Driving Growth Building blocks for global infrastructure · of finance to match these commitments in the post-crisis world. The severe contraction in ... H2 2009 and H1 2010, suggesting

Driving GrowthBuilding blocks for global infrastructure

© November 2010This document provides a general overview only and is not intended to be comprehensive. Specific legal advice should always be sought in relation to the particular facts of a given situation.

ContentsForeword ............................................................01

Industry foreword ..........................................03

Executive summary .......................................07

Outlook for global infrastructure ...........13

Outlook for UK infrastructure ..................31

International comparisons .........................43

Building blocks for growth .......................51

Conclusions ......................................................59

Contacts .............................................................60

01/ Global infrastructure

Paul Severs, Partner, Finance Tel: +44 (0) 20 3400 4626 [email protected]

ForewordWith the consequences of the financial crisis still very evident in the balance sheets of sovereigns, banks and infrastructure specialists, the coming years will be challenging ones for global infrastructure. Many governments see infrastructure projects as a key driver for economic growth, but serious concerns remain about funding sources, certainty of cashflows and structures. There is also considerable variation across countries, regions and sectors, with investors’ attention focused on the areas that offer the greatest opportunities. As well as looking for the best absolute returns, investors will seek to find locations where the local conditions are right and where the political climate and legal framework mean risks can be appropriately underwritten and thus achieve the best risk adjusted returns.

In order to understand both the challenges and opportunities in greater depth, we canvassed the opinions of over 130 leading global infrastructure experts, focusing particularly on the views of the C-suite and senior decision-makers drawn from corporate finance, investment, construction, power, government agencies, utilities and other specialist sectors. Our sample included many of the leading international, commercial and investment banks that play a major role in funding global infrastructure investment, as well as infrastructure equity investors and contractors. Together, their responses provide a comprehensive analysis of the current state of global infrastructure, as well as looking ahead into prospects for the future.

In the UK the Coalition government, like many governments in Europe and the rest of the world, is adjusting to austerity and, following the Comprehensive Spending Review, is setting out details of its long-term review of UK infrastructure investment, through its National Infrastructure Plan. This review and the National Infrastructure Plan will together provide the first indication of its agenda for infrastructure and suggest ways of attracting new sources of private sector investment. A key concern to all involved in the sector is whether the Coalition is serious about improving infrastructure delivery and achieving ‘decarbonisation’ targets. Our research indicates that PPP and PFI have a critical role in maintaining a healthy pipeline for new projects, and the review will be a crucial gauge of the Coalition’s commitment to these models.

Global infrastructure /02

The next five years will be good ones for infrastructure development

Globally, there’s a strong consensus among respondents that the next five years will be good ones for infrastructure development, which represents a good way of pumping money into recovering economies and supporting fragile growth while investing for the future. The detailed picture is complex. While projects in many areas are still seen as offering good investment opportunities, those in fields that rely on high volumes of use – such as toll roads and airports – have been hit. There are also wide variations in which regions throughout the world are perceived as most attractive in the current climate, with the UK and US topping our league table. Significant threats include lack of access to appropriate long-term funding, government interference and economic instability. Given the importance of social and economic infrastructure development to the stability and growth of economics, many are looking to governments to take the initiative in encouraging the capital markets back into infrastructure funding. This could be done though commitments to new projects, regulatory concessions, tax and other incentives.

Our research into global infrastructure helps us to understand the needs and concerns of our clients and to align our services to them in the context of their future challenges. We hope that the report will also be of use to policymakers addressing current issues and adapting project structures to meet the needs of the market. In particular, we hope it will be helpful to those companies, funds and financial institutions who are adjusting to the ‘new normal’ of infrastructure, finance and development following the recent financial crisis or who are expanding their investment into new sectors and regions.

Many thanks to those who contributed to our research – we hope that you will enjoy reading this report.

Paul Severs, Partner (Finance) Berwin Leighton Paisner LLP

Joanne Segars, Chief Executive, National Association of Pension Funds (NAPF)

Industry forewordThe fallout from the world financial crisis of 2007/08 continues to deliver shockwaves to investors everywhere. As major institutional investors UK pension funds keep navigating through these choppy waters in search of positive investment performance.

Amidst economic uncertainty and predictions of a double-dip recession, trustees and pension scheme managers must stay focussed regarding investment options. This focus may need to consider broadening the opportunity set into new investment areas for many pension funds. Clearly some UK pension funds, via existing retail infrastructure funds or through public finance initiative projects, are already invested in this area, some for decades or longer.

UK funds – and particularly trustees as the fiduciaries responsible for managing those funds – need help to understand and become better educated on infrastructure as an investment asset class. Working with their professional advisers UK funds will need to assess the suitability of infrastructure investment in helping them meet their investment objectives. However, like any investment decision trustees must undertake a due diligence exercise, understand the risk/reward trade off and be satisfied with the validity of an allocation to infrastructure investment.

The significant reduction in public expenditure announced by the Coalition government in the Comprehensive Spending Review (CSR) will impact on many proposed public sector infrastructure projects. It is expected that the Coalition government will look to other sources of capital and seek to encourage institutional investors to consider infrastructure investment to make up some of the shortfall in the public finances.



In the 2009 NAPF Annual Survey 12% of UK pension fund respondents had assets invested in infrastructure or PPI/PPP projects, albeit on a small scale. The revision of rents in the social housing sector announced in the CSR are, in part, designed to attract investors such as pension funds into the market. Only time will tell if these changes prove to be a big enough incentive to sustain and grow pension fund investment.

The Coalition Government has also begun to develop its thinking with regard to the establishment of a Green Investment Bank and its role as a provider of public risk capital. As long-term investors, pension funds may see some common interest from establishing a dialogue with the Green Investment Bank regarding its long term investment goals.

As the leading voice of workplace pension provision in the UK the NAPF represents 1,200 pension funds, drawn from all parts of the economy, holding assets of c.£800 bn. As Chief Executive I welcome the publication of this report as a valuable contribution to the debate on infrastructure investment – a debate in which the NAPF intends to be a willing participant during the next few years.

Joanne Segars, Chief Executive National Association of Pension Funds (NAPF)

85% of our experts believe investment inflows into infrastructure will increase

At the Toronto Summit in June 2010, G20 leaders agreed on a range of measures intended to promote ‘growth friendly’ fiscal stimulus plans including a renewed commitment to infrastructure spending. Governments are already making significant commitments to infrastructure spending over the next five years.

The Obama Administration, for example, will spend US$150 bn of its US$787 bn stimulus plan on infrastructure and may yet add to this outlay. Meanwhile, China has pledged US$585 bn; India is expected to spend US$500 bn on infrastructure in just five years; the EU US$252 bn; Japan US$129 bn; Canada US$12 bn; Australia US$4.7 bn; Singapore US$13.8 bn; and Germany US$42 bn.1 In the UK, the Coalition government is reviewing all capital spending plans with unofficial estimates putting capital spending at between £49 bn (US$78 bn) and £20.6 bn (US$31 bn) between 2010 and 2015.


Executive summary

65% believe global infrastructure prospects are either good or very good

1E.J. Gerritsen, Collabaratory for Research on Global Projects, Working Paper 48, Stanford University, March 2009.

Despite the opportunities created by these outlays, our survey confirms that there are still concerns regarding the availability of finance to match these commitments in the post-crisis world. The severe contraction in the availabilty of debt has already led to a number of projects being cancelled or postponed, while the movement towards shorter-term funding and the risk-aversion shown by many debt providers is making infrastructure projects slower, costlier and more difficult to finance.

Outlook for global infrastructureThe overwhelming need for infrastructure Although the upheavals brought about by the financial crisis are still front of mind, prospects for global infrastructure are good. 65% of those surveyed believe prospects are either good or very good, compared to 8% who said prospects are poor or very poor.

The financial crisis of 2008 left governments and economies around the world with two pressing concerns: first, how to deal with the enormous cost of financial stability packages; secondly, how to stimulate growth within the context of a constrained borrowing capability.


This positive sentiment fits with a slight improvement that has followed an otherwise downward trend in global infrastructure activity over the past three years. While the total value of infrastructure deals declined rapidly from its 2007 peak, the value of deals closed rose in both H2 2009 and H1 2010, suggesting an improving outlook for infrastructure investment.

As identified by the OECD, one possible explanation for this upturn is the perceived need to deliver investment to improve infrastructure capacity in order to help support economic recovery. If infrastructure development were to stall over the next two to three years, this could put pressure on prices, weaken economic growth and reduce future returns from investment in infrastructure.2

The expectation that governments will play a smaller role in funding infrastructure investment in the future is not currently reflected in the data for government funding. Our survey suggests that overly pessimistic views on reductions in government spending are not borne out by recent experience. Since H2 2007, for example, infrastructure investment funded by government or international agencies has actually increased - from less than 2% in H2 2007 to nearly 18% in H1 2010.3 This suggests that government investment still plays a crucial part in infrastructure deals.

Equity investment, bond issuance and bank debt also remain crucial to infrastructure funding. Equity investment has remained relatively stable as a proportion of the value of infrastructure deals over this time period, although falling in absolute terms. By contrast, bond issuance has declined severely since H2 2007, due largely to the collapse of the monoline insurance companies. Bank debt continues to make up the lion’s share of infrastructure debt funding, despite a decline. So although government funding has increased, the availability of long-term debt continues to be an extremely important factor in infrastructure financing.

Despite the overall optimism, there are clearly major concerns around the availability of funding for infrastructure. Lack of finance, government interference, a perceived reduction in government funding and the continuation of economic uncertainty were regarded as serious or very serious threats. 47% view the lack of funding as a serious or very serious threat, although 85% expect investment inflows into infrastructure to increase.

Outlook for UK infrastructureThe need for greater liquidityIf experts are broadly positive about prospects for global infrastructure, views on UK infrastructure prospects seem rather more pessimistic. UK policy makers and specialists will take comfort from our survey’s finding that the UK is considered the most attractive location for delivering infrastructure projects, but this contrasts with gloomier assessments of its overall prospects.

While 52% consider the UK to be the most attractive region for infrastructure investment, only 17% believe prospects have improved since 2008 and 14% feel they have stayed the same. 43% believe prospects have worsened.

