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We would like this session to be as interactive as possible therefore, if you have any questions as we are going along you’ll notice the Q&A box on the right hand side of your screen. If you would like to remain anonymous please note this in your question and we can ask questions as we are going along. There is also chat box if you have any comments for the panel.
You will also have an opportunity to ask questions at the end and that will be a Q&A session and you can ask the questions in the box. I would now like to hand over to Mark Richards at BLP and he will be chairing this session.
Mark Richards - BLP
Thanks Rachel. Welcome everybody
24hours later, after the UK Autumn Statement, we are going to focus on infrastructure and the opportunities that have hopefully been created by the UK Government but that’s for debate. I am joined by a fantastic set of panellists, one of them is dialling in remotely and I have got 4 of them round the table with me now.
So I will ask each of them to introduce themselves, starting with Richard.
Richard Abadie - PwC
Hi my name is Richard Abadie I am partner at PwC and I lead our global infrastructure group.
Richard Shennan – Mott MacDonald
Hello, Richard Shennan – Mott MacDonald, I am the global building sector leader.
Andy Rose – Global Infrastructure Investors Association
Hello I’m Andy Rose. I’m chief executive of Global Infrastructure Investors Association which is a trade body representing about fifty of the largest infrastructure funds in the world and then in prior roles I’ve been chief executive of Infrastructure UK and the Homes and Communities Agency.
Mel Zuydam – CH2M
Good afternoon my name Mel Zuydam, I’m the only guy or girl here without global in my title! I am the CFO for Europe for CH2M.
Mark Richards - BLP
…and John if you could please introduce yourself as well.
John Rowland – Cicero Consulting
Hi, I’m John Rowland. I’m executive director at Cicero Group and we are a political consulting company.
Mark Richards - BLP
Thanks John. Welcome everyone.
We’ve had 24 hours to sort of digest Chancellor Hammond’s statement now and we caught up earlier on so Mel is this good? Do you think it’s an opportunity lost? Where do we see ourselves after twenty-four hours later?
I think, from a glass half full point of view, I think there is huge opportunity. I think like everybody on this webinar, we have all been letting it sink in a little bit and I have certainly been doing that and I guess where I’ve come to on this is around sort of two main headings: Cash and Resources.
One of the things that struck me about the Chancellor’s statement was for the first time in many years I saw what I call a reverse hockey stick. Now quite a few of us in sort of performance related industries know about the hockey stick which is where everyone promises the up-tick in Q4 on performance. When you see a hockey stick you are always worried. When you see a reverse hockey stick, it is even worse, now the reverse hockey stick we are talking about here is the GDP forecast that we heard yesterday which is the up-tick is a down-tick now for 2 years, followed by the sort of handle of the hockey stick very slowly recovering.
The reverse hockey stick is very bad news so for me that has brought it into focus. I think Hammond said as much as he could yesterday and I think he was very brave, but I think he tried to put a sort positive as possible picture on what is a very challenging economic situation.
So what does that mean in terms of opportunity? For me it’s around cash and resources, the cash part obviously speaks for itself in terms of infrastructure and you know that really, I think, for all of us points to boosting private investment in infrastructure and boosting it in a way that can be off balance sheet if it can be, but even if it can’t be off balance sheet it’s got to make sense and that also could deal with the resources piece; the resources piece indeed hangs around Brexit, hangs around inflation, hangs around the cost of input to infrastructure and construction in this country both in terms of raw materials and labour.
Again, if you are going down a [boosted] private investment direction here, you do get the benefit there as well on resources because actually if you’ve got a consortium of infrastructure plans or pension plans who are global then they can draw on their own global resources and they are not limited to the UK. So those are a few thoughts that struck me.
Mark Richards - BLP
For the benefit of webinar listeners, I think it might be quite useful, I just wonder if it’s worth orientating ourselves to the actual main points of the Autumn Statement as well, so Mel touched on some of the challenges like cash resources and that reverse hockey stick. I think it would be quite useful to just talk through some of the key headlines in the slide.
So the Autumn Statement is really against the real uncertain world - I mean I don’t know and you can see people dialling in can see Nigel Farage with his £50 bet on the leave vote but if you’d have had an accumulator on Leicester winning the premier league, the leave vote and Donald Trump, I think you’d have done quite well. So real amounts of uncertainty there.
So what has happened? Well we have seen growth has slowed down to 1.4% next year, we are seeing government borrowing peaking to around 90% of GDP, [well my god] that’s the kind of leverage that you see in project finance so we should all be very familiar with that, and limited borrowing in the UK for investment and there is a real desire to boost productivity levels and the panel will be talking about this later, this creation of the £23 billion(bn) National Productivity Fund.
