Market Experience

The seventh annual Financing UK Infrastructure conference unearthed significant potential in the PPP market

A consensus became clear during one of the boardroom debates on the afternoon before the main conference at Financing UK Infrastructure 2018, in which most participants acknowledged they had been in the field for at least 15 years.

That experience was given more relevance as the debates and sessions got underway at the Celtic Manor in Wales, as experts were challenged to tackle some of the big issues facing the industry today.

Many in the room have of course seen the market go from its early tentative days, through the highs of the mid-2000s, to the low of the past decade, since the global financial crisis began to usher in the era of austerity and a backlash against the PFI model. That experience, suggested some, will be vital in ensuring that the industry can adapt and change.

Speaking at the end of the conference, Aviva’s head of debt investments Darryl Murphy told delegates that the industry needs to show some remorse over the problems of the past – but more importantly needs to rectify where mistakes have been made and make sure that it is working diligently with public sector clients today to ensure a high standard of service delivery in existing contracts.

Doing things better became a theme running through the event, from the roundtable discussions sponsored by Arup and CMS, to the main sessions that considered the way in which new breeds of PPP might be developed.

And while everyone acknowledged that the industry continues to face difficult times, there was significant optimism in the room that the UK’s PPP market is in a strong position for the future.

Indeed, it may be that part of the problem for many in the industry when looking at the market is that they are comparing it to the boom years.

In the panel session sponsored by law firm DLA Piper, Sacyr’s investment director for Europe, Ovidio Bartolomé, pointed out that things may not be as bad as some may think.

He was speaking after sessions from the Welsh government, the Scottish Futures Trust (SFT) and the UK Treasury’s Infrastructure and Projects Authority (IPA), in which all three organisations set out positive prospects for future investment.

“If this is what is coming forward in circumstances where you have Brexit happening and [the continued fallout from] Carillion, that is positive.”

The day began with delegates in confident mood. A poll found that 57% of the audience were cautiously optimistic, while a further 9% considered themselves to be very optimistic on the state of the market.

And that confidence appeared to be well-founded. The event was kicked off by the Welsh government’s head of innovation, Steve Davies, who presented an update on the progress of the Mutual Investment Model (MIM) – one of the options being touted by some as a potential saviour for the private finance concept, not least due to its focus on local benefits.

Davies explained that the three committees relevant to the three projects being developed under the MIM model are “really interested” in the concept, which means his team “are working ever harder to communicate the benefits of the MIM model to a wider audience”.

However, there remain a number of potential bumps in the road for the programme. Davies pointed out that the original plan was for the European Investment Bank (EIB) to fund up to 50% on MIM projects. But with Brexit meaning the EIB may no longer be financing projects in the UK, that idea has had to be revised. “That is why we will be looking for fully funded bids,” he explained.

Meanwhile, Davies admitted that the impact of the Carillion collapse has been for his team to now look more carefully at issues around the weighting given to price versus quality in project proposals.

He was followed on stage by Sara Humber, formerly of the Education and Skills Funding Agency’s Priority School Building Programme in England. Humber is now the programme director for Wales’s MIM 21st Century Schools initiative and she revealed that the principality would be taking a novel approach to delivering its privately financed schools.

Instead of simply launching a round of batched schools, as had once been the thinking, Wales will now establish a single delivery partner that will be similar to Scotland’s Hub programme.

While this may reduce the number of procurements on the horizon in Wales – there had been hopes that a number of schools would be packaged into small batches – it does mean that the final opportunity is likely to be of a scale big enough to attract a range of investors. “By having one strategic partner, it means we can deliver smaller scale schemes,” Humber explained.

With delegates still taking in the Welsh government’s plans, it was time to move on to look at what Scotland has to offer, as CMS partner Ailsa Ritchie interviewed Scottish Futures Trust (SFT) chief executive, Peter Reekie.

Following the announcement from the Scottish government earlier in the month that the SFT would be exploring new ways of financing infrastructure, including the MIM model, Reekie provided delegates with his views on what the agency is doing, as well as highlighting its openness to discuss how models can be developed to attract private finance.