With no clear consensus on predictions for UK infrastructure growth, there is much closer agreement on the factors that will determine the UK’s prospects. When asked to rate the importance of different factors in determining the outlook for UK infrastructure, 70% of our experts believe the availability of credit will be the main influence over the next five years. Anticipated reductions in government spending on capital projects and the reduced supply of debt are considered the two main factors likely to restrict UK infrastructure growth.

2OECD, Transcontinental Infrastructure Needs to 2030, 2009.3Infrastructure Journal, Global Infrastructure Finance Review, 2010.

Our survey was carried out prior to the UK Comprehensive Spending Review (CSR) and publication of the National Infrastructure Plan so does not reflect views in light of the spending decisions announced. Though we cannot speculate on the extent to which the CSR will affect government expenditure in the years ahead, the most pessimistic views on future UK government outlays do not appear to have been borne out by the Chancellor’s 20 October statement.

The government has reaffirmed its commitment to prioritising economic infrastructure that supports growth and transition to a low-carbon economy, with capital spending of £51 bn announced for the year 2011-12. Commitments to transport included the announcement that capital investment will be higher in real terms in 2014-15 than 2005-06 levels. A specific commitment was also given to support renewable electricity installations through the investment of £5.6 bn over the year ahead.

As with other countries, the availability of PPP/PFI is regarded as particularly important in the UK. Experts are generally positive about the level of security these options provide for project funding.

Though there is clearly a view that UK projects can be expensive to run – to the extent the UK is viewed as “treasure island” in the words of one expert – PPP/PFI models are credited with helping ensure projects are achieved to cost and on time. 59% believe PPP/PFI is important or very important in helping to stimulate demand for UK infrastructure development, compared to 13% who consider it only marginally important or not at all important.

Experts also believe the UK’s PPP/PFI model can be improved, with measures likely to improve efficiencies in arranging project finance viewed as particularly desirable. The CSR announcement of plans to create new powers to implement Tax Increment Financing (TIF) also indicate some desire from government to look at new mechanisms for raising revenue for infrastructure projects. Through the publication of the National Infrastructure Plan detail has also been added on how the government expects to support its growth agenda, as outlined in section two.

As with the global outlook changing patterns of energy demand and supply are driving demand for investment in these areas in the UK. Renewables stand out as the most attractive type of infrastructure in the UK, cited by 24% of respondents, followed by power (20%).

Transportation is also felt to be a key growth sector but remains some way behind, with 7% viewing rail and a further 7% viewing road as the most attractive types of UK infrastructure project.

The UK is considered the most attractive destination for infrastructure investments, with 52% of our experts regarding it as attractive or very attractive. The availability of PPP/PFI arrangements is an important part of this appeal, with 59% considering PPP/PFI to be important or very important in helping to stimulate demand for UK infrastructure projects.

Major investment into social infrastructure, such as schools, hospitals and healthcare, in the last decade has clearly built trust in PPP/PFI as a delivery model with the ability to generate stable cashflows. The question now is whether a new political settlement can be agreed for PPP/PFI that reflects post-crisis realities yet still produces equitable results for both investors and taxpayers. The system is not broken, but is likely to benefit from an examination of how to upgrade to a model that better reflects current funding and affordability constraints.

In a global context, our experts have mixed views on the availability of PPP/PFI structures as a factor in a region’s attractiveness for infrastructure investment. Although PPP/PFI arrangements are likely to attract many investors, others do not see this model as integral to investment decisions.



International comparisonsPower and roadsThe perception of opportunities also varies greatly between different countries and regions. The historic performance of infrastructure, changing demographic needs, and the political and economic environment are all key factors in determining appeal. Our experts’ feedback has enabled us to establish a league table of preferred locations for infrastructure, as outlined later in this report.

Emerging markets and growth areas, including Brazil, Russia, India, China and Turkey, are considered to offer strong opportunities. Countries that have natural resources or mineral wealth to help support infrastructure development are also considered attractive. In addition, Asia was viewed as a region where distance from the ‘Western’ credit crisis meant funding was much more readily available than in Western Europe or the US.

These preferences are borne out by recent patterns of global infrastructure investment over the last five years. Western Europe is the clear global leader for investment, with the value of deals closed exceeding all other regions by value between 2005 and 2010, reflecting the attractiveness of the UK and Western Europe as rated by our experts.

Similarly, the relatively poor view taken of Africa, the Middle East and Latin America, seems evident from investment inflows into these regions. The value of infrastructure deals closed in H1 2010 as a proportion of those closed for the whole of 2009, amounts to just 15% in Africa and the Middle East and 22% in Latin America (Infrastructure Journal, Global Infrastructure Finance Review, 2010).

Building blocks for growthMore assistance neededThe relative attractiveness of particular regions or countries varies greatly with factors ranging from the availability of PPP or PFI-type arrangements to more fundamental concerns about global political risk, including legal security, transparency and political stability. Investors are obviously put off by certain locations associated with corruption, unreliable legal frameworks, or potential risks to the physical security of projects. 84% of our respondents rated political stability as either an important or very important factor in investment decisions.

Funding for infrastructure projects is more difficult to obtain as a result of the financial crisis but our experts see a major opportunity for new forms of investment to fill this gap. There is clearly scope for pension funds and other long-term institutional investors to invest directly in debt as well as equity positions in infrastructure if the right products are made available. Long-term infrastructure bonds are also expected to grow in appeal, with 70% viewing growth prospects in this market as positive or very positive over the next five years.

In fact, with 85% of our experts believing investment inflows into infrastructure will increase, and only 9% expecting inflows to reduce, there is some cause for optimism.

84% of our respondents rated political stability as either an important or very important factor in investment decisions

The great opportunity is the overwhelming need for infrastructure. The biggest threat is the lack of government capacity to procure and pay for itGeneral Manager, Corporate Finance Sector


The overwhelming need for infrastructure

Section one: Outlook for global infrastructure

Facts and figures

65% of our respondents hold the view that the prospects for global infrastructure have improved since 2008, regarding them as ‘good’ or ‘very good’; only 8% regard them as ‘poor’ or ‘very poor’.

47% feel that lack of funding is a serious or very serious threat. This is followed by government interference (45%), reduction in government support for funding (44%) and economic instability (43%). Regulatory costs were less of a concern at 20%.

35% of respondents cite lack of deal flow as the biggest obstacle to encouraging greater private finance investment into infrastructure.

47% see the development of new infrastructure as the greatest opportunity, while 34% favour the renewal and upgrade of existing infrastructure, and 16% the expansion of existing infrastructure. Just 2% feel government commitment to infrastructure development is so weak as to offer no real new opportunities.

Globally, the level of opportunity is thought to vary greatly, with the perceived attractiveness of a country or region determined by its history of infrastructure development, changing demographic needs, and political and economic environment.

Emerging markets and growth regions or countries, including Brazil, Russia, India, China and Turkey, are viewed as offering strong opportunities. Asia in general was considered an area where distance from the “Western” credit crisis meant funding was much more easily available than in Western Europe or the US.


Prospects for global infrastructure“My prognosis for project financing is good and always has been good. The world undeniably needs it. The glass of water is more half full than half empty - people need infrastructure and will do for the foreseeable future.”

This comment by one of our experts sums up the generally optimistic view of the global market. Despite major upheavals brought about by the economic crisis, participants generally consider prospects for global infrastructure to be good: 65% believe global infrastructure prospects are good or very good, with just 8% saying they think prospects are poor or very poor. Many infrastructure projects fall within the category of ‘essential services’ and are therefore necessary.

This optimism - and the view that there is “an overwhelming need for infrastructure” - is consistent with what many of our specialists told us during in-depth discussions. Most believe that the prospects for global infrastructure have improved since 2008, presenting exciting opportunities but also some major risks (as seen in Fig. 1).

5. Very good

4. Good

3. Neutral

2. Poor

1. Very poor

49%

16%

27%

7%1%

1 23

4

5

Fig. 1How do you rate prospects for growth in global infrastructure over the next five years?

Our respondents also highlighted the complexities of the market. In some sectors, water and waste-water for example, demand is relatively unaffected by economic changes. In others, such as transport and renewable energy, a political commitment to ‘decarbonisation’ will drive projects forward. In some regions, infrastructure projects represent a good way of pumping money into the economy and supporting fragile growth. This reflects the differences between essential services, such as water, and nice-to-have services, such as renewables. However, renewables are increasingly being seen as essential services.


This broadly positive sentiment fits with a slight improvement to an otherwise downward trend in global infrastructure activity over the past three years. As Fig. 2 shows, the total value of infrastructure deals closed peaked in the second half of 2007, reaching US$140.5 bn, but then declined rapidly during the financial and economic crisis to a low of US$84.4 bn in H1 2009. The total value for the whole of 2009 stands some 42% lower than the total for 2007. Nevertheless, the value of deals closed rose again in H2 2009 and in H1 2010, suggesting an improving outlook for infrastructure investment.

Over the same period, Infrastructure Journal reports that the number of infrastructure deals closed peaked in 2007 and fell by 32% between then and 2009. This reflects the fact that more of the deals closed have been smaller deals, particularly in the renewables sector.

But the outlook is still uncertain. Projects in fields that rely on high volumes of use (as opposed to availability pricing structures), such as toll roads and airports, have been hit hard by the downturn in GDP.

Investors in infrastructure, even in emerging economies - especially the rapidly developing ‘BRIC’s (Brazil, Russia, India and China) - are faced with a complex picture offering both huge opportunities and huge risks. According to our interviewees other significant barriers include lack of funding, government interference and economic instability. Lack of liquidity, along with poor deal flow and deteriorating returns on investment, are also concerning a number of our respondents. Given the importance infrastructure development will assume in the next five years, many are looking to governments for commitments to tax breaks and other incentives for investment.

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US$ bn

2005 2006 2007 2008 2009

H1 H2 Total H1 H2 Total H1 H2 Total H1 H2 Total H1 H2 Total H1

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Project value

Table A: Global project �nance (2005-2010) (bar chart)

Project debt

Fig. 2Global project finance (2005-2010)

Source: Infrastructure Journal, Global Infrastructure Finance Review, 2010.