Additional R&D and some creation around infrastructure to develop housing development which is a big thing coming out of there, and also additional money going into the transport network as well. Plus, the thing that we haven’t seen very often in Autumn Statements, some real investment in or a question whether it is enough in the digital infrastructure in the UK with 5G trials and ultra-fast broadband.
And then finally, we look at infrastructure itself. 0.8% of GDP at the moment has been spent on economic infrastructure; one for the panellists to ponder. The Government has finally said that they have put some actual target on GDP spending on economic infrastructure to 1-1.2% of GDP in 2020, what does that mean for the industry? We have had some funding for the Oxford - Cambridge Expressway and we have also got some money going down to devolved governments as well, with the 1.8 million going to local growth funds.
And then finally, the buying powers for the combined authorities, extension of the guarantee scheme, some debate around the energy retail market and then finally, we will be waiting for PF2 deals are likely to be announced in early 2017. So against that background panel, against that, so Mel cash and resources – Andy what was your reaction when you pondered after twenty four hours?
So the initial reaction, like Mel, let’s start with the positive. The overall tone is positive, the identification of key areas; so we talk about housing, roads and network and particularly smaller unblocking congestion which I think is pretty positive, digital, I think there is a great opportunity in and could be a lot around R&B. So all very much needed.
Just as an aside for a second, ironically I think one of the most important things that the Chancellor did yesterday was cancel all future Autumn Statements. Let me explain why I say that.
Historically the Autumn Statement was a very low-key update on the political position of the country and Richard and I have both worked in Treasury and it sort of becomes political theatre and over the years the Autumn Statement has become political theatre, and, we have all looked at these key big announcements and obsess about them.
Most of them are leaked well in advance and as I said what the Chancellor has said now, and I think it is a very good thing, is that there will be one of these a year and then literally, because really the key items yesterday will be updated in the physical forecast and this statement about £122bn of extra borrowing and you have to see it in the context of that, so that putting it in the context that very often these are headline grabbing announcements and - let’s focus on the most headline grabbing announcement - that is the creation of a £23bn National Productivity Investment Fund, which has many positive things but two things I would observe, one is it’s not £23bn fund and the second it’s not a fund but it’s [essentially] this is allocating money to departments to spend and breaking it down we have got £8bn of housing which having been Chief Executive of the Homes and Communities Agency, I think is very much needed, I also personally welcome the shift more to the supply side and away from very much demand side home ownership driven schemes before that, so I think that’s very welcome from a housing point of view.
Again I think the transport targeting more on unblocking key congestion and blockages in the system I think is welcome. I think digital is important, R&B is important. The reason I say it’s not £23bn is as I understand it £7bn of it is in 2021/22 and I don’t think that is part of this Parliament. Again, when we talk about the 1% going forward, again it’s from 2020 and I’d much rather see a focus on the spending commitment being within the period of this Parliament.
So my own view is, the tone is positive, the areas that are identified are sensible, I think personally the Chancellor set the right tone which is we’ll all debate whether the OBR forecast are right, wrong, pessimistic, optimistic - not particularly a debate I feel interested or qualified in entering into but you have to see this in the context of the high degree of uncertainty going forward and therefore incredibly difficult. So I think it’s positive, I think it is important to see the devil in the detail – personally, I don’t think labelling things “funds” when they are traditional spending allocations actually really moves the debate forward at all because people will now focus on this fund which as I say is not a fund and what we really should be focusing on is the opportunities that the identified spending will create and I think there will be many and that’s where I’d like to see the focus.
Mark Richards - BLP
We will focus on asking people questions from their lens as it were. Richard, from your lens, you were Infrastructure UK, you have been party to a number of statements and budgets. Where does this rank - how does this feel for you in terms of positives for infrastructure?
I think I’d reflect, Mark, on more my time out of the government [laughter] because it is getting a bit distant into the past – but just a couple of observations, if I may. I was delighted not to see a dayglow jacket and a hard hat on anybody in the run up to this particular announcement, also personally I also appreciated what I thought was a pretty honest assessment of where our infrastructure market is.
I agree with you, Andy, in terms of I’m not too sure why they called it the spending commitment a fund, but I think beyond that everything is pretty much clearly laid out in terms of what is being spent. We don’t have much of an announcement about pension funds and insurance companies and sovereign wealth funds, rescuing our infrastructure, we don’t have grandiose statements about long term infrastructure commitments beyond as Andy you said, the final year of this Fund, under £7bn.
