Getting new investors into the infrastructure sector

Rock Infra

The UK Government and infrastructure finance community have been talking for some time now about the need to make the infrastructure sector accessible to direct investment from institutional investors

It is well known that investments in infrastructure projects should be very attractive to institutional investors with long term liabilities given the stable long-term cashflows that infrastructure projects enjoy. The possibility of all or part of these cashflows being index-linked furthers the appeal to institutional investors.

The announcement made in December 2013 that six leading UK insurers (Aviva, Friends Life, Legal & General, Prudential, Scottish Widows and Standard Life) will work alongside Government, regulators and other interested parties, with the aim of delivering at least £25 billion of investment in UK infrastructure in the next five years is a very welcome step.

As this announcement sets out, in order to gain from this investment projects must be commercially and economically viable and must be designed in a way that is familiar to insurers and other investors. The message from these insurers is clear – any infrastructure project presented to them for potential investment should be an investable proposition with an acceptable and simple to understand risk profile to allow for a quick assessment of the opportunity. The targeted £25 billion investment is not “free” money.

The introduction by the UK Government of the UK Guarantee Scheme (which was first used in a PPP on the Mersey Gateway Bridge PPP where Rock was acting as the development partner for Halton Borough Council) and the introduction through PF2 of equity funding competitions post preferred bidder should make infrastructure more accessible to institutional investors. The UK Guarantee Scheme means that institutions providing debt to infrastructure projects do not need to do lengthy due diligence on the underlying project. The use of equity funding competitions under PF2 mean that institutional investors can bid to provide equity to a project once the winner of the bidding competition is known, rather than spend effort – time and money – supporting a bidder for a project that ultimately may lose.

However large scale infrastructure projects remain complex and take a long time to develop before they are in a form that can be presented to institutional investors in a state that meets the criteria set out in December’s announcement. This is where Rock comes in.

Rock, as an independent developer of infrastructure projects, focuses on the commercial and financial aspects of infrastructure projects. We have an excellent reputation for the structuring and closing of complex infrastructure projects with both the private sector and central and local government.

Our independence means that we can use our skills and expertise to bid and structure infrastructure investments free of conflicts or pre-determined requirements. Our approach ensures that projects are structured to be acceptable to the market, but at the same time in a way that meets the needs of the public sector, resulting in the optimal bid.

Our approach recognises that institutional investors are different and therefore the right investor for a project based on the needs of a procuring authority or the characteristics of a particular project needs to be found. Ours is not a “one size fits all” approach. We invest our own time in the intensive early development phase of a project to ensure that projects are only presented to potential investors when ready so that an institutional investor can deploy its own human resources more efficiently and cost effectively. We will lead bids and encourage institutional investors to become part of the bidding consortium once the project is sufficiently developed.

The future of the UK infrastructure sector is bright. The UK Government has clearly set out its priorities for investment in UK infrastructure in the National Infrastructure Plan which includes mega projects such as the £4 billion Thames Tideway Tunnel and the expansion of nuclear energy capacity through the construction of new nuclear power stations. These projects will inevitably require tapping the capital of institutional investors and therefore it is important that the public and private sector does all it can to facilitate this investment.