Future infrastructure needs are clearly among the key drivers for today’s economic investment and, in particular, include:

y Increasing demand for air transport: although airport projects have generally fared badly over the last two years, longer-term prospects are likely to be supported by future demand. Demand for air transport is expected to reach 7 billion passengers by 2020, while current capacity is only around 6 billion. The OECD estimates that in Europe alone, the facilities at over 60 airports are inadequate and will not be able to cope with demand by 2025, creating a need for at least 10 new major airports. The Chinese government has already outlined plans to build 97 new regional airports by 2020 at an estimated cost of US$62.5 bn.

Opportunities for global infrastructureAs one interviewee noted, “the great opportunity is the overwhelming need for infrastructure” and this sentiment was echoed by many others. The reasons for this are numerous and highly evident - economic and population growth, new technologies and a looming energy crisis, amongst other things. While governments are likely to struggle to develop effective funding and procurement strategies, the need for effective infrastructure is hardly something that can be ignored by any government.

This corresponds to OECD data outlining the need for investment to support either fiscal stimulus or improved infrastructure capacity, and the link between short-term investment and longer-term returns. With the US and several EU member states committing to major transport redevelopment and infrastructure renewal as part of their stimulus packages, these economies are well aware of the need to maintain momentum for long-term benefit. If infrastructure development stalls over the next two to three years, this could cause significant economic problems just as these countries are emerging from recession, slowing prospects for growth.

y Increased seaborne trade: seaborne trade has doubled since the mid-1980s and this growth is already starting to stretch port handling capacity. Container traffic is scheduled to grow by almost 8% per year until 2015. With congestion likely to become a major problem, estimates for the investment needed to build new capacity have been put as high as US$73 bn. Congestion in key shipping areas such as the Bosporus, the English Channel and the Straits of Gibraltar is also raising awareness of alternative routes including Canada-Alaska-Russia and Latin America.4

y Rail and road: the OECD has also identified ‘bottlenecks’ for freight capacity in North America and parts of Europe. Consequences include the inability of national rail operators to link together effectively and, in the US, restrictions on the capacity to provide freight supply to some regions.

4Ibid

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28%

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Limited or no opportunity

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Expected growth areas offering the best global opportunities, according to our respondents, are illustrated in Fig. 3. On balance, respondents thought that governments’ renewed commitment to infrastructure was likely to provide more opportunities for investment, although a large number of respondents disagreed. Just 2% believed that government commitment to infrastructure development is so weak as to offer no real new opportunities.

The level of opportunities offered varies widely, with the attractiveness of a country or region determined by a complex analysis of past infrastructure development, changing economic and demographic profiles, and the political and economic environment.

Fig. 3How do you rate the following as opportunities for infrastructure developments?

Both developed and developing countries face the challenges of building new infrastructure to support growth and renewing existing facilities, and our participants were split fairly evenly between those who regard the greatest opportunity to be in new-build and those who see greater opportunity in projects where existing infrastructure is being renewed.

As Fig. 4 shows, 47% see the development of new infrastructure as offering the greatest opportunities, while 34% view the renewal and upgrade of existing infrastructure and expansion of existing infrastructure (16%), as the biggest opportunity.


Sale of public sector assets In Western Europe, in particular, participants in our survey often suggested the development of high-speed rail networks and the likely sale of public sector assets as major opportunities for the private sector. There is an expectation that governments throughout Europe will follow the UK’s lead in selling off selected government-owned infrastructure to generate capital receipts and provide finance for new projects.

The proposed sales of the High Speed 1 (HS1) London to Folkestone Channel Tunnel rail link, Dover Port and NATS were cited as examples.

In the case of HS1 the UK government has offered the right to operate the route from London’s St Pancras International to the Channel Tunnel for around £1.5 bn, with the sales receipts being used to capitalise the new Green Investment Bank as recently commented in the CSR.

Question 11 Table 57

1. Renewal and upgrade of existing infrastructure (e.g. replacing bridges, expanding sewage systems)

2. Expansion of existing infrastructure (e.g. building telecoms networks)

3. Development of new infrastructure (e.g. developing renewable energy infrastructure)

4. Don't know

3%

34%

16%

47%

4 1

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Fig. 4Which of the following do you expect to be the strongest growth opportunity in the next five years?

The sale of public assets to generate cash receipts is not a new phenomenon. In the early 1980s the UK had an extremely successful privatisation programme. Both governments and investors, however, realise that it takes significant amounts of time and investment to prepare public sector assets for market in order to maximise receipts. A number of participants called for greater transparency in relation to the pipeline of government asset sales going forward.

Although almost all participants were very concerned about the impact of government cuts on infrastructure, there was considerable confidence in the private sector’s ability to deliver projects even in difficult economic conditions and the existence of “a well-developed private sector capability” was mentioned several times by our interviewees.


Emerging versus submerged marketsEven those who were pessimistic about prospects for UK infrastructure identified a number of healthy opportunities globally. Emerging markets and growth regions, including Brazil, Russia, India, China (the BRIC countries) and Turkey, were seen as offering major opportunities. Its distance from the ‘Western’ credit crisis meant that Asia generally was viewed as an area where funding was much more easily available than in Western Europe or the US. In addition, the strength of the regional development banks and agencies in Asia was seen as positive.

Another category attractive to our respondents included developing countries able to draw on natural resources or mineral wealth. Libya was one such example, where the removal of sanctions and political restrictions has generated a much greater willingness to explore infrastructure opportunities, especially projects involving the building or renewal of infrastructure systems that have remained undeveloped for decades.

Our experts flagged the varying impact of the recent economic crisis. While the US and Western Europe clearly suffered considerably, many countries retained significant reserves of capital that can be used for infrastructure projects. The most obvious example cited was China, where economic growth continues in near-double digit figures and plans are in place to invest over US$500 bn in infrastructure development, as well as emerging market countries such as Brazil and India.

Overall, the countries and regions consistently named by our interviewees as opportunity destinations were Africa, North America, Latin America, China and India.

Types of infrastructureCertain types of infrastructure are clearly more resilient to economic shocks than others, and this was reflected in our experts’ views. Participants from the utilities sector, for example, noted how developments such as those aimed at improving water and waste-water management often remain unaffected by the economic cycle, especially where consumption patterns are also unaffected. Increasing global energy requirements, as well as domestic and international commitments to the development of green energy, the use of reusable energy sources and the renewal or replacement of traditional energy sources, were also cited as major opportunities.

Spending on transport amounted to almost two- thirds of all global infrastructure PPP investment in the first half of 2010Infrastructure Journal,Global Infrastructure Finance Review, 2010


Fig. 6PPP by sector type of PPP (2005 – 2010)

Fig. 5 Investment by type of infrastructure (2007 – 2010)

Table D: Investment by type of infrastructure (2007 – 2010)

0

20,000

40,000

60,000

80,000

100,000

Value, US$m

Value, US$m

Water &Sewage

TransportTelecomsSocialInfrastructure

RenewablesPowerOil & GasMining

2005

2006

2007

2008

2009

H1 2010

0

20000

40000

60000

80000

100000

H1 2010

2009

2008

2007

2006

2005

Water & SewageTransportTelecomsSocial Infrastructure


0

50

100

150

200

250

0

50

100

150

200

250H1 2010

2009

2008

2007

2006

2005

Water & SewageTransportTelecomsSocial InfrastructureRenewablesPowerOil & GasMining

2005

2006

2007

2008

2009

H1 2010

Number of deals

Water & Sewage

Transport

Telecoms

Social Infrastructure

Table E: PPP by sector type of PPP (2005 – 2010)

0

10,000

20,000

30,000

40,000

50,000

Value, US$m

Value, US$m


H1 1020092008200720062005

0

10000

20000

30000

40000

50000

H1 1020092008200720062005

Water & Sewage

Transport

Telecoms

Social Infrastructure

Table E: PPP by sector type of PPP (2005 – 2010)

0

10,000

20,000

30,000

40,000

50,000

Value, US$m

Value, US$m


H1 1020092008200720062005

0

10000

20000

30000

40000

50000

H1 1020092008200720062005



In addition to power, particularly renewable energy, transport was considered to be a key growth area over the next five years.

While transport, power and renewable energy are clearly considered to offer strong growth prospects, these sectors have experienced a turbulent track record over the last five years, as illustrated in Fig. 5. Although these sectors experienced a peak period in 2007 and even 2008, the 2009 figures show the extent of the drop in the market. However, the available project data for the first half of 2010 suggests an upturn in some of these sectors - oil and gas in particular.

The particular strength of transport can be clearly seen in relation to global investment in PPP activities, as demonstrated in Fig. 6. With spending on transport amounting to almost two-thirds of all global infrastructure PPP investment in the first half of 2010, demand is already providing a firm basis for onward investment.

Fig. 7 illustrates participants’ views on the growth prospects for different types of infrastructure development, with renewables comfortably considered to be the strongest area, followed by other types of power, waste, road, rail, water, health, telecoms, schools, housing, airports, prisons, and defence and security.

Green shoots – renewables and decarbonisationOur experts identified renewable energy, greener transport, water treatment and waste recycling as stand-out opportunities for infrastructure over the next five years. Renewables, in particular, have the dual attraction of delivering energy efficiency and reducing domestic reliance on foreign imports. In the UK, for example, experts believe the ‘decarbonisation’ of energy production and transport may create openings for important new projects.

Experts also cited the opportunities that may be created by moving to Intelligent Transport System (ITS) models - the coordination of efforts to add information and communications technologies to both transport infrastructure and vehicles.

While improving existing infrastructure in the water and waste (and waste-to-energy) sectors stood out as an almost universally promising growth area, the scope for renewables projects in individual countries tends to be determined by their governments’ commitment to the green agenda, whether at a domestic or international level. Although interest in renewables is growing internationally, the greatest potential is felt to lie in those countries which already have a strong track record in the sector and a stable regulatory framework.

Large parts of the electricity transmission network need renewal. The decarbonisation of transport also presents an opportunity. In the UK this is likely to attract more than £20 bn per annum of capital investment between 2015 and 2050Chairman, Global Infrastructure & Projects Group

Reduction in government support for funding

Economic instability

Government interference

Regulatory costs

Lack of funding

0 10 20 30 40 50

No threat

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Lack of funding

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Very serious threat Neutral No threat

Economic instability

Reduction in government support for funding

47%

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31%

22%

20%

20%

40%

45%

43%

46%

38%

17%

36%

20%

38%

Fig. 8How would you rate the following as threats to infrastructure developments?


