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Unlocking private finance deals

Project finance and the best way to remove the obstacles to investment were the topics for discussion at the first of two round tables hosted by NCE and Autodesk.

What are the root causes of investor caution towards major projects? And how can the industry improve the way it quantifies, mitigates and communicates risk? These were some of the questions raised when NCE recently convened a round table discussion with financiers, consultants and contractors to move forward the way the industry finances projects.

Launched as a collaboration with technology firm Autodesk, the two-part event sought firstly to identify the nature of the problems in project finance while a followup event later this month will seek to propose a plan of action and solve them.

“I’m optimistic that technology could significantly help here,” said Autodesk thought leader: construction, energy and natural resources Dominic Thasarathar at the start of the first discussion.

Autodesk round table

Under discussion: Talk topics ranged from risk transfer to revenue models

“I believe BIM to improve performance of major projects; city-level data-modelling to make more informed, collaborative decisions about what to build, and how it’s likely to perform; and emerging trends, like crowd-funding to provide alternative sources of finance, are all worthy of exploration.”

Autodesk round table

Thasarathar: Technology optimism

In this report, NCE reveals some of the most interesting points from the first event.

Government needs to carry a substantial portion of risk

EC Harris managing director, transportation, Mark Cowlard said the government would have to carry more financial risk in those projects where the sale price of an asset was much lower than the cost of creating the asset in the first place.

“If ultimately government are only going to achieve let’s say half of their investment back in a sell off then making the opportunity more attractive [to external investors] in the first place, particularly around risk, must be a good thing. Government ultimately will be able to invest in more schemes from the same pot, bringing greater economic growth to the country.

Industry has lost the ability to communicate risk

Ferrovial programme director John Hotham said he was shocked that there was such a lack of confidence in the construction industry’s ability to communicate the fundamental elements of a project to external investors.

“I’m amazed if there’s a belief in the industry that we don’t understand the preliminaries, overhead, risk, contingency, fee , net to gross, how that all works. There clearly is a breakdown in communication,” he said. “I’ll go back to the 1990s and delivering PFI with my old Carillion colleagues -  PFI hospitals, custodial establishments, schools - we absolutely got it off pat in terms of actually understanding how to secure that funding because it was all about certainty of risk.”

Government wants investors to do the difficult projects

Autodesk round table

Murphy: Investment gap

KPMG partner, corporate finance infrastructure, Darryl Murphy said there was a gap between what investors wanted to invest their money in and the projects that government wanted them to support.

“The government is saying that if you’ve got private capital, they don’t want your money in roads, they’re not going to do PFI or PPP any more. What they want you to spend it on is the really difficult stuff. They want you to put the money into nuclear, large scale biomass, they want you to put it into offshore wind,” he said.

“We have this gap in my mind between risk appetite and the capital that people have to invest. It’s what I tritely call either the wrong capital for the right projects or the right capital for the wrong projects.”

Sell off assets to fund further investment

Synaps managing partner and Constructing Excellence chair of funding and finance Madoc Batcup suggested private finance might be more inclined to invest in assets after they are built. “In Australia, the federal government has tried to encourage the state governments to sell off their assets so that they can use the proceeds for further investment,” he said.

“In the same way it would be perfectly open for the UK government to turn around and say they will finance the construction stage - if the private sector, because of the knowledge gap doesn’t wish to do so - with the view that once it is up and operating they will then sell it out to the private sector.”

Operational risk needs to be considered, too

Arup director, digital, Volker Buscher said it was important to consider the impact that an upgraded asset would have on the surrounding infrastructure.

“We talked to a couple of ports who are saying the new mega-container ships that are coming in will triple the throughput of containers.

“In theory you would say that’s a no-brainer as a business model. Your business model doesn’t change, you still move containers through your port, but because they’re land-bound, they have to get three times the capacity of the rail and road infrastructure feeding them, so they have to innovate radically how they operate if they want to be able to deliver this new asset effectively.

It’s hard finding funding for flood defence schemes

Royal Haskoning DHV director water governance and strategy, Jaap Flikwert, said finding private funding for flood defence schemes was a considerable challenge.

“We know what government is planning to spend £600M a year or so [on flood defence schemes]. We know that’s not enough so we know there is a massive stack of projects with at least a five-to-one benefit to cost ratio but it’s a benefit-cost-ratio based on future damage avoidance and it’s very difficult to find the money to make those schemes happen,” he said.

He suggested a solution might lie in turning flood defence assets into revenue generating assets. “I guess you could think of Green Deal type structures where the direct beneficiaries pay based on their future damage reduction, but I’m not sure if that’s ever going to work. I personally think the only way we’re going to get that money in is to develop flood defence schemes as multi-purpose schemes that have an aim of creating something that has an income stream.”

Transport for London is open to the idea of private finance

Transport for London, senior principal, commercial finance, Julian Ware said the Silvertown River Crossing project - a road tunnel under the Thames - showed how private finance could be secured.

“I’d like there to be a place for private finance,” he said. “The Silvertown River Crossing is not going to be contractually linked, we think, to the fact that it’s going to be tolled. But actually, conceptually, at a sort of wider level it is linked to that because we’ve identified what I hope is a politically acceptable funding source in the tolling that can take us towards private finance.”

Wider infrastructure at Heathrow might need public money

Phil Wilbraham, programme director, Heathrow, said that the investment for the airport’s expansion following the Davies Commission decision would be over a 10-year period.

“There may be a need for some taxpayers’ money where the public infrastructure is being improved beyond what is needed for the expansion of Heathrow,” he said.

“However the main investment will come from Heathrow itself. The risks around investing in an expansion programme are different to those when investing in a built asset and these differences will need investigating at Heathrow.’

Conflict with the political cycle is a big problem

Autodesk round table

Price: Politics gets in the way

CH2M chief economist Andrew Price, said there still wasn’t necessarily a clear timetable for expansion at Heathrow, in spite of the Davies Commission’s recommendations about increasing air capacity in the South East.

“It may go ahead but the history of infrastructure is one of a conflict with the political cycle,” he said. “I think that’s a big issue for the infrastructure industry,” he said.

Industry should have taken advantage of low interest rates

Aberdeen Asset management head of infrastructure funds, Gershon Cohen, lamented the fact that the industry hadn’t taken advantage of the cheap finance available after the credit crunch. “We’re in a time right now where we’re seeing the lowest cost of capital we’ll see for years to come; interest rates are going up probably by the end of the year and it’s a shame,” he said. “I think the epitaph of the UK one day will be ‘I wish we had done more between 2008 and 2020’ because that would have been the golden age to rebuild the UK’s infrastructure.”

Round table attendees

  • Madoc Batcup chair of funding & finance, Constructing Excellence
  • Volker Buscher director, Arup
  • Gershon Cohen head of infrastructure funds, Aberdeen Asset Management
  • Mark Cowlard managing director, transportation, EC Harris Arcadis
  • Jaap Flikweert director water governance & strategy, Royal Haskoning DHV
  • John Hotham programme director, Ferrovial
  • Mark Hansford editor, NCE
  • Darryl Murphy partner, global infrastructure, KPMG
  • Andrew Price chief economist, CH2M
  • Dominic Thasarathar Thought leader: construction, energy and natural resources, Autodesk
  • Julian Ware senior principal, finance, Transport for London
  • Phil Wilbraham, programme director, Heathrow

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