On the right road

The appetite for investment in infrastructure projects has been growing apace over the last decade, with both fund managers and institutional investors looking to take a slice of the action in a market that has largely defied the European economic turmoil.

Many nations within Northern Europe are embracing the public-private partnership (PPP) model, with the nations of the Benelux region being prominent. Allard Ruijs, managing director at Dutch fund manager DIF, says: “The upgrade of the A1 and A6 highways – major roads linking Amsterdam and Almere – involves a total cost of more than €1 billion.”

The project involves a refurbishment of 18 kilometres of existing road as well as the addition of more lanes. And there are further initiatives on the cards. Ruijs continues: “Currently there are three further Dutch road projects being tendered by the government, with completion of the process expected within the next 12 months.”

NEW DYNAMIC

Andy Matthews, a partner at London-based 3i Infrastructure, sees a new dynamic: “In the Netherlands, there is currently a huge undertaking in renewing the country’s canal lock structures,” he says.

Andrea Echberg, a partner at London-based private equity and infrastructure specialist Pantheon Ventures, puts it into perspective: “The Dutch locks project requires €3 billion to €4 billion of investment, and considering the logistical importance of the canal network in Holland, this is one of the most significant projects in Europe at present.’

There are also the beginnings of some PPP activity in the Nordic region. A new report published for the Swedish Ministry of Finance examines developments in the financing of road and railroad systems across the US, the UK, Germany, Denmark, Norway and Finland. One of the findings is that, in many countries, charging for the use of roads by motorists is becoming a more prominent part of the infrastructure financing model, and that alternative organisational forms, such as privatisation, regionalisation and PPPs are being more extensively employed. Aside from transportation, there are other projects that are also opening up to the PPP model.

Brandon Prater, co-head of private infrastructure at Swiss private markets specialist Partners Group, says: “In Scandinavia, the new Karolinska Solna Hospital, due to be completion in 2017, represents the largest PPP contract for construction firm Skanska and is the world’s largest PPP-funded hospital to date.”

HELD BACK BY AFFLUENCE

However, the consensus on the whole is that the Nordic region is not particularly conducive to the PPP model. Ruijs says: “We are not seeing many such projects in Scandinavia, since – on the whole – it is a relatively wealthy part of Europe, meaning that the governments have little need to seek private capital.’

Away from continental Europe, the UK is seeing some interesting activity. Matthews says: “There are several PPPs currently being undertaken in the UK. For instance the Mersey Gateway Project will see the construction of a new six-lane toll bridge over the River Mersey, relieving the congested and ageing Silver Jubilee Bridge. In addition, the £750 million Aberdeen Bypass is currently on the table and the widening and tolling of several sections of the M25 are currently underway.”

And, of course, any discussion about transportation in the UK must include the High Speed Two (HS2) rail development, which could potentially cost anywhere from £40 billion to £80 billion, and will likely involve a large number of investors and contractors.

SOCIAL INFRA ON THE UP

Outside the transportation sector, there are other initiatives. Prater says: “We are seeing a flurry of activity in terms of investments in hospitals, prisons, courthouses and social accommodation, largely being driven by a renewed availability of funding.”

This point is key. Funding for PPP initiatives has not always been plain sailing in recent years. The economic downturn saw the majority of the banks retract their funding, leaving the PPP market in a state of suspension.

Scott Springett, an asset Manager at London-based European fund manager EISER Infrastructure, says: “Whereas there has never been a shortage of equity players looking to invest in infrastructure, the absence of debt providers has created a hiatus. While governments have been courting financiers for many years, it is only now that we are seeing institutional investors such as Allianz and Aviva re-entering the market.”

Prater agrees: “In the UK, there are a large number of projects involving the re-development of public service-related institutions, including fire stations and hospitals, which are now being funded by large insurance companies, such as Aviva, AXA and Met Life.”

This is evidenced by recent events. In July 2013, Allianz announced its commitment to a €127 million investment in the long-term debt financing of a new ‘Music City’, to be built on Seguin Island in Boulogne-Billancourt in France. Also last year, Aviva, in partnership with NIBC, closed a £620 million Collateralised Loan Obligation (CLO) fund, to be allocated to infrastructure projects in the UK.

Springett says: “The new wave of investment in the market has seen the re-opening of a number of initiatives, for example the €7.8 billion Tours-Bordeaux high-speed rail link, as well as the Paris to CDG airport Express Link.”

ACTION GUARANTEED

He also sees other positives emerging from the changing market: “Governments across Europe are beginning to embrace the PPP model once more and are devising means of attracting investors. One method we are seeing deployed is that the government offers a guarantee to its construction or financial partners, meaning that if there is an unassailable risk in the lifespan of the project, the local government body will underwrite the cost.”

This goodwill from governments, combined with an upsurge in interest from institutional investors, should ensure a healthier PPP deal flow in northern Europe in the coming years. Those market participants frustrated by the lack of supply post-Crisis may be forgiven for breathing a sigh of relief.