Fig. 7Which of the following types of infrastructure do you expect to offer the strongest growth opportunity in the next five years?

Question 10 Table 56

20%

27%

34%

21%

43%

63%

Health facilities

Rail

Roads

Water

Power

Renewables

0 20 40 60 80 100

Equity

US$ bn

Bonds Loans Government/multilateral support

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Threats to global infrastructure“In the developed nations, government funding has decreased and financial restrictions have impacted on our ability to move projects forward.”

This statement by one of our survey participants sums up the threats to global infrastructure projects and is supported by our findings: 47% of our survey participants feel that a lack of funding is a serious or very serious threat, followed by government interference (45%) and a reduction in government support for funding (44%), as outlined in Fig. 8. Economic instability was also considered a serious or very serious threat by 43%, with regulatory costs perceived to be less of a concern at 20%.

Government support is also considered vital. Our participants felt that political commitment should extend to active strategies to encourage investment, such as greater tax incentives, to encourage capital markets to return to investing in infrastructure projects. In many cases, participants felt that the reduction in public funding would see the role of government shift from project funder to project initiator, with a much greater reliance placed on the private sector for funding.

Fig. 9Sources of funding (2005-2010)

Our experts’ views on the impact of the economic crisis varied widely. Pessimists expect funding to be severely diminished or stopped entirely over the next four to five years, while others point out that, although concerns about the availability of funding and PPP and PFI were valid, money can still be found for the right projects. Either way, the heightened scrutiny and prioritisation of infrastructure is expected to mean that only the strongest bankable projects attract funding.


The expectation that governments will play a smaller part in funding infrastructure investment is not reflected in current data for government funding. Although the value of infrastructure deals closed has fallen since H2 2007, the proportion of this funded by government or international agencies has actually increased - from less than 2% in 2007, to nearly 18% in H1 2010, with some volatility in the intervening period (see Fig. 9). If anything, this data suggests government investment in infrastructure now, as a result of current stimulus packages, plays a much more important role in infrastructure deals.

Equity investment has remained relatively stable as a proportion of the value of infrastructure deals over this time period, although falling in absolute terms (although it has increased as a proportion since H1 2005). Bond funding has declined severely since H2 2007 from nearly 11% (US$17.5 bn) to only 2.4% (US$2.4 bn) in H1 2010 due to the collapse of the monoline bond insurance market. Loans continue to make up the lion’s share of infrastructure funding, despite a decline. This source of funding represented over 69% (US$114.7 bn) in H2 2007 and only 62% (US$62 bn) in H1 2010. So although government funding has increased through stimulus activities, the availability of loans (likely to be the significant component of a deal capital structure) continues to be an extremely important factor in infrastructure financing.

Inevitably, our experts had diverging views on who was to blame for funding shortfalls, but clearly the banks were a major target for criticism. Infrastructure developers regularly criticised the banks for not providing the type of long-term financing needed for infrastructure projects, and for major increases in lending rates and the time taken to finalise finance deals.

On the other hand, bankers argue that the new lending terms are born of necessity, with credit for infrastructure projects in the past often offered at rates that were not commercially viable due to the cost of long-term funding to banks, or which did not accurately reflect the risk involved.

With many banks recovering from the worst effects of the financial crisis, efforts to restore the banking sector’s liquidity position is clearly impacting on its appetite for risk and long-term lending. In fact, restrictions on the availability and cost of long-term capital may even be worsened by the implementation of the Basel III banking reforms, if only while banks implement new capital requirements or reduce their assets to match their Tier 1 capital.


In developed nations, government funding has decreased and financial restrictions have impacted on our ability to move projects forwardAssociate Director, Transportation Sector


Cuts versus selective austerity“Politics is everything in infrastructure - if you don’t have political will to get something done then it doesn’t get done,” noted one participant. This view neatly sums up a general feeling that governments’ commitment to infrastructure projects will be critical over the coming years, and a core driver for economic growth. Government cutbacks are clearly generating concern and there is consensus that new structures will need to be created to fill the funding vacuum.

The global nature of the infrastructure sector is expected to help lessen the impact of country-specific downturns where access to project finance has been significantly reduced. In fact, our participants considered infrastructure to be a very resilient asset. Even during the worst days of the crisis, most felt that the sector had been able to “hold its own” with relatively few examples of defaults or provisions for losses across infrastructure holding portfolios. Many participants even indicated that they have experienced an upturn in demand for projects and were enthusiastic about the prospects for infrastructure projects promoting long-term economic growth.

Overall, participants believe that governments and policy makers recognise the importance of infrastructure as a catalyst for wider economic growth, and some expect governments to show restraint when cutting funding for infrastructure projects for this reason. This is apparent in the recent UK CSR that was received by the infrastructure sector positively.

Participants also feel that the restrictive conditions brought about by the crisis are showing signs of improving, with a number saying that they are seeing the capital markets reopen for business in relation to infrastructure. One notable exception is the UK, where many participants expressed concerns about the Government’s commitment to PPP and PFI in its current state, as illustrated by the report on page 33.

Conversely, commitments to drive growth through infrastructure given by the G20 nations were not expected to have a major impact on encouraging new development. Just 15% of participants believe that the G20 commitment will have a significant or very significant impact, compared to 45% who believe that it will have little or no impact and 37% who expect it to have only a marginal impact (as seen in Fig. 10).

There is less availability of finance. Margins have increased and covenants have tightened. Banks are willing to commit to less amounts of debtHead of Global Infrastructure, Advisory Sector


Despite general confidence in infrastructure’s ability to withstand the impact of government austerity measures, some participants said that they have experienced projects being mothballed or reduced in scale. Participants cited Central and Eastern Europe road-building projects that have scaled back or postponed, Middle Eastern states whose university expansion plans have been delayed due to shortages of affordable long-term funding, and projects cancelled in the UK, such as the Defence Training Review.

However, contrary to the common fear that government cuts are likely to have serious negative effects on infrastructure projects, some participants pointed out that PPP and PFI opportunities have actually proved resistant to fiscal tightening by governments during previous recessions. Although this depends on the nature of particular projects, the opportunity for private sector investors to absorb a greater share of infrastructure projects is likely to appeal to some investors.

FundingWith 47% of participants in our survey agreeing that a lack of funding was a serious or very serious threat, the difficulties in accessing adequate long-term funding and finding appropriate funding structures are clearly a major barrier to investment.

Although our experts expressed a feeling of cautious optimism about the future, all had experienced the consequences of the credit crunch on project finance and expected it to have a lasting impact on infrastructure funding, with both banks and governments limiting the capital available for major projects. Banks are not only more reluctant to lend but the terms on which they are happy to lend are increasingly restrictive, in conditions of funds, ticket size and pricing. As another of our participants commented: “The main impact of the crisis has been significant increases in banks’ margins and a reduction in the loan duration. Before they would lend for 25 years and now it is five to seven years - this has made it very challenging to push through big deals.”

The reduced number of deals and the relatively slow rate at which companies are receiving business proposals or investment offers is also having a major impact on the market. 35% of our participants felt that the lack of deal flow or trades represents the biggest obstacle to greater private finance investment into infrastructure. This suggests that, while there is an appetite for private finance investment in infrastructure, the current market conditions are not offering the right opportunities.

Question 8 Table 51

6. Very signi�cant impact

5. Signi�cant impact

4. Some impact

3. Little impact

2. No impact

1. Don't know

1%

37%

39%

6%3%

14%612

3

4

5

Fig. 10At a global level, what impact do you expect the G20s commitment to help encourage economic development through developing infrastructure to have?


5HM Treasury/ONS, Financing PFI projects in the credit crisis and the Treasury’s response, July 2010

Difficulties in accessing funding and general sluggishness in the market were not the only reasons for concern. Other major obstacles cited included the lack of return on investment (27%), a lack of liquidity (20%), and the complexities inherent in deals (16%) as illustrated in Fig. 11. This suggests that, as governments seek to encourage greater private investment into infrastructure, they may need to adapt existing PPP/PFI structures to simplify the bidding process and to ensure that investors receive a higher return. The responses to our qualitative interviews support this with participants saying that when investment opportunities came as part of a programme of significant size, investors were able to achieve economies of scale making projects a much more attractive prospect.

Another factor that is having a massive impact on investors’ returns is the increased cost of finance. Our experts’ views are consistent with observations made by HM Treasury, which estimated that the total interest cost of bank finance increased from one-fifth to one-third as a result of the credit crisis. The ONS observed that: “In the 35 projects agreed after the establishment of The Infrastructure Finance Unit, we found that the part of the cost relating to loan margins on PFI deals, which had been 1% or less, widened significantly to around 2.5% on average.

Some, for example, the complex Greater Manchester Waste project, will rise to more than 3% in stages over the project life. The increased loan margins resulted in substantial increases to the cost of finance…These increases occurred despite the fall in short-term borrowing rates and little change in the intrinsic risk profile of projects.” 5

Under the circumstances, many are looking to governments to ease the gridlock threatening infrastructure projects by offering incentives such as tax breaks and redefining transactional risk/return models with structural concessions.

Good performers / bad performersWhile many of our experts have serious concerns about future funding and supply lines for new projects, the long-term nature of infrastructure projects, the stability offered by regulation in many sectors, and the essential nature of infrastructure, is felt to have contributed to the sector’s resilience. Long-term funding structures put in place for ongoing projects have clearly played a significant part in protecting infrastructure against the volatility of other markets.

Fig. 11Which of the following represent the main obstacles to encouraging greater private finance investment into infrastructure?

Lack

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“Not racy – but reliable”. This was our experts’ take on infrastructure’s recent performance. In their view, the success of an infrastructure project is judged on the project performing as expected, rather than exceeding return expectations. If a project has been built to budget, on schedule and generates an appropriate revenue stream then it has been successful.

In the UK, social infrastructure has experienced the biggest growth over recent years. The previous government’s Building Schools for the Future (BSF) initiative, which aimed to rebuild or renew nearly every secondary school in England, was cited as an illustrative example. However, the cancellation of this £55 bn project, and the 715 projects attached to it, demonstrates the serious impact of government expenditure reviews. Such projects have benefited from being both politically popular and economically beneficial but now face a precarious future.

Rail has also been a strongly performing sector in recent years. In this case, decades of underinvestment generated the need for a range of substantial, urgent projects. Telecommunications infrastructure has also generally exceeded expectations due to the relatively small capital outlay required and the potential for high returns.

