The £2.5 billion (€3.3 billion; $3.8 billion) sale this week of rolling stock company Eversholt Rail by several infrastructure funds to Hong Kong’s Cheung Kong is a reminder of both the attractiveness of certain privatisation-era legacy assets in the UK and of the overseas capital that sees the UK as a welcoming investment destination.
It also acts as something of a provocation to those who would like to see infrastructure deal flow in the UK grow beyond pass-the-parcel private-to-private deals – where stakes regularly change hands between private funds and institutions – to encompass a healthy pipeline of fresh deal prospects. With May’s general election looming, there appears little sign of this hope being met – whoever assumes power in the aftermath.
With increasing pressure on capital costs being applied to sectors such as airports and water under the coalition government and calls for an energy price freeze by the opposition, it has become clear that regulatory influence in the UK these days will generally come down on the side of the consumer rather than asset operator. And that’s fair enough, you may venture, at a time when the public is still feeling the squeeze – but it does need to be acknowledged that, in helping the consumer, the pressure then transfers to capital investment.
New greenfield projects are certainly proceeding; some of them extremely large. Take for example, Hinkley Point C – the £24.5 billion flagship project within a nuclear new-build programme that will see 16 gigawatts of new nuclear power capacity coming on stream by the early 2020s. The deal is a landmark in terms of the much-touted prospect of overseas investment in UK infrastructure, with a consortium led by France’s EDF Energy and including Chinese groups.
However, for the private sector, the story is rather less exciting. Through the construction period, trade and government-backed entities will be involved as investors. Eventually, some degree of ownership may pass to institutions such as pension and insurance companies but this is mere speculation and, even if it does happen, is probably on the far horizon.
Another flagship project is London’s Thames Tideway “super-sewer”, which has a cost estimate of £4.2 billion. However, while this is indeed a project seeking private sector support, the shortlist of interested consortia had reportedly shrunk to just two by the end of last year – in spite of the government offering guarantees to keep financing costs down.
Market sources say potential bidders may have been put off by the creation of an independent investment vehicle that resulted from primary legislation – as an untested model, it could be viewed as too risky. Ominously, some think there is yet time (and a real possibility) for either one or both of the remaining bidders to walk away from the process.
Indeed, despite the government having a £400 billion National Infrastructure Plan (NIP) – which was welcomed as the kind of visible forward pipeline previously lacking – there is still scepticism around the number of genuinely investable projects. Although the headline NIP number sounds impressive, the High Speed Two rail link alone has been valued at around £43 billion by the Department of Transport and any private sector involvement in parcelled elements of this project is expected to be around a decade away.
For most infrastructure fund managers, the real interest lies not in the over-wieldy, high-risk and often uninvestable trophy projects, but at the smaller end of the market where you might expect to find a more regular flow of deals.
Under the previous government, pre-2010, the Private Finance Initiative accounted for a regular, predictable capital requirement of around £5 billion per year (of which about £500 million was equity). However, the new “PF2” procurement model introduced by the coalition has barely been used as the priority has clearly shifted towards economic infrastructure and away from social infrastructure.
Thus, across the deal size spectrum, the lack of opportunity for infrastructure investors is problematic. The UK, while perceived as having somewhat higher political risk these days, is still widely viewed as business-friendly and home to good quality, regulated assets. But that doesn’t count for much in the face of sparse opportunity to put money to work.