Again, referring to the impact of Carillion, Reekie said that there are lessons to be learned on the financial stability of big contractors. “We need to do what we can as a procurer to avoid these problems occurring in the first place,” he said. “We need to think of ways to make sure our procurements can cope with a variety of situations within the industry.”

He pointed to the Edinburgh schools review, carried out in the wake of the collapse of a wall at the Oxgangs school, which “showed some really ingrained issues in the construction industry as a whole”.

And while many in the room may have been hoping for a swift return to a programme of projects emerging from Scotland, Reekie reiterated his intention to properly consider what the need is.

“The last thing we want to do is rush into projects,” he said. “It is about looking to the medium term to look at what is needed.”

Later in the day, it was the turn of Matthew Vickerstaff, head of project finance at the IPA, to put forward the Treasury’s programme of private finance investment. Like Reekie before him, Vickerstaff seemed keen to listen to the private sector to develop a way forward for private investment.

In particular, he said the IPA recognised that bid costs had become something of a thorny issue for bidders and acknowledged that in Europe some countries supported bidders through refunding some unsuccessful bidders. Pointing to political uncertainties around Brexit and the potential impact of a Labour government that would be keen to scrap all privately financed projects, Vickerstaff said the IPA has been “actively discussing [bidder compensation] with a sympathetic ear” on some active procurements.

While many in the room may have felt there was little new to come from Vickerstaff’s presentation – perhaps in contrast to the Welsh government’s plans and Scotland’s proposals for the future – there was a compelling argument to suggest the UK government still believes in partnering with the private sector on infrastructure.

Vickerstaff pointed to Highways England’s A303 and Lower Thames Crossing PF2 projects, as well as the Ministry of Justice’s plans for a programme of five privately financed prisons over the coming years. He also highlighted the health sector’s Regional Health Investment Company (RHIC, formerly known as Project Phoenix) plans, as well as the Ministry of Defence’s £2bn-worth of housing plans regarding the optimisation of its estate.

As he demonstrated a package of privately financed projects and programmes worth a combined £12bn, Vickerstaff also referred to the rail sector’s ambitious programme of investment, spearheaded by its call for market-led proposals and the East-West Rail initiative.

The many and varied opportunities in the rail sector were discussed during one of the afternoon’s panel sessions, chaired by Stephen Williams, director of infrastructure at session sponsor MUFG. Kamal Patel, from the Department for Transport’s corporate finance directorate, told delegates that the ministry had been pleased to receive 30 responses to its call for market-led proposals and is now in the process of going through them.

However, while Patel looked to highlight the importance of additionality and innovation in what is driving the department, Rock Rail partner Nick English raised the familiar concern of the amount of risk facing private firms considering developing such proposals.

“These schemes will take years to procure,” he said. “[Companies] don’t want to start down the road on something only for the DfT to change its mind.”

“This is a priority,” insisted Patel, adding that the department would “resource up those that we can take forward, within our finance constraints.

To make people wait doesn’t do anyone any good. If we were to wait too long then how would we convince people to invest?”

The panel that followed, which focused on future technology in infrastructure, was also keen to demonstrate a certain amount of urgency when it came to delivering results. As a number of people pointed out, new technologies such as driverless vehicles, new digital developments and electric vehicles are not too far away, meaning the industry needs to act now to ensure the right infrastructure is in place to deal with such changes.

Philippa Eddie, head of financial advisory at the IPA’s infrastructure finance team, told delegates that the UK is relatively well-placed when it comes to electric vehicles, with the largest number of rapid chargers anywhere in Europe, as well as 17,000 public charging points. She has been working on the government’s Charging Infrastructure Investment Fund (CIIF).

“The fund is trying to be catalytic and get the finance industry up the learning curve a bit faster than it otherwise would,” she explained.

With so much experience in the room, it must surely be only a matter of time before investors are up to speed on yet another new opportunity for the market, as it looks to leave behind some of the problems of the past by learning from them for future benefit.

Financing UK Infrastructure was sponsored by Affinitext, Arup Corporate Finance, CMS, DLA Piper, MUFG and Commerce Decisions