Projects in fields that rely on high volumes of use, rather than an underpinned concession or availability backed structure, have not performed as well due to overarching GDP declines. Toll roads, bridges, tunnels and airports have all been hit. Investors’ experiences with toll roads and airports was cited as a key reason why projects based on the availability of regular onward payments from governments, rather than user demand, were generally seen as better prospects for stable returns. The performance of these sectors was also felt to have been adversely affected by a political bias towards investment in alternative forms of public transport.

Infrastructure has survived the recession amazingly well. We are still in for a tough time but we have seen the edge of Armageddon and are still hereManaging Director, Ratings Agency

Cost of infrastructure in the UK is probably the highest in the world - I know major organisations who refer to it as ‘treasure island’Expert, Construction industry


The need for greater liquidity

Section two: Outlook for UK infrastructure

Facts and figures

Renewables are seen as the most attractive type of infrastructure in which to invest in the UK (24%) followed by power (20%), road (7%), rail (7%), schools (6%) and health facilities (5%).

59% believe PPP/PFI is important or very important in helping to stimulate demand for UK infrastructure development, compared to 13% who consider it only marginally important or not at all important.

70% of our experts believe the availability of credit will be the main factor determining the outlook for UK infrastructure investment over the next five years.

The UK was rated the most attractive region for infrastructure investment, with over half (52%) of respondents calling it ‘attractive’ or ‘very attractive.’

43% believe infrastructure prospects have worsened in the UK since 2007.


y A “reboot” of the planning system, to encourage sustainable development of new infrastructure; and

y A full government response to the Penfold Review on non-planning consents and the recommendation made in this report for simplifying planning and consents processes.

A separate government review, supported by external experts, will also consider extending the use of the regulatory asset base model for funding infrastructure. Other commitments outlined in the plan include: providing new borrowing powers to enable authorities to carry out Tax Increment Funding; targeted interventions in specific markets, such as the introduction of Feed-In Tariffs and the Renewable Heat Incentive to encourage energy efficiency; £1 bn of funding for a Green Investment Bank; and plans to establish a Regional Growth Fund (RGF), with this particular initiative now extended to three years and increased in size from £1 bn to £1.4 bn.

A NIP in the airOur report closely follows Prime Minister David Cameron’s announcement of the UK’s first ever National Infrastructure Plan, identifying the scale of the infrastructure challenge and the major economic investment needed to underpin sustainable growth in the UK over the coming decades. The plan outlines how and where the government plans to redevelop UK infrastructure and details its proposals for unlocking £200 bn worth of public and private sector investment up to 2015.

Reflecting the major concerns identified by our experts, these plans focus heavily on encouraging investment into infrastructure from new sources. The plan sets out four key measures intended to ease project funding and delivery and encourage increased private sector investment:

y Moves to fast-track projects through a newly-established Major Infrastructure Planning Unit, to replace the Infrastructure Planning Commission;

y Consultations on National Policy Statements for major sectors such as energy production;

Reflecting our experts’ concerns relating to the effectiveness of current PPP/PFI models, the reforms incorporate changes to existing regulatory structures designed to improve the operation of government-funded infrastructure projects. These changes include:

y Reviews of Ofgem and Ofwat by the Department of Energy and Climate Change and the Department for Environment, Food and Rural Affairs respectively, to complement reviews into how these agencies approach price-setting in these sectors;

y The planned publication of a common set of principles for economic regulation by the Department for Business, Innovation and Skills; and

y A cross-departmental review of competition and consumer outcomes, in the context of wider reforms of competition and consumer bodies.

It is certainly positive that so many of these announcements appear to directly address our experts’ concerns, as outlined in this section. However, the real test remains whether these measures improve the delivery of effective, timely and value for money infrastructure projects in the UK.

Health facilities

Schools

Housing

Prisons

Defence and security

Rail

Road

Airports

Ports

Water

Telecom networks

Power

Renewables

5%6%

0%2%

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PPP/PFIReduction of regulatory costs

Improvements to planning laws

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Fig. 12What is the most attractive type of infrastructure in UK?

Fig. 13How do you rate the following as main drivers for investment in UK infrastructure over the next five years?


Prospects for UK infrastructureWhile our survey uncovered a generally optimistic view of the global infrastructure market, the prospects for the sector in the UK look poor. Interviewees were pessimistic: 43% believe prospects have worsened since 2007, compared to just 17% who believe they have improved. The main problem in the UK market is access to capital, with many of our experts believing that UK banks remain excessively risk averse, while public funding has been cut drastically.

There is a feeling, however, that project funding and structures can be adapted to work more effectively in the new economic climate. The expectation is that the private sector will assume more responsibility for originating projects, with the government developing into the role of ‘positive enabler’.

A reduction in bureaucracy, including a cut in the number of agencies involved in PPP/PFI, and an improved dialogue between the public and private sectors, were among other suggestions for securing the sector’s future. As summed up by one expert in the construction industry: “Cost of infrastructure in the UK is probably the highest in the world - I know major organisations who refer to it as ‘treasure island’. We have a fragmented supply chain, dominated by engineering consultants.

Project financing needs to create a new era by reducing the unhelpful bureaucracy and reducing the cost of capital for investors.”

UK opportunitiesThe view that renewables, power and transport are major growth prospects internationally is supported by our experts’ views on UK infrastructure opportunities. As outlined in Fig. 12, 24% consider renewables to be the most attractive investment prospect in the UK, followed by power (20%), rail and road (both 7%), schools (6%), health facilities (5%), water (4%), prisons (2%), and defence/security and airports (both 1%). The privatisation of state assets, the expansion of nuclear and renewable energy production, transport, recycling and energy-from-waste all stand out as the main growth sectors.

Although investors clearly still see opportunities in the market, the availability of credit remains the critical factor determining new infrastructure developments in the UK. An overwhelming majority of our experts (70%) believe that the availability of credit will remain the main driver over the next five years. Similarly, new sources of funding were considered important or very important by 59%, as outlined in Fig. 13.


Fig. 14Likely minimum level of infrastructure investment required in Britain by 2020

Sector Requirement Cost (£ bn)

Energy Replacement requirement 42

Energy Investment in the networks 65

Energy Renewables 136

Energy Energy efficiency 21

Transport Rail networks and high speed lines 69

Transport London transport 32

Transport Road 9

Transport Air transport 10

Communications Nationwide roll-out of Fibre to the Cabinet/Very High Speed DSL (FTTC/VDSL) 5

Water Water and sewerage networks 37

Water Flood and coastal defences 8

TOTAL 434

Source: Delivering a 21st Century Infrastructure for Britain, Dieter Helm, James Wardlaw and Ben Caldecott, Policy Exchange, 2009


These figures also correspond with other recent research into the likely minimal investment in UK infrastructure over the next decade. Figures produced by the UK public policy think tank Policy Exchange estimate this figure could be as high as £434 bn in the years up to 2020, with renewables (£136 bn) and rail networks (£69 bn) standing out as the two largest areas requiring new investment6 (see Fig. 14).

The future of the PPP/PFI modelWhen our experts were asked about the relative attractiveness of countries included in our survey, the UK came out top of the league table for infrastructure projects. The availability of PPP/PFI was clearly felt to have a significant impact by enabling private business ventures to be funded and operated in partnership with government.

As one of our experts remarked: “The UK is the most predictable regime for doing PFI work. It is standardised, with the same approach and documents – it can take a long time but you know what you are going to get and when you are going to get it. The UK is the absolute leader when it comes to PFI.”

PPP/PFI certainly plays a key part in the delivery of many successful projects in the UK, but that doesn’t mean that there isn’t room for further improvement to be made to the model. There are calls for amendments in project structures to reflect the new constraints on government expenditure. For example, our experts suggested that, in the future, private sector partners should play a much greater role at the ‘front end’ (ie procurement stages) of infrastructure projects, in originating the terms and outcomes for projects, with the government taking the role of ‘a positive enabler’.

Other critics of the current system hold the view that PPP/PFI has become over-engineered and over-bureaucratic. In particular, they want to see improvements to the procurement process, which is considered to be too lengthy, involve too many advisers, and too costly for all parties concerned. Most importantly, the government is called on to work more closely with the private sector in developing changes in policy that will encourage smoother working of PPP/PFI models. Experts see government action as the key to improvements in both project structure and generating increased funding.

6. Very important

15%3% 3%

20%

39%

25%

5. Important

4. Neutral

3. Little importance

2. Not important

1. Don't know

123

4

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Fig. 15How important are PPP and PFI in helping to stimulate demand for UK infrastructure development?

6Delivering a 21st Century Infrastructure for Britain, Dieter Helm, James Wardlaw and Ben Caldecott, Policy Exchange, 2009


Although PPP/PFI cannot solve the problem of availability of credit and project funding, it is nevertheless expected to remain a key factor in helping to stimulate demand for UK infrastructure development. Although a small percentage of our survey participants felt that the role of PPP/PFI is overstated, the majority view (59%) remains that PPP/PFI is important or very important (see Fig. 15).

TIF in the UK?We also asked our expert panel about the prospects for Tax Increment Funding in the UK. TIF is a scheme which allows councils to borrow more, against anticipated increases in business rates expected to arise from improved infrastructure in a particular area. A great success in the US, recent announcements by the UK government (most recently in the Comprehensive Spending Review) suggest that TIF may be implemented as soon as 2013.

Although most participants were unaware of, or did not feel able to comment on, the potential application of TIF policies as a stimulus for UK infrastructure, some experts believed this was an innovative solution and certainly worth exploring.

The UK is the most predictable regime for doing PFI work. It is standardised, with the same approach and documents - it can take a long time but you know what you are going to get and when you are going to get it. The UK is the absolute leader when it comes to PFIChairman, Fund Management Sector

They explained that, if the TIF scheme could encourage pension funds to make long-term investments in council’s infrastructure projects, this could effectively marry the needs of infrastructure projects with that of pension funds given the long-term nature of both. Others suggested that the tariff-style nature of TIFs may represent a practical new approach to generating income for projects.

One concern raised was that, if the public sector leads in raising debt, public perception may be that the risks to the taxpayer may ultimately be too great to take on.

