Private finance appetite ‘could significantly worsen’

You’ve been very active in renewable energy. Could you tell us a little about the strategy and ambition in that sector?

DP: We have developed our position in the renewable energy sector over the last two years. Our reasons for entering this sector are: a) both in our existing markets and globally, the development of renewable energy infrastructure has good political support (part of the low carbon agenda) and very strong growth prospects, so it represents a large and exciting target for John Laing in the coming years; b) the skills required to engage in renewable energy projects are to a significant extent common to John Laing’s existing range of infrastructure activities – we have had to develop and acquire some new skills, but we have also been able to exploit our existing capabilities; c) the renewable energy sector offers a strong counter-balance to the reduction in traditional public-private partnership (PPP) deal flow in some of our markets (due to the current economic climate).

Our work in the sector so far has been focused on investment opportunities in proven, lower-risk technologies, in particular onshore wind and solar photovoltaic (PV), such as Carscreugh Wind Farm in south-west Scotland, Svartvallsberget Wind Farm in Sweden and Luxulyan Solar Park near St Austell in Cornwall.

We have strong ambitions to grow our renewable energy activities in the coming years, based on our normal business model where we position ourselves as a developer and investor in primary (pre-construction) projects, looking to grow value as we de-risk projects to mature, steady-state operation.

In the UK, you’ve been involved in many notable projects. How confident are you in the future of UK infrastructure – both economic and social?

DP: The UK infrastructure market has been heavily constrained in recent years (since the credit crunch) due to cuts in government spending and political focus on perceived weaknesses in the “old PFI model”. The UK government’s stated focus is on economic, rather than social, infrastructure; however, investment in some areas of economic infrastructure (e.g. roads) has also been very constrained.

The short- to medium-term outlook could at best be described as “mixed”, although longer term, the government is still planning to invest substantial amounts in UK infrastructure generally, although it remains to be seen how much of that requires funding support from the private sector.

Are there policy measures that you think could be introduced to make life easier for infrastructure developers and investors?

DP: We believe that the UK government’s new PF2 structure includes some good elements which will attract more interest from developers and investors, for instance the improvements in risk transfer in relation to facilities management (FM) services and change of law.

However, other PF2 elements could significantly worsen private sector appetite, in particular the government’s right to retain a large part of the equity (either for itself or for institutional co-investors introduced at the preferred bidder stage); this could result in a consortium incurring large costs at-risk to win a project, but ending up with their equity being heavily diluted. We believe that there are other, simpler structures which could deliver the transparency the government requires, without imposing heavy disincentives on private sector developers.

Another key area where an improvement could be made (for the mutual benefit of investors and government) is in policies relating to the tenor of debt funding for projects – if current UK policies which prevent the use of shorter-tenor debt were relaxed, this could generate large cost savings for government particularly if they agreed to bear (or share in) refinancing risk.

Overriding all of these issues is the need for deal flow – nothing attracts greater competition than a healthy volume and visible pipeline of projects.

Derek Potts is managing director, business development at John Laing in London