Phillip Hall is cautiously upbeat on the state of the UK infrastructure investment market today.
“There are some pretty big projects out there,” he says, referring to the proposed Lower Thames Crossing, A303 and Silvertown Tunnel schemes – all planned as versions of the PF2 model.
There are, however, concerns, warns MUFG’s head of structured finance for EMEA. “I think on some of those larger schemes, everyone is slightly scratching their heads, asking ‘are we certain they can truly get financed?’,” he says, pointing to the uncertainty that surrounds the future role of the European Investment Bank (EIB) post-Brexit.
In Hall’s view, one of the key things that will need to happen if these and other deals are successfully financed is more involvement from institutional investors. It has long been acknowledged that, in the wake of the financial crisis and the subsequent introduction of the Basel II and III regulations, banks can no longer be relied upon as the sole solution to raising infrastructure debt.
And while institutional investors have long been seen as the holy grail of debt investment, finding a way to bring them in where all sides are comfortable has remained challenging.
This is where Hall believes he and his MUFG team are in the vanguard. “There is plenty of bank appetite and institutional appetite. What we have been working on is harnessing the two together, and we’ve been doing that quite successfully over the last few years.
“We identified about three or four years ago that there was all this interest from the institutional market,” he explains. “We thought that we had two ways of playing this: either we can go ahead and try to compete with them, which would be a no-win situation for all of us; or we can find ways of trying to harness their interest and liquidity and seeing how we can work together.
“So we set up a new team within our structured finance unit then called structured finance solutions. The whole unit was really to harness other people’s money and not necessarily deploy the bank’s balance sheet.”
MUFG first started deploying this approach in Ireland, where it had interests and clients who wanted to do deals, but less appetite to lend itself. “Over time, our position internally evolved and Ireland opened up for us to lend into. So we found ourselves in the situation where we could lend, but we were also having very good discussions externally with potential institutional investors. So it made sense to bring the two together.”
Hence in April this year, Hall took on the whole of MUFG’s structured finance business, having previously been head of the infrastructure and transport side as a co-head of the wider structured finance business.
“What that means for me is that it’s a great opportunity to bring the whole business back together as one structured finance offering,” he says. This move, he argues, reflects the way the market has evolved over recent times, in part as a response to the slowing pipeline around the world.
“As far as the challenges in the PPP space at the moment, [the biggest] is the paucity of new dealflow, particularly here in the UK but to some extent across Europe as well,” he says. “We are seeing clients increasingly looking further afield and to different sectors as to what else they should be tracking.
“Our clients are increasingly looking across their sectors. They’re not just looking at infrastructure or energy or renewables. They’re looking across the whole piece. So I think from a client perspective it’s going to be very beneficial to bring the business together as one.”
This more joined-up approach came out of the bank’s Irish experience, where it ended up funding some deals in a 50-50 partnership with institutional investors.
“That is now evolving further in that we can still structure in that way, or we might structure where we take the short-term lending piece, which can be anything up to 15 years, but they will come in and take the longer term financing,” Hall continues. “That has been working well, particularly on projects around the PPP space.
“I think we’ve established some very good relationships with a number of these institutional investors and that’s continued to grow. We have now successfully delivered this on a number of projects, so clients have got more confidence that these structures work.”
Furthermore, Hall believes that there will be other areas where this approach may prove successful. “We are now looking to see whether there are other areas where we might not want to deploy our balance sheet today but we can work with our clients and find them alternative sources of finance.”
Hall has been part of the PPP market for nearly 30 years, so is well-placed to pick up on what works. Having started at NatWest Markets back in the 1990s, he spent three years in Hong Kong as the territory transitioned from UK rule back to China.
“Some people talk of Hong Kong as a fantastic example of a PPP, in terms of a 150 year concession to the UK from the Chinese,” he quips.
After that, Hall spent three years “effectively commuting to Holland”, as he helped the country structure and deliver its first PPP. When NatWest was acquired by RBS, Hall took on the role of heading up the bank’s infrastructure business – at a time when RBS was a major project finance and PPP powerhouse.
“There we did debt, advisory, but we also did equity investment,” he says. “We did a lot of early PFI equity investment.”
As the financial crisis engulfed RBS, Hall found opportunities for new work severely limited. He moved to join HSH Nordbank, where he became head of infrastructure and rail, as well as global head of infrastructure advisory.
Hall takes up the story: “[Then] this opportunity came along with BTMU – MUFG now – which I saw as a fantastic opportunity to join a significant organisation that liked project finance but hadn’t been doing much of it in the infrastructure space.
“So I was tasked to come on board and build the transport and infrastructure side of the business. We went from having a team of two, to growing that to 20 in the team within 18 months. It has been a great journey.”
As is clear from his previous role at HSH, Hall considers bank advisory services to be an important part of the overall offering. “When we are looking at new markets, we do try to get in early on, particularly using our advisory offering,” he says, “whether that is working with bidders or working with the government on the advisory side.”
However, he argues it is much more than just about helping the bank break into new territories.
“One of the key things our clients like is that we are product agnostic in terms of which way we will advise them to go,” he says.
“We can do that because it’s clear we have got a strong balance sheet, so we are more than happy and willing to lend. We’ve got the debt capital markets side of the business, which we are happy to deploy as well.”
So the question now is, where can Hall and MUFG focus their attention to find deals in what has become a rather thin market?
“The more interesting opportunities on the horizon are potentially in the Middle East, and how they are going to develop their PPP frameworks,” he says. “Saudi Arabia is the country that everyone is talking about at the moment, and that is certainly an area that we will be targeting going forward.
“There is an awful lot of talk around healthcare [in Saudi], which is a sector we feel we know and like well. And there is also talk of light rail schemes and things like that. So we see Saudi as a potentially huge market.”
As a result, MUFG is in the process of establishing an office in the country, which will give it an important presence not only in Saudi but in other parts of the Middle East, too, as Hall expects to see more PPP opportunities develop across the region.
If the region does become a PPP hotspot, it may give Hall the chance to indulge one of his favourite activities: scuba diving. “It’s something I got into in Hong Kong,” he says, “I guess I was a bit spoilt during that time, but I try to keep it up now.”