With plans announced to implement TIF in the UK in the October Comprehensive Spending Review, interest in TIF will increase. Further details are expected in a forthcoming White Paper on local growth, which is also likely to look at other options for improving procurement and PPP/PFI processes. Though the government has introduced these plans in an effort to build on measures already taken to improve the delivery of PPP/PFI projects, including reductions in the number of regulatory bodies and expanding local authorities’ powers of competence, the likely impact of these changes remains unclear at this time.

Threats to UK infrastructureThe single overriding concern for UK infrastructure development is lack of access to capital. Most of our expert panel held the view that prospects for infrastructure development in the UK have worsened. Our research indicates 43% believe prospects have worsened since 2007, compared to only 17% who believe that prospects have improved.

Follow the money – UK infrastructure post CSRDetails announced in the Chancellor’s Comprehensive Spending Review clearly fit with our experts’ views on transport, power and renewables as key growth sectors. As Fig. 16 shows, efforts to address the UK’s structural deficit have not led to the mass cancellation of road, rail, and bridge-building projects. Significant examples of continued rail investment include Network Rail, Great Western Main Line services, Crossrail, continued upgrades for London Underground, and new high-speed rail links between London, Birmingham, Manchester and Leeds.

Reflecting the government’s commitment to reducing UK carbon emissions, the CSR also demonstrated support for new investment in low carbon technologies.

New carbon capture and storage developments, offshore wind plants, and plans for new electric car charging infrastructure fall within a £5.6 bn plan for new renewable energy installations. Consistent with experts’ expectations, revenue from the sale of government-owned assets will also be used to help capitalise a Green Investment Bank.

While the CSR may have confounded some pessimists’ worst expectations for project funding, new proposals are also likely to change processes for procurement and project delivery. Efforts to decentralise procurement and delivery processes, increase scrutiny in approval processes, and better coordinate relationships between government agencies and infrastructure developers, are all likely to be welcomed in theory.

The test will be whether these measures will have a significant positive impact in the years ahead.

Changing funding patterns With access to funding the number one issue, it is hardly surprising that the UK banks are being criticised for the constraints on funding in relation to the projects they will fund and support.

Club deals are becoming increasingly common, where a number of funders participate in the debt. The withdrawal of the monoline bond insurers has forced infrastructure developers to seek new finance structures.

For example, the widening of the UK’s M25 motorway was cited as an example of a well structured project, where over 15 commercial banks and the European Investment Bank (EIB) were required to obtain the agreed funding commitment on a club basis for approximately £1 bn, reflecting the lack of a syndicated bank debt market to underwrite the commitments and provide the long-term funding so critical to financing infrastructure projects. Infrastructure developers are also experiencing much more cumbersome processes for arranging finance, making project setup more time-consuming and costly. In some cases they are being expected to accept increased risks to their equity return when uncertainty in the banking market is making refinancing deals more uncertain. Although some of our experts were positive, suggesting that conditions are starting to improve again, the general view is that deals remain difficult to fund and are taking much longer to arrange.


Fig. 16Regional examples of capital projects

North WestManchester – northern urban centres rail capacity improvementsMersey Gateway Bridge – new suspension bridge over the River Mersey between Widnes and RuncornCumbria – superfast broadband pilot project and West Cumberland hospital redevelopmentLancashire – Royal Oldham hospital redevelopment and Typhoon fast jet construction

ScotlandRail and Roads – devolved to the Scottish ExecutiveHM Naval base Clyde – home of the UK’s submarine fleet including the Astute class submarines and the Deterrent submarinesGlasgow and Rosyth – partial construction of the aircraft carriersHighlands and Islands – superfast broadband pilot project

North EastEast Coast – improvements to the East Coast Main LineNexus – refurbish and upgrade the Tyne & Wear metroTees Valley – bus network enhancements

Yorkshire & the HumberM62 – hard shoulder running and variable speed limits between junctions 25 and 30Leeds Station – new southern entrance to improve accessYorkshire – northern urban centres rail capacity improvementsSheffield to St Pancras – line speed improvementsNorthern Yorkshire – superfast broadband pilot projectBoston Spa – British Library Newspaper archive

East MidlandsA46 – improvements between Newark and WidmerpoolM1/M6 viaduct – replacement of failing Catthorpeviaduct carrying the M6 over the M1 at Junction 19M1 – hard shoulder running and variable speed limitsbetween Junctions 28 and 31Nottingham re-signalling – improved performancefor train services operating through Nottingham

East of EnglandA11 – upgrading the remaining section to provide a continuous dual carriageway link between Norwich & the M11M1 – hard shoulder running and variable speed limits between Junctions 10 and 13A130/A13 Sadler’s Farm Junction – improved access within the Thames Gateway

Northern IrelandMost public spending on capital is devolved and it is for the Northern Ireland Executive to decide which projects to prioritise

WalesRoad – devolved to the Welsh Assembly GovernmentBroughton – continued construction of the wings of the FutureStrategic Tanker AircraftNewport and Cardiff – major rail signalling renewal programmeBarry to Cardiff corridor – increased line speeds and network

West MidlandsHS2 – new high speed rail link from London to Birmingham, and then to both Manchester and LeedsMidland Metro – route extension and capacity increaseBirmingham New Street – station upgradeHerefordshire – superfast broadband pilot project

South WestM4/M5 – hard shoulder running and variable speed limits north of BristolYeovil – support to Agusta Westland for civil rotorcraft design and manufactureWeymouth 2012 package – an integrated transport package to be delivered in time for the OlympicsPoole Bridge – new bridge providing link to key development sites

South EastA23 – improvements to the A23 Trunk Road between Handcross and WarninglidDiamond Synchrotron – Phase 3 development of the national science research facilitySurrey – St Helier hospital redevelopment

LondonCrossrail – a new rail line linking East and West London providing an additional 10% to London’s rail capacityTransport for London – continued funding will help support the London Underground upgrade programme which will increase capacity by 30%UK Centre for Medical Research and InnovationM25 – widening from junctions 16 to 25, and 27 to 30

Source: HM Treasury Spending Review 2010.


The government is not supportive or not engaging enough with the core capital markets players. The government needs to be more open-minded and engaged with this issue... to ensure deals are capital market-driven and encourage greater competition in the capital marketsManaging Director, Ratings Agency

Suggested improvements include: y Reducing the number of

public sector agencies involved in PPP/PFI projects

y Introducing measures to address the perceived lack of trust between private and public sector partners

y Increasing procurement expertise in the public sector

y Reducing bureaucracy and standardising processes as much as possible

y Increasing the public sector’s awareness of the commercial drivers that facilitate investment

y Easing regulatory requirements

The main change in arranging finance has been the unwillingness of banks to lend long-term to infrastructure projects. No one has any money, and if they have, they are unwilling to lend itInfrastructure Specialist, Advisory Sector

One participant commented that government-owned banks are among the most willing lenders for infrastructure projects. He added that banks’ differing appetites for infrastructure lending has also led to distortions in the market, with some banks willing to lend substantial sums over long terms while others are unwilling to lend even small sums and have introduced unrealistically short time frames for repayment. Even where banks are willing to lend, their risk aversion is expressed tangibly in the higher costs of borrowing.

Public and private sector cooperationAlthough PPP/PFI processes in the UK were generally seen as a strength in this market, our interviews with both public and private sector infrastructure specialists revealed some of the tensions between these two parties to PPP/PFI.

Cultural differences between the public and private sectors were cited as a source of friction, including misunderstandings about the processes, expectations and agreed outcomes.

Private sector participants raised the issue of the large number and diversity of government agencies that private sector contractors have to engage with, and the relative lack of expertise in procurement that they had encountered. Some participants suggested that private sector operators, meanwhile, can fail to understand the drivers and objectives of their public sector counterparts.


The countries in which it is more difficult are usually those with political unrest... That political risk is usually one of the biggest issuesAssociate Director – Transportation, Corporate Finance Sector


Power and roads

Section three: International comparisons

Facts and figures

Respondents consider the UK (52%) and the US (49%) the most attractive destinations for investment in infrastructure. Following closely behind were China (46%), Western Europe (45%) and India (45%). Russia (16%) and Africa (15%).

There is a striking difference when it comes to which regions are considered best at delivering infrastructure projects. Western Europe (58%) is rated highest, followed by the UK (52%) and the US (28%). No other region rated more than 15%.

Power is seen as a key sector for investment in all regions, with the highest proportion in China (27%), and the lowest proportion in the US (10%).

Interest in the road sector is less evenly spread: this sector is seen as most attractive in the US (33%) and in CEE (37%), but few people see it as the most attractive investment opportunity in the UK, China or the Middle East.

Renewable energy is only considered a significantly attractive investment in developed regions (the UK, US and Western Europe).


Which regions are considered attractive for infrastructure investment? As might be expected, one of the most striking contrasts internationally is the attitude of potential investors in infrastructure towards different regions.

Respondents to our quantitative survey still consider the UK and the US the most attractive destinations for investment in infrastructure - 52% rated the UK as either attractive or very attractive and 49% rated the US in the same way.

74% of our respondents said they had already been involved significantly in UK infrastructure projects, and this might be one reason for the UK’s high attractiveness rating in our survey. However, interestingly, only 19% of respondents said they had been involved in US projects. The high rating given to the US is therefore particularly striking.

Following the UK and the US in the rankings were China, Western Europe, and India, all with comparable scores (46%, 45% and 45% respectively rating these regions attractive or very attractive). Again, the perceived attractiveness of these regions does not correspond directly to where our respondents are doing business. While a large proportion of our respondents (52%) said that they had been significantly involved in Western European projects, only 21% said the same about India and only 16% were already involved in China.

At the lower end of the table came the Middle East (still rated attractive or very attractive by 35% of respondents), Central and Eastern Europe (26%), Russia (16%) and Africa (15%) (Fig. 17). The relatively low score for CEE is perhaps surprising, given that many countries in this region are members of the European Union, although our CEE category is deemed significantly more attractive than Russia by potential investors.

Fig. 17Global infrastructure league table (ranked based on attractiveness of country/ region for infrastructure developments)

Country Attractiveness

1. UK 52%

2. US3. China4. India= Western

Europe6. Brazil

49%46%45%45%

41%

7. Middle East8. CEE9. Russia

35%26%16%

10. Africa 15%


Forward popularity v recent investment flowsAn analysis of the value of deals closed across the different global regions shows wide disparities in actual investment patterns since 2005 (Fig. 18). Western Europe is the clear global leader for infrastructure investment, with deals closed exceeding all other regions by value in every year during this period.

