Still Hungry

The market for PPP investment in the UK and Europe may be dwindling, but appetite from the private sector remains there, reports Marina Formoso

It is fair to say that 2017 has not been the strongest year for the infrastructure industry. In the UK, several major companies have been forced to take a step back and re-evaluate the kind of risks that they take on – and whether these are worth it.

The most obvious examples that have hogged the headlines in recent months are the likes of Carillion and Interserve – both facing serious financial difficulties, both as a result of being lumbered with some tricky PPP contracts.

In Carillion’s case, issues on a road delivered under Scotland’s non-profit distributing (NPD) model, and the Midland Metropolitan Hospital (once expected to be the poster child for a new programme of PF2 deals in England), were among deals that have dragged the firm into trouble.

Interserve, meanwhile, continues to struggle with waste contracts that it has been trying to exit for some time.

However, it is not just these firms that have had their differences with the PPP model. Other big names, including Laing O’Rourke and Galliford Try, have said that big, complex contracts may no longer be for them – and while that does not mean they are getting out of the PPP market, it does mean they would no doubt think twice about bidding for another big hospital scheme.

So who is left in the market? While these players are not yet out, few are likely to appear on the list of bidders for the upcoming A303 and Lower Thames PF2 projects being progressed by Highways England. And it has long been rumoured that Wales may struggle to get a good crop of ‘the usual suspects’ on its planned Velindre Cancer Centre scheme.

Instead, it is larger European engineering giants that are taking on the bigger jobs – apparently encouraged by the UK government, which has been keen to bring investors from across the continent into the UK, in part as a way to maintain good links as the UK prepares to exit the EU.

And Spanish firms, in particular, are showing interest. FCC has had a presence in the UK for some time, while Sacyr recently opened an office in London. ACS has an interest in the UK, through its subsidiary Hochtief, and Ferrovial has its own offices and its subsidiary Amey based in the UK.

The question, then, is where does this leave the traditional players of the UK market? None claim to be out of the sector altogether, but it is likely to be some time before we see Carillion bidding for a big project again.

As one contractor puts it, the situation is not so much that the likes of Laing O’Rourke or Galliford Try would not enter the PF2 market. Rather, it is the projects on offer that make it difficult. “In terms of a general pipeline of opportunities in healthcare, education or accommodation, or maybe just medium sized infrastructure projects, we are not really seeing those at the moment so we have no confidence over what the market looks like.”

He suggests that, without such a pipeline, it is difficult for companies to put the money in to invest in procurements, not knowing if there will be any return whatsoever. “We want to be involved because we want a balanced portfolio,” he says, “but that pipeline is one of the things that causes us a huge concern.”

Experts in the industry believe that the UK should never worry that it will struggle to find organisations willing to play – provided it offers a decent pipeline.

“If the government comes forward with a healthy number of projects across a number of sectors, then we would be happy to bid a series of projects,” says Chris Field, managing director at Interserve Investments, particularly looking at custodial, education and healthcare deals as obvious areas of potential for the firm.

Field’s ‘If’ is a big one at present, though. “The industry is yet to be convinced that the [UK] central government is committed to PPPs,” he continues. “The government has been talking about building a credible pipeline of projects for some time but nothing has yet emerged.”

A report published by the European Investment Bank in November pointed out that PPP activity across the continent has continued to remain low over the last five years – and put the blame squarely at the foot of the UK, where it said activity had dwindled without other countries picking up the slack.

A year ago, in the wake of the Autumn Statement by Chancellor Philip Hammond, there was hope that the UK market may be about to turn a corner, with a promise to publish a PF2 pipeline in the New Year. However, first the General Election got in the way and then – with the government benches drastically reduced – it was decided that deals should come out on a project-by-project basis, rather than the ‘big bang’ of a published pipeline.

That did little to comfort the market and there is now a growing sense of resignation among most industry professionals.

“There is very little primary dealflow and we don’t see that changing in the short term – perhaps not ever,” says Michael Ryan, co-founder and chief executive of fund manager Dalmore Capital.

If this year’s Autumn Budget is anything to go by, Ryan may be right. There was no mention of PF2 this time, and even Hammond’s much-trailed pledge to deliver new housing investment was found to be far less than many had hoped.

However, his proposal of using private finance to develop five new ‘garden towns’ around the country potentially hints at the way in which things are now being done differently.

“Pure PPP dealflow has substantially decreased in recent years,” agrees Mark Bradshaw, head of European PPPs at Macquarie Capital. But he and others see scope for alternative approaches to infrastructure investment that mean many are sticking with the UK.

Field points to a number of opportunities that are interesting Interserve at the moment, highlighting the Welsh Mutual Investment Model, as well as the prison expansion programme in England and Wales, the continuing boom in student accommodation projects, and the potential in the health sector for more strategic estates partnerships.

On health, Field is adamant that more opportunities are available, pointing out that a failure to invest will put the country back in the position it was in the early 1990s, when the condition of the existing estate made a largescale rebuilding programme a necessity.

