Danny Alexander MP, the UK coalition government’s Chief Secretary to the Treasury, has gone missing – but one of his advisers insists that he is close to being found. This assurance elicits smiles from Labour MP John Healey and five representatives of infrastructure investment and advisory firms gathered at Parliament’s Portcullis House.
In fact, Alexander walks into the room just moments later. He was detained for at least two reasons – one being the school run and the other a conversation with his Liberal Democrat party leader and Deputy Prime Minister, Nick Clegg. It would surely be impolite to enquire which of the two events was considered to have the higher priority, though it’s an interesting thought.
Alexander and Healey are here at the invitation of Infrastructure Investor because they believe that politicians and the infrastructure industry have much to be gained from an improved dialogue with each other. Healey says the aim of such conversations should be “to tease out the tensions, recognising that you need to combine the social and economic purpose of infrastructure with the requirement for investors to deliver a certain level of margins and returns”.
This implies the kind of pragmatism likely to be appreciated by investors otherwise worried by recent political and regulatory interventions in infrastructure investment – including, in the UK, changes to the feed-in tariff regime for renewable energy. Across Europe, such interventions in countries as seemingly disparate as Norway and Spain have had a common consequence – investor frustration at what is perceived to be moving of the goalposts after agreements have been reached.
“The world changed post-GFC [global financial crisis] and so have government fiscal pressures,” acknowledges Healey. “As a result, politicians are now making some of the big calls in infrastructure – bigger than they did previously.”
Some might perceive a hint of threat in these words. There was considerable unease in the UK investor community when the Labour party recently proposed a freeze in energy prices for 20 months should it win the next general election in 2015. This was an example of the kind of “political risk” that investors are now growing accustomed to factoring into their pricing.
But others may feel compelled to try all the harder to understand political pressures – including the need to be fair to the consumer in times of strain on household budgets – and attempt to gain better insights into how decisions are reached. After all, both sides have a common interest in trying to get infrastructure financed and built.
Said with meaning
Starting on a note that no-one would be likely to disagree with, Alexander says: “We need to make a high-level case for infrastructure. The word ‘infrastructure’ doesn’t mean much to people but when you talk about the roads we drive on, broadband speeds or the prospect of the lights going out, that means something. These are real human issues.”
He relates how the lights going out – which has been largely relegated to the status of a hypothetical consideration in the UK in recent times – was a very real phenomenon when he was growing up, his family having made use of a diesel generator which would occasionally pack up.
Keeping the lights on, in Alexander’s view, means the need to map a long-term vision for infrastructure rather than being straitjacketed by the confines of the electoral cycle. “There have forever been tensions between good long-term plans and short-term decision making, and the balance in relation to infrastructure has not been right in past years,” he says. “Big long-term calls such as the M25 [motorway] and HS2 [High-Speed Rail Two] have to be made and stuck to.”
The vision came in the form of the National Infrastructure Plan (NIP), which was published in October 2010 and which outlined the future demands of the UK’s economic infrastructure and how the needs might be met. “The stop-go nature of public spending has been a big problem and the National Infrastructure Plan set out to address that,” reflects Alexander.
In the wake of the NIP’s release, private capital providers waited to see how they might benefit. Some say (frustration all too evident) that they are still waiting three years later. Few dispute that the plan offered a welcome vision of how things might be – the kind of vision that was arguably lacking previously – but what investors really want are projects they can invest in, and many say these have been in short supply.
“We’re greenfield investors and, from an investor perspective looking at the NIP, what can we invest in?” asks Julia Prescot, partner and chief strategy officer of fund manager Meridiam Infrastructure. “There are only about four or five out of 40 projects [in the plan] that we could put money into. As a predominantly greenfield investor, I’m more interested in what the potential is for investable projects rather than supporting the Highways Agency or a Network Rail bond.”
Not all new-build
Alexander acknowledges that the needs outlined in the plan and the investment requirements of a particular fund may not necessarily be well synchronised. “It’s not about finding enough greenfield projects for particular fund managers, it’s about what infrastructure the country needs,” he insists. “In offshore wind, for example, there’s a big need.”
Taking note that a lot of the focus since the NIP was published appears to have been on new-build projects, Peter Ho, head of infrastructure at Hermes GPE, says: “There is a lot of investment in existing infrastructure that goes unseen and unrecognised.”
Adds Andreas Koettering, managing director and head of EMEA in the London office of the Canada Pension Plan Investment Board: “It’s not all about building new infrastructure in its entirety. Infrastructure oils the wheels of the economy and you need to constantly upgrade it and take account of new technology.”
