If large scale infrastructure projects are going to be successfully procured the private sector must step into the void
The current challenging economic conditions means that 2013 is unlikely to be a year in which we see a large number of new government-funded infrastructure projects.
Since 2008, a combination of fiscal constraints, the collapse of the monolines and a lack of liquidity in the senior debt markets has resulted in a scaling-back of government-funded, or underwritten infrastructure projects. While some major or essential projects have been procured, the steady pipeline of the early and mid-2000s has all but vanished.
If large-scale infrastructure projects are going to be successfully and regularly procured in the current economic climate, the private sector needs to step into the void left by governments. It must find innovative ways to solve the lack of liquidity within the senior debt and bond markets. The private sector needs to be responsive to the current climate and find new, bespoke structuring and funding solutions. There is, however, still a vital role for government in helping to deliver infrastructure projects. But, where possible, this role should be one of enabler and not as the procuring entity.
Regional regeneration projects are industry-led projects, funded by private investment but enabled by government and can have a huge impact in terms of social improvement and regeneration, as well as providing environmentally positive solutions. These projects means are not bound by the constraints of PFI drafting and are hybrid in nature, taking the best parts of many funding routes, including PFI, leverage finance and real estate financing. They can make use of grants and assistance from regional government, as well as central government assistance, such as the UK Guarantee Scheme.
One example of this approach is the proposed Circuit of Wales project, the most significant capital investment programme in automotive infrastructure in the UK in the past fifty years, situated in Ebbw Vale, Blaenau Gwent. It will be designed to host international events such as MotoGP, World Superbikes, World Motocross and World Touring Carl, and will represent a centre of excellence for UK motorsport. Unlike most past UK infrastructure projects, the Circuit of Wales is being procured completely by the private sector. It will transform 830 acres of Blaenau Gwent, one of the most economically deprived areas of the UK, and will contribute in the order of £45m annually to the Welsh economy. It will also deliver approximately 4,000–6,000 construction jobs and a similar number of operational jobs.
While the infrastructure market and various governments have tried to access pension funding to make up for the lack of liquidity in the UK banking market, there has been only limited success to date. Where pension funds have lent to infrastructure projects, it has been to projects in established sectors, such as PFI, which have been underwritten by government. This project is revolutionary as it has persuaded pension funds to invest in a non-government backed infrastructure project which is entirely demand-based. The alternative would be a hybrid funding structure, which integrates and aligns pension fund monies with other sources of funding, such as commercial partners and family office capital.
The transfer of the planning risk in the project to a third party is also a first in the UK infrastructure market. The heads of the Valleys Development Company Limited have entered into an agreement with a third party, who will compile and submit the relevant planning applications. The third party is underwriting all costs associated with the planning and will only be reimbursed for the costs expended upon the completion of a successful planning application and the project reaching financial close. Given the uncertain nature and duration of the modern planning system and the cost of the process, at a time in the project's life where funding is not usually available, this approach make the early stages of projects more affordable and manageable.
The Circuit of Wales represents an exemplar of innovation in infrastructure investment. The financing structure can act as a template for future privately procured UK infrastructure be replicated in most jurisdictions worldwide.
Will Lewis is a senior associate at Stephenson Harwood LLP. His article is part of our Investing for growth series on the local leadership hub.
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