I think we have a more realistic assessment of what our infrastructure forecasts are going forward. So I’ll take that positively because we have some insight, some genuine insight that we didn’t have previously. I think the one thing that did disappoint me, and I don’t know about you guys in your businesses, or the listeners, but I do remember when we were in government one is really very bad news and my personal point of view on this point is that if I had been the Chancellor, I certainly wouldn’t have made a big announcement around the fact that infrastructure spending beyond 2020 and effectively in perpetuity was going to be 1 to 1.2% of GDP. I think that’s shocking, if we believe infrastructure contributes to economic growth those numbers should be in excess of 2%.
Just to put it out there, the level of spending that has been committed to beyond 2020 I’m saying is half, at least half of what it should be and again I am not sure why that statement has been made if that’s actually the case because those numbers are way too low if you do want to drive infrastructure, public services, economic growth through infrastructure investments and the like so that would be my second observation. The first one was just meant to be a little bit of realism and no hard hats and dayglow jackets on politicians; the second one is a bit of a disappointment in terms of sort of committing to a very very low percentage of GDP target in terms of infrastructure investment and the third one which I can’t avoid commenting on is PF2.
A little bit like you said Mark, it’s good to see that there are some comments in the pipeline. I have forgotten when we as an industry responded to the Government invite around PF2 and gave them feedback - 5/6 years. Feels probably maybe even a touch longer than that. It is maybe telling or that may be coincidence but as the Prime Minister and Chancellor have left, now we have PF2 back on the table in a serious way, admittedly the information is quite out there but I look forward to seeing what does come up.
Why I do think it’s a shame and it is interesting how the Government had changed and we have basically very little PF2 for - if it is six years- six years is as we said at the time switching off those taps - it is not an efficient way to manage an investment infrastructure. If you are going to invest in infrastructure, consistency, certainty and predictability are paramount, making big announcements around PF2 and doing nothing for six years hasn’t helped the industry one iota and if there is a big programme coming up, we are going to have to ramp up that programme, but I do reserve judgment until I see what’s in that programme.
Mark Richards - BLP
Thank you. No holds barred there. Richard, from an engineering perspective, you’ve heard Richard mention that he felt that the GDP commitments for infrastructure going forward are woefully short. How did you take the Autumn Statement?
Well as you say, I am an engineer and I am looking at, you know what can we do within virtually constrained finances, that is the reality, so I think first of all the importance of aggregating the benefits of the investments that are going to be made so that they are effectively creating more of the individual projects so we need to start to look at systemic approach to analysing what are the best investments so that they add up to more than just a whole lot of individual projects that people are chasing after.
I think also in terms of aggregation of investment there’s mention here of investment in digital side and I think this is absolutely key; if the objective is to take the whole of the UK infrastructure form more effectively in meeting social and economic needs then there is an awful lot to do with existing infrastructure and making that work properly because you know the majority of infrastructure we’re going to have in 2020-2025, 2030 is already here really and this is where I think the digital angle comes in, because getting a handle on the data that surrounds assets (both existing assets and new assets) and then using that so to first of all make the assets themselves function more efficiently and we see that in almost every large asset owner that we come across so, the extent to which they are on top of their own data is highly variable I would say but also connecting into interaction with social users of data so that we can get closer to matching both the assessment of demand and reaction to the performance and continuous optimisation of infrastructure through wider use of data and interacting and I think the connection between the physical and the digital is very important and this is something where we have got two different streams here, we’ve got a digital stream and we’ve got a physical stream – it’s actually the interaction between those two which is absolutely critical, so digital infrastructure is going to be key and somehow getting a systematic overview of how these different proposed investments interact because each infrastructure investment has it’s own benefit that the benefits of the joined up approach to the project by looking at aggregated co-benefits is to be much greater and finally I think one thing we’re looking at as an organisation is how to get onto an outcome based rewards system so if we say, you know, the purposes of our organisation is to deliver better outcomes in terms of performance of the build environment and then we’re talking about new ways of funding and we’ve got straight forward things like value relief and so on, which you can do rather easily, but how do we measure outcome more accurately connecting that to data so that we can get a structure in place so that the return on investment is more closely linked to the outcome and that will encourage people to put all their efforts into developing infrastructure which actually makes a difference.
Mark Richards BLP
Thanks Richard that’s great. And finally just to get the first comments from the panellists, looking at people’s lenses, I’m going to call on John who is up in Edinburgh today.
John, can you give us a perspective from the political angle of things? What did the Chancellor say, what didn’t he say, what was this all about, from a politics angle John?