The pattern for Western Europe, however, reflects the pattern seen globally: infrastructure deals peaked at over US$100 bn in 2007 and then declined rapidly. Although total value was reduced but still relatively high in 2008, it dropped to just US$46.5 bn in 2009. Now a recovery appears to be underway, with the value of infrastructure deals in the first half of 2010 already nearly three-quarters of the total value for 2009. This is supported by the views of our respondents, who rate the UK and Western Europe highly in terms of attractiveness for infrastructure investment and consider it to be the best region in which to arrange and deliver infrastructure projects (see Fig. 17).

A similar pattern is evident for Africa, the Middle East and Latin America, although these regions did not experience a similarly strong recovery in H1 2010. The value of infrastructure deals closed in H1 2010, as a proportion of those closed for the whole of 2009, amounts to just 15% in Africa and the Middle East and 22% in Latin America.

Asia Pacific and Eastern Europe seem to follow a slightly different pattern, where the total value of deals in 2008 significantly exceeded that in 2007, despite the onset of the financial crisis in the developed world. There was still a significant decline in 2009 (proportionally greater in Asia Pacific than in Eastern Europe), yet the value of deals closed in H1 2010 already exceeds the total figure for 2009 in both regions, showing an extremely strong recovery in infrastructure investment.

These figures are in contrast with our survey participants’ ratings. While China is seen as an extremely attractive region for investment, Central and Eastern Europe was much further down the league table. In contrast, India is considered extremely attractive by our respondents, although investment in the region has not yet shown signs of a marked recovery: infrastructure deals closed in the Indian subcontinent in H1 2010 amounted to just 7% of the total figure for 2009.

Also surprising is the relatively low level of infrastructure investment in North America compared to Western Europe, given that our respondents rated it the second most attractive region for investment. The value of deals closed in North America has increased but at a much lower level than in Western Europe.


Fig. 18Investment by type of infrastructure (2007 – 2010)

0

20,000

40,000

60,000

80,000

100,000

Value, US$ m

Water &Sewage

TransportTelecomsSocialInfrastructure


2005 20062007 20082009 H1 2010

0

50

100

150

200

250

2005 20062007 20082009 H1 2010

Number of deals

Water &sewage

TransportTelecomsSocialinfrastructure




International preferences Respondents’ feedback to the question of which regions are considered the best in relation to arranging and delivering infrastructure projects was striking: Western Europe is rated the highest at 58%, followed by the UK at 52% and the US at 28%, but all other regions were rated at below 15%. This indicates that some regions - notably China, India and Brazil - would be even more attractive to investors if difficulties in arranging and delivering projects in those regions were to be reduced.

Our qualitative interviews gave a much more detailed picture. While the UK is still rated the most attractive region overall, and respondents praised its stable framework for infrastructure projects, they also highlighted a number of particular challenges facing investors in the UK. One of these, not surprisingly, is a lack of privately sourced finance (whether debt or equity), although this is seen as an issue which will be rectified eventually and which, therefore, does not affect the view of the UK being an attractive prospect in the longer term. Another fundamental problem cited by a number of respondents is the state of the UK’s public finances, which is expected to make obtaining public finance for projects much more difficult.

The qualitative survey also allowed us to explore views about Western Europe more fully, where, in fact, there was a wide disparity in perceptions. Unsurprisingly, Northern European countries are seen as more attractive due to their reputation, track record in projects and stable legal frameworks. Investors have less confidence in Southern Europe, but there was no single reason for this. Italy was criticised for its excessive bureaucracy and lengthy decision-making, while the Spanish government came under fire for its history of retroactive and unpredictable decisions. Respondents did, however, point out some of the strengths of Southern European countries - one expert, for instance, noted that infrastructure deals in Spain and Portugal tend to be completed much more quickly than those in the UK.

Our interviewees also expressed mixed feelings about the US. Some respondents praised the quick decision-making and availability of finance. But despite the high rating it received for attractiveness overall, there were also criticisms of the fragmented nature of the country, lack of political risks and the difficulty of working across states’ varying legal regimes.

Respondents put forward a surprising variety of opinions on the major growth areas of China, India and Brazil. Many consider their regimes bureaucratic and took the view that there was too high a degree of political risk to make these countries attractive prospects in the short term. Others praise the “vision” and “leadership” of these countries - particularly China, and the abundance of finance available for infrastructure. There seems little doubt that, as their systems and processes for infrastructure projects become more efficient, and if fears about political risk can be allayed, these areas are likely to grow in attractiveness to potential investors.

Concerns were also expressed by our survey participants about Russia, although there is already an awareness in the Russian market that changes need to be made. For the last few years there has been active discussion in Russia about how to create a suitable environment for implementing infrastructure projects. Recently, amendments have even been introduced into the legislation on concession agreements in order to eliminate certain legislative barriers to implementing concession projects relating to municipal infrastructure systems and other municipal facilities, as well as to protect the interests of creditors financing these projects.


An attempt was also made to provide concessionaires and their creditors with guarantees in relation to setting of prices (tariffs) and (or) markups to these. Even so, on the whole, the legislative framework for guarantees relating to investment in infrastructure projects in Russia is still in need of further improvement. Again, if these problems can be tackled, then it is likely that Russia will become a much more attractive prospect for investors.

Preferences for different sectors in different regionsAnother important question in our quantitative survey was which are the most attractive infrastructure projects to invest in across different global regions? On average, across all regions, the road transport and power sectors proved by far the most popular. However, there were a number of important regional differences.

Power is seen as a key sector for investment in all regions, with the lowest proportion of respondents identifying this sector in the US (10%) and the highest in China (27%). However, interest in the road transport sector is less evenly spread: this area is seen as most attractive in the US (33%) and in CEE (37%), but few people see it as the most attractive investment opportunity in the UK, China or the Middle East. Rail is a slightly more popular choice in Western Europe, China and the Middle East than in other regions.

In the UK investors’ preferences are spread more evenly across different infrastructure sectors than in other regions - perhaps due to the fact that many of our respondents said they had already had significant involvement in UK infrastructure projects. The UK is also the only region where waste management is seen as a significant investment opportunity, with 9% of respondents favouring this sector.

Renewable or low carbon energy is only considered to be an attractive investment in more developed regions (the UK, US and Western Europe). In fact, the UK and Western Europe are far ahead of the US in this respect, with twice as many respondents identifying renewables as the most attractive infrastructure sector in the UK than in the US. Although there is a small amount of interest in this sector across CEE and the Middle East, this is far behind the levels seen in the UK, US and Western Europe.

The Middle East and Africa stand out as the only regions where water infrastructure was seen as one of the most attractive investment opportunities - the Middle East much more so than Africa, with 17% of respondents saying it is the most attractive opportunity in that region, compared to 10% in Africa and below 5% in all other regions.

58% rated Western Europe as the best region in relation to arranging and delivering infrastructure projects

Funds are desperate for assets and there aren’t enough of them. I have come from a pension fund today and they cannot get enough infrastructureManaging Director, Corporate Finance Specialist


More assistance needed

Section four: Building blocks for growth

Facts and figures

Political stability is the primary concern when deciding whether to take on an infrastructure project. 84% of respondents rate this factor either important or very important.

Openness to foreign investment and the level of transparency and corruption in a country are further factors affecting investment decisions (74% and 73% respectively). Availability of PPP/PFI arrangements (44%), tax incentives (32%) and the local labour market (22%) were rated less important factors overall, though they were still considered significant.

When asked what government could do to reinvigorate the capital markets towards infrastructure investment, 66% believe the most effective policies would be those aimed at promoting infrastructure, as opposed to any policies directly affecting the capital markets themselves.

75% believe infrastructure is undervalued by investment managers.

34% believe ratings agencies have either correctly assessed or understated the risk of infrastructure projects, compared to 31% who believe risk has been overstated.

70% see positive or very positive prospects for long-term infrastructure bonds over the next five years. 85% believe investment inflows into infrastructure will increase, with only 9% expecting them to decline.


What makes a particular country or region an attractive one in which to invest in infrastructure projects?Our panel of experts delivered a clear answer to this question (Fig. 19). Local political stability is their number one concern when deciding whether to become involved in an infrastructure project: 84% of respondents rate this as either important or very important. Next in importance among the factors affecting investment decisions are openness to foreign investment (74%) and the level of transparency and corruption in the country (73%). In comparison, the availability of PPP/PFI arrangements (44%), tax incentives (32%) and the local labour market (22%) are rated as less important, although they are still significant factors.

Fig. 19Risk factor league table (ranked based on importance of risk factors when considering developing infrastructure projects)

Risk factor Most important

1. Political stability 84%

2. Openness to foreign investment

3. Transparency/absence of corruption

74%

73%

4. Availability of PPP or PFI-type co-funding arrangements

5. Tax incentives

44%

32%

6. Vitality of local labour market

22%

Our qualitative findings broadly support this quantitative research, with political instability, lack of transparency and corruption among the most commonly cited risk factors. In addition, respondents mentioned:

y The stability and development, or ‘maturity’ of the legal system (and, within this, specific legal provision for PPP/PFI);

y Problems caused by the fragmentation of the legal system (specifically with regards to US states);

y Regulatory stability;

y Bureaucracy and the time taken to complete a deal;

y The reputation and track record, or ‘maturity’ of the government (and, within this, the credibility and stability of the procurement process);

y Sovereign credit ratings;

y Currency risk;

y Access to capital and development of financial markets;

y Deal flow.


Certain countries are associated with particular risk factors. Italy, for example, was criticised by a number of respondents for a level of bureaucracy that meant deals could take far too long to secure, while Spain was criticised for its inconsistent regulatory framework and reputation for unpredictable decision making.

Many respondents felt that the biggest factor in making a region attractive was simply having the right local knowledge, personnel or influence. In certain jurisdictions, having the right local staff on the ground is clearly of paramount importance.

Finally, fiscal stimulus plans and large-scale investment schemes could affect the attractiveness of some regions over others: those in the UK, Eurozone, US and China, in particular, were praised for having stimulated investment in those regions. Apart from improving deal flow, this bundling of projects into substantial programmes allowed contractors and investors to achieve economies of scale.

