leading player in that sector, and I think we’ve done that because we’ve had exceptionally good engagement with the EIB,” says Frost. “We’ve understood very clearly what the objectives are.”

He argues it’s a better approach than old-style grant funding, because the focus is on recycling investment, rather than simply spending money. “This is all about effective investment, achieving the economic and social goals and getting a return for that money with the expectation that the money will eventually be returned so it can be reinvested again.

“It’s quite exciting because we’re taking on a role that was hitherto taken by grant awarding bodies and now it’s for us to do. That is picking where to invest money for the greatest social and economic return as well as financial return,” he says. “And we’ll stand or fall by how well we do, I guess.”

Having made such progress in winning bids on new and emerging partnerships models, proving them to be more efficient and more flexible than what has gone before is the challenge for both Frost and his team in 2012 and beyond.

This page was last updated on:
1 March 2012.

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After the Shipwreck

Giles Frost tells Paul Jarvis about leading Amber Infrastructure out of the ashes of Babcock and Brown

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