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Could Greek crisis damage infrastructure investor confidence?

Greece is hoping to agree its second rescue plan details as early as this week while critics lambast the country for remaining in the Eurozone.

Several of the plans to restructure Greece’s crippling sovereign debt are said to be unfeasible, a banking source told NCE. In any case, ratings agencies say restructuring would be considered a default.

Undermining insurance

The source says that a restructure of the debt would severely undermine “insurance” that had been bought to protect against a default.

If this were to happen the insurance, known as a credit default swap, would be worthless as investors would be left asking how the rules could be changed.

While infrastructure investors ponder these more confusing financial aspects of the crisis, there are other concerns closer to home.

One concern is the danger of a potential Greek default spurring volatility across Europe, and undermining the confidence of banks facing requests to finance infrastructure.

Offputting volatility

Volatility is so worrying that investors could avoid projects in other European nations, including those that would normally be seen as a safe bet such as France and the UK.

Lloyds Banking Group global head of project finance Gershon Cohen says constraints on the availability of private finance for infrastructure is his biggest worry.

“There will be significant liquidity issues on the debt side as a result of what’s going on,” he says. “Coupled with that, the European banks are the market leaders in project finance so they are concerned that the Eurozone financing and inter-relationships could affect banks and sources of liquidity.

Increasingly worrying

“Major institutional investors will also relook at how they allocate into infrastructure which they may see as an unstable investor portfolio and could scale back investments. It’s not a good story and increasingly worrying for an infrastructure perspective with decreases in available cash,” says Cohen.

Other bankers say that in this period of instability, governments will also relook at their infrastructure programmes and be reluctant to fund major works.

“The government will always be nervous about committing to major infrastructure projects and in times of volatility and uncertainty there is the potential to disrupt procurement,” says one source.

Renewed effort

But Cohen believes that one good news story from the Greek crisis is that while governments might not risk providing funds for major projects, there is the chance that PPPs or PFIs could be improved in a renewed effort to attract funding.

Indeed, a source close to the Treasury told NCE that the department is close to announcing its own solutions to reinvigorate PFIs in the UK.

“The Treasury, the Department for Business, Innovation and Skills and Infrastructure UK all say we have got to make it better…I think we can say that they are looking at ideas and are being very open minded,” he says.

“I think things are clear and they are taking it seriously but the key is to optimise PFI/PPP… I think the important thing that was lacking in PFI and is needed now is flexibility.

“With most of the contracts, even the smallest change was impossible or it would cost exorbitant amounts in fees.”

Water inspiration

He says that one of the sectors providing inspiration to those in Treasury is the water sector and the Regulatory Asset Base (RAB) funding model that it uses.

This involves creating a defined set of assets in which the water companies are allowed to invest by the regulator over a predefined period. “This enables infrastructure operators to raise finance by enabling them to tell their banks that they have well defined investment programmes which are officially sanctioned by a government-appointed regulator.

“The water sector has been seen as being a very successful model in terms of providing new infrastructure.”

But Cohen says this shouldn’t be seen as a panacea and that the model could only be applied to sectors such as managed motorways.

As the debt crisis continues to unfold and solutions are posed, the PFI financiers can only hope that their method of funding infrastructure is reconsidered as the most effective procurement tool.

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