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.
In other areas the news was not so bad, in that there were other big schemes around that were to continue. For example the
The airport sector has suffered, however. For example, there was a plan to build a
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’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’s a
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’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 £500 million to run a tram service from the airport into the centre of Edinburgh. It is said it will cost now over £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 – monolines enabled longer maturities than the bank market could provide – beyond even 30 years). That was a big benefit.
- Banks’ 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’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
So you’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’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.