Thanks Mark, so I feel that I should declare my interests that I live in Philip Hammond’s constituency so I should be the representative ‘Team Phil’ on this call. I think the key thing to take away from an infrastructure perspective before talking more generally about the politics of this is, for the first time I have heard a case made for why infrastructure matters, and that is because Philip Hammond thinks that productivity is the largest structural problem facing this economy and he is probably right from that front that UK productivity is extremely poor and the best way to fix that productivity or one of the best ways to fix that productivity is through infrastructure.
So what you’ve got there is a Chancellor who has identified a problem, but I think that is the correct diagnosis and one of the cures for the problem is infrastructure so I think from a kind of micro-political perspective that is extremely encouraging. I think just drilling down a little bit more into this and one of the other things that I thought was very encouraging around this Autumn Statement is that I see evidence of greater rationality in infrastructure policy making beginning to emerge now, so it is quite interesting to see this sort of political mandate for the infrastructure commission being set out in a letter much like a mandate is sent to the Bank of England on mandatory policy.
I think the long term health of the infrastructure market in the UK this kind of predictability and stability in policy making is extremely important; and I honestly think – and this is a stylistic point and engages the kind of politician I think that Hammond is, this is not about big flashy projects, it’s more about incremental projects much more made for localised impacts and so for example if someone who is a heavy user of the train system very happily could see money being paid for digital signalling, these are the things that you could never really imagine George Osborne making a big announcement about, but I think Philip Hammond is much more likely to kind of just choose lots of small targeted infrastructure investments and to press those because he thinks those will have an impact on productivity more quickly.
Just about the politics of the packaging of this, yeah look the fiscal situation is difficult but it’s not catastrophic, and I think that if we’ve been perhaps speculating on what would be in the Autumn statement just after Brexit I think people would think that he’s going to have to go change here and there is going to be billions and billions and billions for infrastructure because, you know, everybody is going to be in crisis mode now.
Actually the economy has held up better than expected, growth has slowed actually but it is still great so I think in that respect Hammond is probably keeping powder dry but if he needs to fire the political cannon, he will, but right now he doesn’t need to.
And yes the debt figures are difficult but again they are not at crisis point so I think there is some flex in the future and just to make that final point about ABR forecast, of course all Autumn Statements and projects or budgets as they will be in the future - Autumn budgets - are very sensitive to the forecasts and we saw George Osborne’s fortune swing wildly from one Autumn Statement to the budget in the Autumn Statement it’s crisis mode, in the budget suddenly the outcome for the public finances looks better than it did 6 months ago, so I think you know we ought to just look at the long term trends and those are towards a focus on productivity and more rational policy making and I think that can only be good news.
Thank’s John that’s a great insight. Any thoughts on John’s insight?
I was going to say only that I didn’t know that living in Philip Hammond’s constituency had to be disclosed but I know that at least three of the panel do live in his constituency, [laughter] I am not quite sure what that tells you about the panel.
I live in David Cameron’s constituency [laughter].
I think productivity is the word I wanted to pick up on there and just like Richard’s point as well because, you know, I mentioned the cash and resources and my resource piece was around the need for the material input, cost inflation there but also labour. I think productivity, looking back to the PF2 private investment thing and the digital piece is the key.
Productivity really is the thing that will really in the long term in a multi-government timeline drive GDP and economic growth and productivity is widely acknowledged in this country to be actually one of, at the centre of the problem, and they were way behind many of our comparable peers but I think certainly it may be a sort of very light weight point to make but an important point is around investments in, you know this commitment to sort of 5G commitment to fibre optic cable I think is vital and is too easily overlooked.
You know it’s a real easy low hanging fruit, some serious investment there massively increase productivity and Richard made the point around, you know, 1% is not early enough to boost GDP, it needs to be 2%. A lot of that economic infrastructure is around transport and the way it feeds through to GDP is through productivity, it’s through getting more people into work but actually you could have big productivity boost spending money on physical infrastructure getting in a fibre optic cable, you know, roll that, far more quickly not relying on proper cable for the last week.
That would have a huge impact on productivity in this country alongside the large economic infrastructure investments.
Mark Richards - BLP
So a slightly more serious point than my last one, I mean what I thought was interesting Richard sort of talked about the hard hat and John talked about the sort of style and the tone and I talked about the lack of theatre and I think there is a serious point here which is I think we have a Chancellor who is taking a much less political approach to planning for long term infrastructure and imbedding long term commitments into the national infrastructure commission whether it’s the right number or not.
I actually think it’s a very positive thing because you know people often say let’s get the politics out of infrastructure you will never get the politics out of infrastructure nor should we, that’s why we appointed our politicians but you don’t need to politicise infrastructure.
