‘We’re not just about equity’

“There is a sense of the pendulum swinging.” This is the view of Bryn Jones, team co-head of infrastructure development in the London office of fund manager InfraRed Capital Partners (InfraRed), as he reflects on opportunities in the US public-private partnership (PPP/P3) market.

Of course, this is the kind of comment that has been made by others many times before. Plenty of observers would say the US PPP market has been frustratingly slow to evolve and that to suggest some kind of turning point is a brave call indeed. “It was like waiting for Godot five or six years ago,” as Jones readily admits. But, he adds: “We’re bidding projects now and there’s a pipeline coming through, which is good news if you have a solid reputation and your business is well established.”

Bolstering numbers

Becoming a key player in the market is something InfraRed is now striving to do. Jones says the firm is currently looking to bolster numbers in its New York office (part of a four-office network that includes Paris and Hong Kong as well as London). He says: “We have positioned ourselves as a co- or lead-developer [in the US], not simply as a firm that puts equity on the table. And the full developer role demands two or three people on each project.”

Jones seems pleasantly surprised by the turn events have taken. “We thought the US would be just demand risk,” he says, but instead the likes of the Yonkers project to update its school infrastructure – where the feasibility of a PPP is currently being assessed – hint that social infrastructure is coming to the fore as well. There will also be “pockets of activity” in the healthcare sector, Jones thinks.

Other factors seem to be contributing to what may end up being seen with retrospect as a tipping point. For example: increased federal allocations to the TIFIA (Transportation Infrastructure Finance and Innovation Act) loan program are helping to give US infrastructure a much-needed financing boost; more PPPs are being seen across more states and in more sectors (“you need a few guinea pigs and then you get follow-ons,” says Jones); while the gap left by crisis-hit European financiers and developers retreating to their home markets is being filled by increasing activity from domestic players.

InfraRed is currently bidding on a number of US projects, including Indiana’s Ohio River Bridges project where it is part of the Ohio River Transportation Partners consortium alongside Balfour Beatty Capital and Kiewit Development Company. A winning bidder for the $2.6 billion scheme to bridge Southern Indiana and Louisville, Kentucky, is expected to be announced by the end of this year. The firm is also a bidder on the Interstate 77 toll road project in North Carolina alongside ACS and Dragados USA.

The encouragement being provided by the US market is timely for InfraRed. When the firm closed its latest infrastructure fund – and first since spinning out from HSBC – on an oversubscribed $1.2 billion in October last year, it was anticipated that Europe would be key. But Europe is now “a region where few places are open for business”, according to Jones, who adds: “Since we raised the fund what we’ve noticed is how quickly the world moves on.”

Dormant UK

He notes that the Netherlands, France and Spain have all gone quiet on the new deal front while the UK is also dormant. A trickle of deals are coming through in Belgium and Germany, while Poland would offer more encouragement if weren’t for currency issues, he thinks. Taken overall, Europe is now a “completely opportunistic” play, says Jones.

The firm does, however, continue to actively invest in secondary opportunities through its listed HICL Infrastructure vehicle. For example, in two transactions between December 2011 and February this year, HICL added a 67 percent stake in the UK’s Dorset Fire & Rescue project; while last month it bought an additional four Private Finance Initiative stakes, in UK social infrastructure projects, from facilities management firm Sodexo.  

Elsewhere in the world, InfraRed takes a keen interest in the Australian market, where it is currently looking at opportunities in the road, rail and hospital sectors. Last year, it committed more than A$100 million (€73 million; $106 million) of equity to the Royal Adelaide Hospital PPP – which attracted A$2.5 billion of debt funding from 15 banks – having previously invested in the A$3.5 billion Victoria Desalination project in 2009.

Two other markets of interest to InfraRed are Canada and Chile. In the former, it has been involved in a range of projects including two building projects adjacent to each other in British Columbia – the Jim Pattison Outpatient Care and Surgery Centre and the Royal Canadian Mounted Police ‘E’ division headquarters. But Jones questions the regular use of public subsidies for Canadian PPPs which means cheaper borrowing and more risk transference “but let’s see what happens when a project goes wrong and there’s a write-off that falls on the taxpayer”, says Jones.

Chile, says Jones, “ticks a lot of boxes”. He goes on: “It’s politically and economically stable, has a great track record, a secondary market, and some very smart people [in the public sector]”. He is particularly impressed by the flexibility of the country’s road concessions, with concession lengths increasing or decreasing depending on whether traffic volume is above or below a given volume.

Refinancing concern

But while Chile may be doing a great job of attracting private investment, it can’t compete with the enormous potential of the US market. Jones has some concern about the possible polluting effect of US PPPs that were structured pre-Crisis and which will be coming up for refinancing in the next few years. After all, high-profile private sector-backed infrastructure assets going bankrupt would not be a good advertisement of the PPP model’s merits.

But his view is nonetheless one of a market finally beginning to deliver on its promise. And InfraRed is determined to put itself in a position to capitalise. 

A stake in cutting crime

When InfraRed Capital Partners signed up to the SecureFuture consortium, which in September achieved financial close on the $245 million Wiri prison public-private partnership (PPP) in New Zealand, it was also signing up to crime-fighting.

After all, the consortium partners will be compensated over 25 years through a payment-by-results model under which incentives will be paid for reducing re-offending by an agreed percentage. Conversely, payments will be cut if the prison fails to achieve specified targets for effective rehabilitation and reintegration programmes.

Accommodating up to 960 prisoners in South Auckland, the facility will be designed, financed, built, operated and maintained by the consortium partners on behalf of the New Zealand Department of Corrections. Building work is already underway on the project, which is expected to open in 2015.