Post-Election outlook for infrastructure - wrong capital for the right projects?

Darryl Murphy
01 May 2015

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Can learn from Scotland and the political success of the NPD programme and fall back in love with PPP, asks Darryl Murphy? 

2014 will be remembered as the year that the infrastructure debt markets fully recovered. There is now ample liquidity from banks with repaired balance sheets and institutional investors with proven ability to provide competitive long term capital.

There was also much activity in 2014 with some £16bn of debt financing in the UK for greenfield projects and refinancing of acquisition assets.

However, you may be forgiven for thinking the Government has fallen out of love with private finance for infrastructure. PF2 as the successor to PPP has hardly been used and this may not change significantly post-Election.

The National Infrastructure Plan set out £79bn of project finance opportunities - £44bn relating to nuclear. Aside from Thames Tideway Tunnel, all is required for energy.

“You may be forgiven for thinking the Government has fallen out of love with private finance for infrastructure.”

There is no plan to utilise private finance in transport other than localised schemes such as Silvertown Tunnel or roads under the Scottish and Welsh Non Profit Distribution programmes. Even more striking is that projects in need of financing are generally complex projects such as nuclear, carbon capture and storage, offshore wind or merchant energy from waste projects.

Hence, is there a danger we have the wrong capital for the right projects?

The UK Guarantee Scheme (UKGS) was set up primarily to respond to a market failure in terms of availability of long term infrastructure debt. The market has now significantly improved, so many may think the case for UKGS has become weaker.

However, there is an argument that the UKGS perhaps needs to expand and develop further products. Alongside
the Green Investment Bank, it has a big part to play in attracting wider capital into complex energy projects through the use of credit guarantees, mezzanine debt, specific risk mitigation and particularly equity.

There is an increasing concern that the provision of equity is too challenging for complex greenfield projects. European utility balance sheets are constrained and despite an increase in Asian strategic capital, it is finite.

Complex construction risk is not something that infrastructure, pension funds and Sovereign Wealth Funds have found attractive to date.

An alternative strategy might be to use the deeper pool of capital available in the market to finance the less challenging projects in road, rail and schools for example and focus Government financing to the more challenging energy projects.

Of course, that would require us to fall back in love with PPP.

Perhaps we can learn from Scotland and the political success of the NPD programme? 

Darryl Murphy is a partner at KPMG