And I think the sense that we got yesterday was a serious Chancellor who is articulating it in a way that hopefully I think he is going to help long term investors in infrastructure to take confidence and if the Chancellor has said this is what we are going to do, investors can take more confidence. I think the stop/start around PPP, PFI, PFP is a great pitch both Richard and I have worked in the treasury and been responsible for it and actually having a stable clear policy that people believe in and their policies.
So I think the whole tone while tone is at one level deemed superficial I don’t think it is superficial at all. I think we have the style and approach here and people can take confidence and invest in and ultimately that is a hugely important underpinning for the infrastructure market.
Mark Richards - BLP
And Richard we’ve got the tone we’ve got a few people talking about realism and almost a reality check and a bit more of a grounded approach to infrastructure. We have seen this potentially good news in terms of forward planning for the investors, although maybe the levels aren’t right. Is there room from what you’ve seen in the Autumn Statement to deploy classical private sector capital into our UK infrastructure; has this created any opportunities for the IPFA members listening?
The, so yes that’s a sort of sharp question given within the private sector. The thing that probably most interested me while attracting throughout the capital and its infrastructure is the guarantee scheme, UK guarantee scheme considering guaranteeing construction risk for those of us that work in the project finance markets, we know that many lenders – bank lenders - will take construction risks and are prepared to assess the credits and manage it. Institutional debt investors are a lot less comfortable.
At the credit rating of the project during that period and most of them; Andy will probably correct me, but most of the equity that is available to invest in infrastructure is chasing brown field infrastructure rather than green field infrastructure.
So I do have a hope that is why I’m very pleased by the announcements around guarantee of construction risks and if government is serious about it, they can assess the credit because they are taking a risk ultimately, they can quantify it and can manage that risk as a guarantor, that should attract additional equity and additional debt into infrastructure and what I would take from that as well, and having just come back from Australia/New Zealand and seen some of the innovation they’ve planned in infrastructure, they don’t guarantee everything, sometimes it’s supply of long dates with equipment that cost uncertainly is volatile with exchange rates.
It is not a hell or high water construction guarantee that is needed so the fact that the guarantees are moving away from pure operations and into construction, that should make a very big difference again, the test will be whether it, and shouldn’t necessarily all to do with PF2 stuff, it’s all the other activity that’s taking place that you need to get into.
Mark Richards - BLP
Mel, I mean you are heavily involved in one of the largest projects in Europe, HS2, presumably that is welcome news for you that that talk could potentially be available from Government.
Indeed, in fact, before I speak about HS2, I was going to speak about Thames Tideway off the back of the point Richard Abadie was just making. That is a classic example of a bad let 4.5bn privately funded infrastructure project right here and purchased underneath the river and just outside the window. With government guarantee and I mean it’s not a current form of guarantee but it’s still guaranteed. For me the exciting piece here is that a lot of the infrastructure funds are looking for quite high returns on their investments, certainly their equity investments.
If you put a government guarantee in there is a threat that you sort of reduce that return actually, because the risks of the threat but the counter argument for that is that, potentially, and I would be interested to hear Richard and Andy’s views on this, it potentially opens it up more to pension funds, who themselves now are gearing up where they can, people like PPGM and Holland to come more directly into projects and they are not so requisite that these de-risks are returned. Just off the back of the point you made there Richard, it is interesting to see whether that does help pension funds.
OK. I would say almost all institution investors whether they are pension funds or insurance companies, sovereign wealth funds, any of the investment asset class, whether they invest directly into projects or indirectly through infrastructure funds or any form of fund, there is still that reservation around construction. I’m genuinely less worried about the price.
One of the reasons is that the level of capital entering this market in any form of competitive process tends to find a market clearing price that is really competitive. I am left thinking about the benefit of pricing [inaudible audio] construction. I am just thinking more about those investors who almost as a matter of principle will not invest substantial amount of money in heavy construction activities.
So the good news is that this is going to increase the cash available?
And just so, Mark we will come back to your original question that you asked and then I will come back to this specific point… Where do I see, you know in a fund or a bank or planning firms, I think housing if you are interested in housing, whether it’s lending directly to house builders, whether it’s affordable housing, I think very clearly there will be opportunities there.
I think this digital fund has real opportunities. I think there is the opportunity to bring new supplies into that area. I think absolutely there will be opportunities. For me the real key here is the one that Richard and then Mel were talking about, if the guarantee scheme can be used flexibly and with clever structuring skills to de-risk key components of the project then that guarantee scheme can be very powerful. If it’s just the concept of guaranteed or not guaranteed then you will basically take the project into a gilt class.