Alexander acknowledges that the need for upgrading is crucial – witness long neglected sections of rail or ever-increasing road bottlenecks – and says that creating the right climate for people to invest in is the crucial thing, whatever type of infrastructure they may be interested in backing.
Doesn’t come cheap
In December 2010, the Treasury conducted a review of civil engineering costs for major UK infrastructure projects. “We found the cost [of building infrastructure in the UK] was markedly higher than in other countries,” says Alexander.
Prescot picks up on the point: “There are very high costs in the UK. In France, we invested in the Tours-Bordeaux high-speed rail line, which is a similar length to HS2, but the costs per kilometre for HS2 are about four times higher – albeit HS2 is designed for a faster train speed. In the UK, consultants do a lot of the pricing and you have to ask whether the pricing is tight enough.”
However, Bill Hocking, executive vice president at Skanska UK – the UK arm of Swedish construction firm Skanska – makes the point that clients can work with contractors and the supply chain to maximise efficiencies. “HS2 has been good at engaging with the supply chain,” he says.
Alexander adds that, where high costs do exist, they are “partly due to things like planning and regulation but also a lot to do with the lack of a forward pipeline”. That forward pipeline, through the NIP, is arguably now in place.
But, as far as investors are concerned, there is still a fundamental missing ingredient – the lack of projects actually coming through the pipeline that they can invest in. “Delivery” is a word that’s been used a lot in relation to UK infrastructure and it was inevitable that it would get another airing here.
“Who takes responsibility for delivery?” posits Richard Bowker CBE, the former chairman and chief executive of the Strategic Rail Authority and now a senior infrastructure advisor at EC Harris, the built asset consultancy. “The Crossrail project is doing well now but it has taken 20 years and been redesigned and rethought.”
He adds: “The concern is how you move forward once the decision has been taken, how you execute. In the UK, we take a decision and then we want to reconsider – for example, HS2. We mustn’t keep rethinking.”
Calls for independence
This prompts consideration about whether the delivery of infrastructure should be taken out of the hands of government and passed to an independent body. This was one of the recommendations in the Labour-commissioned Armitt Review by former Olympic Delivery Authority chairman Sir John Armitt, which explored issues around long-term infrastructure planning.
The findings of the review were published in early September, and called for the establishment of a so-called National Infrastructure Commission that would have statutory independence and would negate the impact of changing governments on the delivery of projects.
There appears to be support for the idea. Bowker says that, in his view, the combination of “strategic planning with statutory force” seems “quite sensible”.
“The planning and the vision is the responsibility of politicians,” asserts Koettering, “and that may take time to settle on. But once it’s decided, it’s time for the politicians to step away from the delivery of new infrastructure and the oversight of existing infrastructure. It should all be kept away from the politicians because you need stable conditions and we have not always had that.”
Alexander picks up on two points: the seemingly constant discussion about the pros and cons of infrastructure projects and the suitability of politicians to be in the driving seat. “It’s right in a democracy that people have a chance to scrutinise major projects,” he says. “And, in terms of the role of politicians, there has to be someone responsible for control of public expenditure and ensuring value for money.”
Hocking proceeds to raise the issue of responsibility within government and the private sector’s need for consistency and trust: “We had four examples of PFI [Private Finance Initiative] jobs cancelled when we’d got to the preferred bidder stage. That kind of thing creates difficulties for the future – can we spend shareholder money on these projects without confidence that the projects will happen?”
Hocking is referring to instances where jobs have been cancelled by the client or another party (including government), not by Skanska. He would like to see greater consistency from government, to support effective planning and delivery of infrastructure projects.
Alexander is sceptical of the idea of infrastructure being effectively outsourced to others, seeing this is likely to slow things down rather than speed things up. “I have a slightly higher opinion of politicians [than some],” he says. “I believe we can have debates and reach rational conclusions. I’m not sure about sub-contracting to committees and moving the political issues that need addressing now to a later stage. These projects need to be scrutinised through public debate in Parliament.”
Hofbauer recognises that “moving to a later stage” is far from ideal. “Over the last decade the temptation has been to defer the problem,” he suggests. “So costs have gathered over time and then it becomes an inter-generational issue. There’s no doubt that a lot of problems have been pushed down the road, and we’re now just seeing the front end of the issue that this has created.”
Like Alexander, Healey believes that where a consensus can be achieved, politicians need to pick up the ball and run with it. “In the last few years, the recognition that a broad consensus is needed has grown stronger,” he says. “The Armitt Review was about how to create a political consensus.” He also acknowledges, however, that “in the end, you can’t take out differences of opinion”.