Impact of local policy – PPP/PFI and the regulatory frameworkGovernments can also make infrastructure investment in their countries more attractive by standardising and stabilising their regulatory and tax systems. The UK’s standardisation of its PFI contract terms (SoPC4), for example, was cited as a factor in making it attractive to investors.

“The UK is the most predictable regime for doing PFI work because it is all standardised and all the same approach and documents.” Chairman, Fund Management Sector

There was a difference of emphasis among interviewees, however, on the precise importance of PPP/PFI structures in persuading them to invest in infrastructure in a particular country. Some respondents were clear that credible PPP/PFI arrangements encouraged them to invest in a particular region, while the absence of ‘proper’ PPP/PFI regimes discouraged them.

“In certain jurisdictions it is more difficult to get projects done... where there are not proper PPP and PFI regimes.” Chairman, Fund Management Sector

Others, however, argued that the presence of PPP/PFI structures didn’t affect their decision to invest, even if they make things easier once the decision has been made.

78% believe that a good return on investment is the most important factor when assessing investment opportunities


Good level of return on initial investmentConcerns regarding

energy securityGovernment commitment

to e�ciency targetsRenewables seen as key

economic growth opportunity

Other (specify)

Don't know

43%

56%

63%

27%

3%

78%

Fig. 20Which of the following factors do you think are the most important in determining opportunities for investment in infrastructure developments relating to renewable energy?

Renewable energyWe also asked our respondents specifically how they assess investment opportunities in renewables (Fig. 20). Unsurprisingly, they report that a good return on investment was the most important factor, with 78% of respondents citing this as key.

Additionally, 63% say that the perception of renewables as a major growth opportunity in the destination region is an important factor, while 56% considered the relevant government’s commitment to efficiency targets as crucial.

This suggests governments can make investments in renewables more attractive by increasing the perception of a robust political commitment to the sector.

The problems cited by our respondents in relation to the Spanish renewables market are in stark contrast to the commitment needed.

FinanceWith the availability of finance clearly key to the success of projects, any measures that increase long-term funding from institutional investors is welcome. Our research uncovers clear opportunities for greater investment from this source, along with a desire for governments to work with industry to make private sector funding easier to obtain.

When asked what were the principal obstacles to greater private investment in infrastructure projects, over a third (35%) of respondents cited limited deal flow.

This suggests that there is a greater appetite for equity investment in infrastructure than there are actual opportunities for investment. As already noted, when investment opportunities come as part of a substantial programme, investors benefit from economies of scale. So greater deal flow may, therefore, even increase the attractiveness of individual investments.

After deal flow, 27% of respondents cite poor returns on investment and 16% view the complexity of deal execution as major obstacles to investment. As governments seek to encourage greater private investment into infrastructure (particularly in the UK), they may need to address the existing PPP/PFI structures, simplify the bidding process and ensure that investors can expect a higher return.


Fig. 21Which of the following factors do you think are the most important in determining opportunities for investment in infrastructure developments relating to renewable energy?

Factor Very effective

Greater tax incentives 84%

More effective regulation

73%

More disclosure 22%

Policies towards promotion of infrastructure

44%

Encouragement of retail investment in infrastructure funds/assets

74%

Reinvigorating capital marketsOur survey asked about the types of government intervention participants thought would be most effective at reinvigorating the capital markets’ activity in relation to providing debt finance to the infrastructure sector. According to both our quantitative and qualitative results, rather than making any changes to the capital markets themselves, the most effective policy was thought to be to promote infrastructure and ensure a substantial deal flow of projects in which to invest. In this context, two-thirds of respondents rate ‘policies towards the promotion of infrastructure’ as likely to be either effective or very effective.

This was deemed likely to be twice as effective as measures such as disclosure, more effective regulation, greater tax incentives, or encouraging retail investment in infrastructure, all of which are rated effective or very effective by around a third of participants.

Many of our interviewees feel that the best thing governments could do is to provide a more substantial flow of infrastructure projects to invest in (Fig. 21). One infrastructure specialist put it plainly: “I’m not sure that the government could do anything to reinvigorate capital markets for infrastructure investment, other than taking more risks and commissioning more projects.”

Nevertheless, many respondents believed that the deals done between governments and private investors should be restructured, whether to provide investors with higher returns on their investments or to reduce their risks. Specific suggestions included: providing more guarantees for investments, or bond insurance; improving the credit quality of the underlying debt; offering tax incentives; or improving the ‘first loss’ positions in deals.


75% state that infrastructure is under-utilised as an asset class within investment portfolios

Encouraging new forms of investment into infrastructureSupport for greater retail investment into infrastructure is much less evident, with a roughly equal split between those who expect retail investment in infrastructure to grow (45%) and those who do not (48%).

This scepticism doesn’t carry over to infrastructure as an asset class: 75% of respondents believed it was under-utilised within investment portfolios. Our experts do not consider this to result from ratings agencies’ lack of faith, however. They believe that ratings agencies have either correctly assessed (34%) or understated the risk (21%) of infrastructure projects, compared to 31% who believe the risk to be overstated.

Perhaps reflecting an urgent need for new funding solutions, industry experts expect a much greater demand for infrastructure bonds and wider investment opportunities over the next five years. 70% of our respondents saw positive or very positive prospects for long-term infrastructure bonds over the next five years. Optimistically, 85% of our experts believe that investment inflows into infrastructure will increase generally, painting a very positive picture of the future.

The outlook is overwhelmingly positive: with 65% of our experts believing that the prospects for global infrastructure have improved over recent years


There is a strong consensus that the next five years will be good ones for infrastructure development. Investors see some exciting opportunities in the market, particularly in the UK, USA, China, India and Western Europe, which were all identified as attractive destinations for infrastructure investments. Globally, power and roads emerged as the most popular sectors, although there are considerable regional variations. Renewable energy and other ‘green’ projects, such as those related to ‘de-carbonisation’ agendas, are regarded as particularly good prospects in more developed countries.

Serious concerns were also voiced, however. Foremost of these is lack of liquidity and availability of long-term funding, along with poor deal flow and the risk of deteriorating returns on investment. Given the importance infrastructure development will assume as the world’s economies recover from recession, our experts are looking to governments for commitments to tax breaks and other incentives for investment.

In the short term the overwhelming message is for governments to take proactive measures to prevent stagnation in the market. Over one-third of our participants identify lack of deal flow as the biggest obstacle to greater private finance investment into infrastructure. Fiscal stimulus plans and large-

Conclusions

scale investment schemes could also help. Apart from improving deal flow, the bundling of projects into substantial programmes allows contractors and investors to achieve economies of scale.

New funding opportunities could also help. For example, the prospect of matching the long-term investment strategies of pension funds with infrastructure projects could prove of considerable mutual benefit, making the development of attractive investable products another key opportunity. Tax incentives, improvements to project structures or the development of innovative investment products will also have a positive impact. However, the consensus was that the main priority should be to rebuild the capital markets’ confidence in infrastructure as a stable, long-term investment.

Changes to the structure of projects may also help ensure investors secure improved returns. In the UK, for example, while many are positive about the role of PFI/PPP and regard it as a model that could usefully be applied in other jurisdictions, there is a prevailing view that the PFI/PPP constraint will need to adapt to reflect cuts in government spending. There are expectations that the private sector will assume more responsibility for originating projects in the future, with the government developing into the role of ‘positive enabler’.

Political instability and under-developed legal frameworks remain key concerns to investors in global infrastructure. Many consider that the regimes in some of the major growth areas, such as China, India and Brazil, remain bureaucratic and took the view that there was too high a degree of political risk to make these countries attractive prospects in the short term. However, there seems little doubt that, as their systems and processes for infrastructure projects become more efficient, and if fears about political corruption can be allayed, these areas will only grow in attractiveness to potential investors, given the demand for new infrastructure in these regions.

Finally, the outlook is overwhelmingly positive: with 65% of our experts believing that the prospects for global infrastructure have improved over recent years, and as many as 85% expecting investment inflows into infrastructure to increase. This suggests a healthy degree of confidence to which will drive new infrastructure activity.


Contacts

PAUL SEVERSPartner, Finance T: +44 (0)20 3400 [email protected]

NEAL TODDPartner, Finance T: +44 (0)20 3400 [email protected]

MARK RICHARDSPartner, Finance T: +44 (0)20 3400 [email protected]

PATRICK SOMERSPartner, Corporate Finance T: +44 (0)20 3400 [email protected]

RUSSELL CLIFFORDPartner, Finance T: +44 (0)20 3400 [email protected]


1. Corporate �nance banking

2. Fund management

3. Investment banking

4. Construction/other building

5. Private equity

6. Government/policy/non-pro�t

7. Infrastructure specialist

8. Other

15%

15%

6%7%8%

17%

20%

12%

1

2

3

456

7

8

1. UK

2. US

3. Western Europe (not including UK)

4. Central and Eastern Europe

5. Russia

6. Brazil

7. India

8. China

9. Middle East

10. Africa

11. Nowhere in particular

1%

74%

19%

52%27%

13%

15%

21%

18%28%

16%

1

2

3

45

67

89

10 11

Fig. 23Which of the following best describes your organisation’s primary activity?

Fig. 22Which of the following countries have you been most involved in, either in arranging or delivering infrastructure projects in the last two years?

The research contained in this report was conducted on a sample of senior infrastructure specialists drawn from a range of sectors. A qualitative survey involving in-depth interviews with 30 specialists was followed by 100 20-minute telephone-based quantitative interviews.

Participants were split between six core areas– infrastructure (17%), corporate finance (15%), banking (15%), fund management (12%), government/policy making (8%), private equity (7%) and other (20%). Those who had classified themselves in the ‘other’ category included specialists from a range of areas, including pension asset consultancy; water and power project development; architecture; engineering/manufacturing consultancy; risk forecasting; defence support services; primary healthcare development; oil exploration; retail; schools and education specialists; and property developers.

Methodology

The research was also designed to gauge views from specialists across all international regions. Fig. 22 outlines the extent of geographical expertise and includes all countries or regions that participants have been actively involved in over the last two years and Fig. 23 show participants’ sector specialism breakdowns.

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Driving Growth Building blocks for global infrastructure · of finance to match these commitments in the post-crisis world. The severe contraction in ... H2 2009 and H1 2010, suggesting