UK infrastructure market will be patchy in the short term

What is the general state of the British market? There are a number of changes that have taken place since the Coalition Government came to power in May 2010: The outgoing Labour administration had been focused on a schools building program (Building Schools for the Future), and following the election around 700 deals were cancelled; Similarly, the hospitals building program was reviewed. The main criticism of those involved in bidding for these deals was that the well established plan for delivering those, was thrown into uncertainty. The pipeline had dried up. The industry used to knowing what was happening was then subject to uncertainty, which, to some extent, still prevails. In other areas the news was not so bad, in that there were other big schemes around that were to continue. For example the Crossrail [1] project has been reaffirmed and construction work continues, and a plan to improve the commuter services into London with the project Thameslink [2] . Similarly, the Thames Tunnel [3] project is in progress. The airport sector has suffered, however. For example, there was a plan to build a new railway to Heathrow [4] , but the project was abandoned in April. Similarly, plans to build new runways at Heathrow and Stansted have been put on hold, notwithstanding the acknowledged economic benefits that such projects would produce. The new government took the decision to look at all of those projects and try to work out which projects they should proceed with, emphasising that they will prioritise infrastructure projects that deliver economic benefits to the country, but also consider projects that will produce some green, or environmental benefits as well. At the same time there has been a lot of interest in infrastructure assets in the UK, from pension funds and sovereign wealth funds. Such interest has resulted in deals ranging from the sale of the High Speed Rail Link to of the regular sale of individual PFI schemes and portfolios, which have changed hands regularly. Did the Olympics have a positive impact on the market? Not really. The Olympics have had a positive economic effect on London, but not on infrastructure investment more widely. This because a normal process with infrastructure is to assess what the needs in the country are, and then to prioritise, to work out which projects produce the greatest benefits, (e.g. a new motorway, a new railway or tram system) and then work to deliver the relevant infrastructure. The Olympics followed a different process, and weren&rsquo;t linked to the national infrastructure program at all. The government needed to build a new stadium for 2012, and a new Olympic park. So they took over an area in East London and spent money to insure what was needed would be delivered. Clearly, delivering the Olympic stadium and park on time within the budget was a positive, but separate from the wider infrastructure question. Regarding this new government, their new priorities, and the current process of reviewing past PFIs, do you fear the principle of PFIs could be questioned? There&rsquo;s a discussion [5] going on between those who believe that PFI projects were a waste of money and a separate group of people who are more analytical and scientific about the process, identifying its benefits and weaknesses. Politicians will be looking at the PFI Scottish model based on a non-profit distribution, fixed-return model for investors and, many expect, reconsidering some of the risk allocation that has become accepted. Of course PFI will have to change but on the other hand the changes to be made are quite difficult to identify to deliver what the politicians are asking for. Are there other areas of dissension with the government? Two areas really, first, what about PFI needs to change at a level of detail and secondly, whether by taking control the public sector can do a better job in delivery of infrastructure. On risk, the government thinks the private sector should take more risks at a lower cost. The unfortunate thing is that when you have competition, people are very keen to win and they put the best price on the table. It&rsquo;s very difficult for politicians to say that there is not a fair price for the risks that are being tendered, without identifying an issue with the competitive process. Public sector procurements are still subject to criticism. One recent classic example is the Edinburgh trams project. This was originally procured and expected to cost &pound;500 million to run a tram service from the airport into the centre of Edinburgh. It is said it will cost now over &pound;1 billion and will not even reach the centre of Edinburgh (See Box). The British market was relying on monolines to structure projects. Is it now a problem since most of them ceased their activity? Three elements of the credit crunch were notable, the decline of the monolines being one of them. Monolines when they appeared, had two main effects: they provided a new source of capital and, by encouraging banks to compete with them, they extended maturities