Some people aren’t terribly interested in that they either want… so I think Richard’s point and then Mel touched on Tideway Tunnel, actually de-risking these projects by cleverly identifying which of the risks that the private sector is uncomfortable in taking has the potential to unlock a huge amount of capital.
I mean Richard said I would correct him about infrastructure investors, but of course I would never correct Richard and what I did…
But you are seeing two things, you are seeing some interest , you are starting to see some green fields emerging, not huge certainly not in the scale that you would see in the brown field side. But I do think if you can identify certain risks that can accelerate quite quickly because clearly it’s a development capital where once you have a viable operating asset generating cash flow then the world is your oyster, there is a huge amount of capital.
So I do think this focus on how is this guaranteed programme, you know, there is something like 40 billion, not a lot of it was used over the last five years. I think, I mean Richard’s point, we need to be more invasive at what we are guaranteeing rather than either it is guaranteed or it’s not guaranteed. I am not actually sure it makes that much difference because, as I say, you either want project risk or you want sovereign risk, guaranteeing a project slightly blurred at the edges. I think there is a real opportunity there.
Mark Richards - BLP
And there’s a bit of focus on what Hammond did not say at the despatch box.
One of the things was that Theresa May announced her leadership credentials, she did it in Birmingham deliberately to focus on Municipality and Joseph Chamberlain and all that wonderful stuff but she also uses, she talks about infrastructure bonds. Now, there is no mention of that at all at the despatch box: is it because it’s not a good idea, is it because it’s not needed, why do you think that was sort of edged to the side?
And we now have this very buried away on page 29 of the Autumn Statement document. This concept of guarantee, guarantee construction, construction only guarantees.
I’ll have a go, I think the answer is because it is not a good idea. Unless the infrastructure bond will be issued at a discount to a gilt which I would struggle very very hard to believe, it’s not obvious why an infrastructure bond of anything other than a gilt premium, the proceeds being dedicated to infrastructure and I think, you know, reading the papers and lead up there are lot of people in treasury and I don’t know this but I wouldn’t be surprised who questioned what, the additionality of an infrastructure bond was, if it is clearly a gilt issued at a slight premium with the proceeds dedicated to infrastructure, so I think, my guess is it was not pursued aggressively because that challenge about where is the additionality in adding an infrastructure bond was never addressed to the satisfaction of the Chancellor.
Now, you know John or others on the phone may have more direct insights but that would be my suggestion.
O.K. just to add to that Andy, like you said I would never disagree with you [laughing – inaudible audio].
So just one quick point on that; one thing that is quite interesting and I am not a massive expert on capital markets but the move of local authorities into issuance of bonds of various forms and I think there is a new municipal finance agency that has just been set up. I am wondering to what extent local authorities will be part of this discussion as well and not just central government and I am thinking there is this great devolution of power, both political powers and policy making powers for cities and for regions whether actually, you know, issuance of bonds to support infrastructure in those contexts might actually be more of what happened.
So yes, so John you took the words out of my mouth because I was against not disagreeing with Andy that is exactly right. I think if we look at infrastructure bonds and, as you said Theresa May didn’t make it clear what she was talking about. I have read it, I assumed that it would be something like the municipal bond market in the US which is municipal level debt rather than national level debt and that may be an option, that may be more interesting.
We’ve all had experience both as to the work of local authority projects and local authorities do have access to public works loan board. I would put it out there that the level of diligence that takes place when borrowing from the public works loan board is not necessarily the same as you would expect from an independent third party bond investor. The one thing that you may get from local authority bonds and infrastructure bonds, may be additional diligence and sort of more robust credit assessments facilities.
The other thing I would say and this certainly hasn’t been debated is, when we do talk about infrastructure bonds and you do look at other markets like the US, you do get two different types of bonds and I’m sure there’s many more. You get; you get general obligation bonds, where the obligor or the guarantor, the payor is in the [inaudible audio] to the sovereign government, and Andy as you said, that’s a credit risk on the [inaudible audio] governments side.
What I would like to start seeing is, and it would require a lot of devolution of borrowing power and revenue sources to local authorities. I would like us to move more towards revenue bonds that effectively project finance as many of us know is where you take a credit risk as an investor on the actual cash flows generated by the project. But, we’re not there yet because of that Treasury paranoia to retain all taxation parts centrally and devolve it.
[inaudible transcription - 38:09 – 38:11]
Just to dive in, I think the really interesting point in having spent the last three years of my life working under the Department for Communities in local government, is the point that Richard raises about if you are going to have the fund raising capability, you really need the tax raising capability as well, because if you separate the revenue side from the debt side, that can get very very difficult.