The conversation returns to the meeting point of investors and politicians – and where the two can either help or hinder each other. The halting, and subsequent review, of the Private Finance Initiative (and eventual replacement by “PF2”) acted as a polarising process. Investors focused on the drying up of the deal pipeline as the procurement model was honed, while government insisted that the changes were necessary and in the public interest.
“At the heart of the PFI debate was that taxpayers should not have to pay for exotic investor returns just because the government doesn’t have the capability to drive a bargain on behalf of the taxpayer,” asserts Alexander.
Hofbauer agrees: “There shouldn’t be a windfall profit [for investors] but a fair return. In austerity, investors should support this process. The issue is where things get politicised and are not rational. That heightens political risk unnecessarily, and we need to find a way of working through that.”
The awkward middle
Bowker says that the process of moving new infrastructure forward starts with “scrutiny and challenge” and ends with “delivery” but it’s “the bit in the middle that’s difficult”. He is referring to the hard-nosed negotiations that take place at the contractual stage between the public and private sectors. In the case of PFI, it was a frequent allegation that those negotiations too often saw canny private sector teams drive hard bargains at the expense of their less experienced public sector equivalents.
Bowker suggests the public sector could address this by recruiting from the ‘other side’: “Does it have to take 20 years [for the public sector] to develop these skills? Or could you create agencies of government with genuine commercial skills by bringing in the private sector to act as clients for government?”
The conversation moves on to consideration of the role for pension funds in UK infrastructure. On the face of it, it seems like a no-brainer to tap this large pool of capital which stands to benefit from the liability-matching characteristic of infrastructure’s long-term cash flows. But theory and practice can be two very different beasts, and it has proved a challenge to get pension money ‘in the ground’.
“We represent pension funds and we want a dialogue about how pension funds can support UK infrastructure because there’s a common interest there,” says Hofbauer.
However, he adds: “You have a lot of defined benefit schemes in the UK and they are going through a process of de-risking. That doesn’t sit with [taking on] construction risk and it limits their capacity. It’s also about educating people, but some larger schemes are open to doing more and they want to contribute.”
Prescot insists that pension funds are “not instinctively against greenfield” and initiatives such as the Pensions Infrastructure Platform – a £2 billion (€2.4 billion; $3.2 billion) initiative launched by the National Association of Pension Funds to attract pension investment into infrastructure on a low cost basis – “may provide the skill base that pension plans are looking to acquire”.
She adds: “When I look at the multitude of international pension funds investing in the UK ahead of the UK pension funds, I think it’s a pity because it’s reducing UK pensioners’ ability to invest in UK infrastructure.”
“The skill base and confidence is lacking,” says Healey. “But the [pension fund] industry is evolving and it needs time to evolve itself without government stepping in.”
Where government has arguably intervened in a useful way, however, is through its UK Guarantees Scheme (UKGS). This was introduced in July 2012 as a way of underwriting infrastructure projects that investors – including pension funds – might otherwise see as too risky.
In October this year, the government announced details of 13 energy, transport and education schemes that had pre-qualified for a total of £33 billion in guarantees in the event that they are unable to attract financial backing by other means.
This announcement met with a lot of positive industry comments, including the following from Nick Prior, head of infrastructure at financial services firm Deloitte: “The guarantees scheme has been this government’s most important infrastructure initiative to date. It is driving forward infrastructure projects that would not otherwise receive funding, particularly much-needed investment in energy infrastructure.”
However, at the time the announcement of pre-qualifying schemes was made, only one project – Drax power station – had actually received a guarantee. Despite Alexander’s insistence that the offer of government backing is in itself sometimes enough to trigger private capital support (and hence the usefulness of the scheme sometimes goes unseen), this slow progress was bound to trigger criticism.
“I was one of the first and the few in my party to welcome the borrowing guarantees,” points out Healey. “But one in 15 months isn’t good enough. Can we please get more signed?”
This brings us back to that “D” word again (“delivery”). The government will say that, via the NIP, UKGS and other initiatives – as well as the appointment of Lord Deighton as a UK infrastructure tsar in September 2012 – plans to get the deal flow pipeline flowing are afoot. Wait a little longer and patience will be rewarded.
Opposition politicians and some in the infrastructure industry will say the waiting has gone on long enough and patience is wearing thin. While appreciating that the importance of infrastructure investment has been recognised, they are still waiting for good words to become deeds.
But everyone can agree on one thing: the more time government and investors/industry spend talking through the issues, the better. Final word to Hocking: “I’m very optimistic. There are better cross-party relationships and a better relationship with industry. I’m encouraged.”