significantly (from 18 years to 25 years &ndash; monolines enabled longer maturities than the bank market could provide &ndash; beyond even 30 years). That was a big benefit. Banks&rsquo; balance sheets became more constrained, and they have had to charge more for their involvement in projects to enable them to fund long term infrastructure deals. Looking forward, and the third effect of the financial crisis, the introduction of the Basel 3 capital adequacy rules will exacerbate the second issue. It will become more expensive for banks to lend longer term. Projects that wish to benefit from longer term lending will also become more expensive. How do you see the future of the industry after the release of the amended version of the National Infrastructure Plan? I think we shouldn&rsquo;t expect too much from the National Infrastructure Plan, which should be released in October. If you had asked the question one year ago, I would have said that this plan was designed to set a list of projects that would be coming to the market in the next 2 or 3 years, a timetable for each of those, a process for establishing that, just as other countries have been trying to do. With the disappearance of Partnerships UK, and the moving of its successor body (Infrastructure UK) to Treasury it is much harder for Treasury to participate or push forward a delivery programme. That is why producing a granular plan will be difficult. Treasury will be very reliant on spending departments, such as DfT [6] to come forward with its priorities. It will also be very difficult for Treasury to distinguish and prioritise between, say, a second high-speed rail link and upgrading of London underground, because such an analysis requires expertise which is in short supply. So you&rsquo;re not optimistic in the short term? I am optimistic that there will be deals, definitively, like schools built, the continuation of cross rails, and Thameslink to happen. Governments need a well planned capital expenditure program if they are to properly steward the nation's assets. The austerity measures are widely appreciated as necessary, but planning for the future is just as important. Simply put, I don&rsquo;t think there will be a long term well-identified pipeline for infrastructure deals probably for another year. As a consequence, any business purely focussed on the UK infrastructure market is going to find it patchy for the next couple of years. We are optimistic, but cautious in the UK, and focused on what is announced on a deal-by-deal basis. 1 Crossrail is a project to build a new railway link under central London. The project was approved in October 2007, and the Crossrail Act received Royal Assent in July 2008.It will complement the north-south Thameslink route. 2 Thameslink is a government-funded &pound;6bn programme of work to introduce new and improved stations, new track, new cross-London routes, and longer and more frequent trains with the purpose of reducing overcrowding. It will be in place by the Summer 2012 Olympics. 3 See http://www.thamestunnelconsultation.co.uk/, a project to use a new tunnel to clean up the River Thames and deal with the problem of sewage overflows in London (and comply with EU legislation). 4 Heathrow Airtrack was a proposed railway link in west London. The line, proposed by British Airports Authority (BAA), would have provided direct rail services from the airport to London Waterloo, Reading and Guilford, and offered an alternative route to the existing rail routes to Heathrow. In April 2011, BAA announced that it was abandoning the project, citing the unavailability of government subsidy and other priorities for Heathrow, such as linking to Crossrail and HS2. 5 See http://www.publications.parliament.uk/pa/cm201012/cmselect/cmpubacc/1201/120102.htm 6 Department for Transport

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UK infrastructure market will be patchy in the short term

Following the financial crisis and the change in political majority, ongoing PFI (1) review make the market perspectives uncertain. Even if deals are happening, investors look for a well-identified pipeline.

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United Kingdom

UK infrastructure market will be patchy in the short term

Following the financial crisis and the change in political majority, ongoing PFI (1) review make the market perspectives uncertain. Even if deals are happening, investors look for a well-identified pipeline.

À retrouver dans la revue

Comptabilité/Trésorerie

Les enjeux de l’open finance : quelles opportunités pour le cash management ?

Métiers

Le potentiel de hausse des MNI reste limité en 2024

Dette et déficit publics : comment éviter le précipice

Capital-investissement

« Plus de 35 milliards d’euros seront investis dans les fonds labellisés non cotés »

Archive

Panorama réglementaire des actifs numériques

Archive

Sberbank : une valeur anéantie à zéro en fonds de portefeuille

Archive

La transformation repose sur des directions responsables et des équipes pluridisciplinaires

Le potentiel de hausse des MNI
reste limité en 2024