So I think devolution is here to stay, very much should be here to stay, but if we are going to look, and again, believe it or not, my first job in life was being a municipal bonds salesman in the United States, one of the big issues is the States have tax where they raise their taxes, and we have seen in many States [such as Michigan, California] it can all go horribly wrong, but to devolve one without devolving the other can get you in a very, very difficult place.
Mark Richards - BLP
We have seen in Battersea the tax incremental finance, [inaudible audio] being guaranteed. Would you welcome that kind of concept in the guarantee scheme in its current form?
Well again, the Treasury has often had an aversion to hypothecating revenue but it is certainly on whether you apply business rates as they did in Crossrail or you know, how you allocate the revenue is something here. You need to make sure you’re procuring authority is sophisticated enough to do it, but yes, I think models where you devolve the fund raising and the revenue raising together, whether its business rates Tax Incremental Financing (TIF) type or direct taxation, those are political decisions and not for me to make but my point is, you must do both together.
If you do one without the other then you really are splitting responsibility. So yes, I think it is an interesting model to pursue. What we need to make sure of is the procurement authorities have the right skill sets to put together those kind of skills.
I think there’s a sort of initial quick comment to make there. I was just talking to a guy from Quebec the intelligent transport systems group the other day about the way sort of toll agencies should be looking.
For me, off the back of this point, the Smart Cities Agenda and it’s integrated transport solutions and before you get on to the taxation debate which is indeed political and somewhat out of our hands, it’s you know how much can we accelerate that integrated transport fair box, if sort of you know, Transport North, can come up with their transport model with their own controlled fair box from various sort of participants in that, they’ll have a revenue stream off the back of which you know they can start raising bond finance.
Are we still online?
Mark Richards - BLP
We are, we are, yes.
OK, so for me it was just an additional point to make on top of tax revenues; prior to that you know we could accelerate some of the private sector integrated transport fair box solutions in these sort of large transport [inaudible audio] and that could accelerate us to a revenue bond situation.
Mark Richards - BLP
And Richard, presumably technology can play a part in that as well?
Yes, I mean obviously experts in the room [inaudible audio] which is why I feel [inaudible audio]. I think there is something about the potential value of data itself so if you have an infrastructure asset and you got more people that might be moving through it or using it and interacting with it.
If you’ve got your data around the asset and the interaction with the asset is organised then actually you know there is potential for the data itself to become, you know, for the balance sheet the value item and you find that a lot of organisations that are already accumulating data, like you know, mobile phone companies and so on and their selling this data left, right and centre, and get a whole lot of new income stream.
So it kind of brings it back to this whole digital side because if the data is organised around infrastructure assets which a lot of them are interacting with huge numbers of [inaudible audio], then you could start to see the potential to have a valuable asset in the digital representation of physical infrastructure which would bring a new type of revenue and income and which at the moment is not really associated with these type of physical infrastructure.
Mark Richards - BLP
Excellent. Richard, I’m very excited, we’ve got a question. I’m just hoping that my number crunchers can help me. We’re apparently in a post back to a post-truth world but I want to make sure that… we’ll try and get this fact-checked.
So the question is asked: “How much does the additional 0.4% translate into for infrastructure spend?” I suspect what they mean by that is the difference between the 0.8 we’re paying, spending now and around about 1.2 we’ll be spending by 2020. Do you expect to be spent on PPP style availability payments or direct public spending on capital projects? Now, I would immediately turn to Mr Abadie because he’s a number cruncher and check that he’s got his calculator out.
So what 0.4 GDP works out too??
Let me give you a little bit of background, because my maths is pretty crap I had to ask one of your experts – it’s not, your maths is equally bad [laughter].
I had to ask your assistant to go and find out what GDP was because it’s such a big number and what it translates into is 0.4% is £11bn, which if you look at that on an annual basis, is a lot of money £11bn buys you depending on the maths, probably a 1/5th to 1/8th of an HS2.
Mark Richards - BLP
And earlier Richard, you wanted another £22bn on top of that.
Mark Richards - BLP
John McDonald must be one of your neighbours as well … [laughter] football, enough said [inaudible audio]… Listen I’ll get to know John McDonald [inaudible audio]…
So for all of us that work in the industry we have all at some point in our career looked at the economic benefits of infrastructure: we’ve read the literature, we’ve seen the research, we’ve heard people’s comments on it to the point where it’s a truth, we live it, we don’t actually have to question it and when we are where we are to actually see those forecasts at go, but just to be clear we talk about a thirty year period after 2020, now I don’t know about anybody else in this room, I’m unlikely to be on this earth towards the end of that time but we’re only growing our infrastructure spending on a percentage of GDP is only at 1-1.2% for the next thirty years, we’ve missed a trick.
