Markets have traditionally treated infrastructure businesses as attractive and stable long-term investments. Yet, as with so many aspects of the economy, covid-19 has forced a fundamental re-evaluation of this view.
The global financial crisis made financing more difficult and there was an indirect impact on the sector, but the underlying businesses remained sound. However, the pandemic has had a dramatic impact on infrastructure businesses that depend on economic activity. Many have seen volumes and revenues collapse. Owners and investors look to government as the guarantor of last resort. In some sectors – notably, rail and buses – government has stepped in to shore up public services. In others – notably aviation, where there is greater private sector ownership – it has been less willing to do so.
The UK government recognises that society needs good-quality, functioning infrastructure. Infrastructure can also provide a rapid boost to economies. State aid rules have been applied more flexibly during the current crisis and this is expected to continue in the post-covid environment. The government seems likely to use post-Brexit flexibility to selectively support infrastructure businesses to a greater degree.
“When procurements come, proposals will have to lead with ESG credentials”
The covid-19 crisis has highlighted the critical importance of service delivery, so government must ensure the sustainability and value of the infrastructure underpinning this. However, more government is not all good news for owners and investors. Greater dependence on government brings additional control and exposure to politics and uncertainty. Government attitudes can change dramatically and political parties can be inconsistent.
Government needs and wants private sector expertise. But if this suddenly does not look like value for money, if the private sector seems to rake in profits while the government bears the risk, or if one player gives responsible investors a bad name, then politics can rapidly shift.
A new relationship
Government is also accustomed to cheap and readily available debt, making private finance harder to justify. Having spent billions responding to the pandemic, it will not be able to finance all its infrastructure requirements, nor will it have the bandwidth or desire to own and operate swathes of assets. Yet it will be under huge pressure to support and provide infrastructure and to ‘level up’ regions that backed the Conservative Party in the 2019 election.
Some of this activity – for example, digital infrastructure and social care – will be driven by the direct impact of the crisis. Some will be aimed at providing a more general economic boost, such as the decision to proceed with the HS2 high-speed rail link, or at meeting long-term housing needs, like the Oxford Cambridge Arc.
It seems that the then-finance minister Philip Hammond’s 2018 obituary for PFI was premature. New models for public-private co-operation are needed in which government provides greater protection against volume risks.
Risk must be aligned fairly with government policy while remaining attractive to infrastructure investors – as the latter will be more risk-averse, post-covid. This will require some farsightedness, as new projects will exist in a changed world. Modellers do not yet know how people will behave, how cities and infrastructure usage will change with lower footfall, and whether people will choose to stay at home and businesses will go to the wall.
Shovel-readiness is critical: procurements must deliver faster to sustain market confidence and interest, so that new infrastructure can provide stability as the economy suffers. The UK can do this, as it responded rapidly to protect the NHS during the early stages of the outbreak. The lessons learned from accelerated procurements will need to be applied during the recovery period.
Although the crisis has heightened the perception of risk, financial investors are unlikely to turn their backs on infrastructure. However, they will be more focused on risk allocation, especially in volume businesses, and may require a rebalancing of risk on long-term investments. Some contracts are already being rewritten to make crisis time arrangements work for the longer haul.
Pre-covid, government and boardrooms knew that change was coming. Events like the collapse of construction and facilities management services company Carillion, climate change litigation and scrutiny of some infrastructure players mean that companies and investors are now subject to more questions than ever. There will need to be upsides for host communities and ‘UK plc’ so that politicians can point to the policy benefits.
Price of government support
Investors can expect that when procurements come, proposals will have to lead with environmental, social and governance credentials – moral capital is as important as cash in the bank. By taking participants to task, government can manage political risks related to events like Carillion’s collapse. Oversight proposals are important, since a badly timed corporate misstep can harm governments where it really matters to them: at the ballot box.
Infrastructure providers will need to be politically savvy. Where government provides support, it will expect visible proof of responsible behaviour.
The picture facing infrastructure businesses and their owners is not simple. Infrastructure’s essential nature has been highlighted, and its ability to boost the economy will be needed. However, revenue risks have become clearer and greater reliance on government comes at a price in a tough economic environment, with ESG and climate change posing additional challenges.
What is clear, though, is that government, infrastructure businesses and their owners all need each other. All three groups will need to find new ways of working effectively and cost-efficiently.
Martin Nelson-Jones is global co-head of infrastructure, Colin Wilson is international head of projects and Howard Bassford is UK head of infrastructure at DLA Piper