The trouble is, any sort of investment will be slow in coming. “Planning a pipeline takes at least 12 months so by the time something changes it is likely to be 2019, not 2018,” says Field.

Away from Westminster, Field warns that the devolved administrations in Scotland and Wales will continue to offer a small opportunity for investors – but it will not be anything more than that without support from London. “Wales has a mature pipeline of projects, but they are limited,” he says.

This lack of opportunity is now causing more difficulty for institutional investors who have been hoovering up projects on the secondary market over recent years. As Ryan explains: “There is less secondary dealflow because the majority of assets are now in the hands of long-term investors, backed in many cases by pension funds and insurance companies.”

That means that there is less opportunity for funds to deploy cash into UK assets, although Ryan adds that Dalmore’s position is such that it has enough to invest “significant capital from our next fund”.

International focus

One impact of the UK’s dearth of projects has been that more and more companies are looking elsewhere for deals. Rather than being a market in itself, the UK has become part of firms’ European-wide strategies, as they look to diversified portfolios across the continent.

All across Europe, though, a pipeline of cookie-cutter, government-backed projects that are reminiscent of the heyday of UK PFI deals is virtually impossible to find. Instead, it is a case of looking to small pipelines in the likes of Norway, Ireland, the Benelux region and, potentially, Spain.

As one source puts it after naming such regions as areas of European PPP potential: “It’s not that I think these areas have huge dealflows, more that they are the only places where there is any pipeline at all.”

When viewed with this wider lens, the opportunities are certainly there for private investors, with institutional investors able to find sufficient scope to remain involved in the market.

“We have invested €250m in greenfield and brownfield PPPs over the last four years,” says Stephane Grandguillaume, partner at 3i Infrastructure. “In greenfield, the most active markets are the Netherlands and Spain. In brownfield, there is activity in France, Italy, Spain, Germany and Benelux. We remain busy in the Netherlands through our relationship with Heijmans, and are exploring opportunities in other countries and in other project sectors where the risk profile and returns are attractive.”

“Within the PPP space there is a reasonable level of activity in the Netherlands, Belgium and Germany,” adds Paul Nash, head of PPP and infrastructure activities at DIF, “and we are expecting deals to develop in France, the UK and most interestingly in Spain.”

For all the latter market’s difficulties over the last decade, an increasing number of investors are looking at Spain as having the potential to be Europe’s next strong PPP market. What makes Spain interesting is that many of the road concessions awarded in the 1980s and ʼ90s are due to expire soon, creating some new opportunities.

In the summer, the government unveiled plans to launch a new road investment programme covering 20 major projects, with a total value of €5bn. Originally scheduled to be launched in September, the programme has been delayed – at least in part because of the unrest in the Catalan region, which has soaked up huge amounts of time in the Madrid government.

Unsurprisingly, the Spanish giants that have developed a presence in the UK remain interested in their home market. The likes of Sacyr, Acciona and others do see Spain as part of their future pipeline, but having spent the best part of the last decade exploring new opportunities, they are no longer dependent on decisions of the Madrid government.

“We are looking at transport and social infrastructure in Europe and America (North and South),” says a Sacyr spokesperson. The firm’s main focus is Europe, in particular the Netherlands, where the company has been prequalified for the A16 Rotterdam road project.

And just as companies are now viewing Europe as one market of opportunities, so they have also broadened the scope of what they will invest in across the continent. Perhaps because of its history in the PPP market, the UK remains in the vanguard of developments here.

“Over the last few years we have taken more of an interest in regulated utilities as we see these as being relatively low risk and mature assets with returns that are economically correlated,” says Nash. Perhaps the most obvious here is the Thames Tideway Tunnel, which included DIF as part of the successful consortium.

Described by some as a ‘hybrid’ PPP, the Tideway model is being seriously looked at by other water companies in the UK as a possible solution to new infrastructure investment needs.

Like DIF, many companies have turned their attention away from social infrastructure, which has stagnated, to target economic infrastructure. Road and rail projects are also popular, sometimes on a standard PPP basis but increasingly through a variety of techniques that involve public and private collaboration, but are not classic PPP structures.

The likes of London’s Crossrail is a prime example. As the UK government gears up for Crossrail 2, a range of financing options including capturing land value are now being considered. Energy, too, has become a haven for investors. In the UK there has been a flight to the offshore transmission owner (OFTO) regime, where healthy competition has emerged to own and operate the transmission lines running to offshore windfarms.

Macquarie has also made a move in the energy market, with its acquisition earlier this year of the UK Green Investment Bank (GIB) from the UK government for £2.3bn. The purchase will be used as a primary vehicle for investments in green projects across the UK and Europe (under the Green Investment Group brand) and to consolidate Macquarie’s existing assets.

“Post the acquisition of the GIB we now have a global focus on green energy,” says Bradshaw.

In the end, if any European government were to suddenly announce a large pipeline of classic PPP deals, most in the industry believe that the investment would be there.

“Investors don’t hold a grudge,” as one source puts it. “They’re not going to say ‘because you didn’t give us a pipeline when we wanted it, we’re not going to invest in it now’.”

Or, to put it another way: over to you, public sector.