We’ve made it to once in a lifetime when we do borrow and do invest whatever the economic approach is doing, we can’t continue to invest such a little sum of money in competitive infrastructure. The only thing that I can see making a substantial shift to that is technology; maybe you know, maybe people will be teleporting around rather than driving cars at some distant point in the future and it would be much cheaper – I don’t know - but, £11bn I appreciate is a lot of money but we need a lot more than that even.
Mark Richards - BLP
But that contends with policy issues as well doesn’t it for the panel, you know autonomous vehicles, technology, all of these things are all of these things are a massive policy issues for government to wrestle with to look thirty years down the line, CH2M are at the forefront of some of this technology - what are you looking to advise government on?
Well I’m not sure I can answer that one. I can’t really speak for CH2M for the government but I was going to make the point that just this week I read that in the age bracket up to 30 years old there is a sharp decline in car ownership and it made me sit up and think for a minute actually because you know I myself work with Andy and Richard and others very focussed on you know increasing transport capacity and indeed HS2 will be doing that.
But actually going back to the digital communications point and productivity point I wonder whether we should keep an open mind about the future and about the need actually to generally increase the capacity of our car transport.
I think there’s a case in there for freight, but in terms of productivity and workers you know just being able to stay at home quite frankly, with a sort of fibre optics cable connection you know instantaneous connections is not an easy task, it takes huge volumes, so just a thought I wanted to throw into [inaudible audio]; certainly at CH2M I know we are committed to technology developments, innovation, we’ve got a huge team working on, actually engineering innovation, on a log you know all of our big schemes, HS2, Tideway, there’s massive, massive engineering solutioneering that’s needed, so innovation for us is huge but I think if this digital piece I keep coming back to; it was just by chance I read and quite an interesting statistic.
My children are certainly not interested in cars and they put the argument into completely ridiculous investment, you get one, it’s de-valued as soon as you take it out the showroom, you’re paying a company insurance to leave it parked outside your house and they’re really against the idea; so the idea of you know wondering what they’d want for their 21st birthday, a car? It’s the last thing they would actually ask for. But I think just in response to this issue about what’s going to happen you know clearly, as the regional forecasting has demonstrated, we don’t know what’s going to happen so I think what actually is quite fundamental in this we can think of in terms of physical by being an engineer, it could help to see it in the physical sense but [inaudible audio].
Adaptability is the fundamental thing I think we are looking at in Mott McDonald because you know the one thing we can be certain is that we don’t know what is going to happen.
So if you think of adaptability in terms of physical aspects in terms of urban planning, in terms of building planning because buildings are changing use the whole time; you know I deal with a lot of work in healthcare and the idea that you can design a hospital to a set of room data sheets which is in a way since like the fifties until quite recently is now is seen to be completely crazy because by the time you’ve finished it technology, the practice, the, you know the whole philosophy around treatment has changed, so adaptability at building level, at City level and I would have thought at finance level, this is fundamental and everything should be adaptability tested against different scenarios to reflect this point and you may not need so many roads some way in the future but we will still need to get around so this adaptability test, whether I think physical, digital or financial I think is the key.
Can I just come in on that point about adaptability because it’s a very good one because we also have an aging population as well and I think when it comes to designing infrastructure and housing and what have you, if you again aside productivity probably one of the few things we know is a problem and will continue to be a problem and needs to be challenged. I mean to put the cost of things for the government in perspective the triple lock on pensions is going to cost the government another £6bn a year and we’re talking about, you know incrementing it in increases in infrastructure costs.
This is just the cost of one pensions policy that the government has adopted in the last few years. So if you multiply that up across all the costs this government will face from an aging population, I think that one of the key things that certainly the National Infrastructure Commission will have to think about is what the implications are of an aging population on the needs of infrastructure within the UK.
Mark Richards - BLP
Do the maths – that’s something like 0.2% of GDP.
That’s genius Mark, you’re wasted on the law.
In fact we couldn’t find a mathematician so we went to the lawyer.
Mark can I come back?
Mark Richards - BLP
Of course you can.
We have received one question I would like to try and answer that question a little bit because I think it’s the whole question issue, the answer of course is ‘we don’t know’ and that is the whole point. What I would like to see is some [inaudible audio]- almost like a business plan: What are our objectives? What is our strategy here? Where and when do we use PF2? So we think - I’ll make this up - we think it’s more about social structure, whether technology risk is low, the build risk is low, people are willing to take it.
What is our energy policy? Are we going to have, you know, drive the market to choose base on carbon taxes are we going to pick winners? How are we going to attract private capital, and is it going to be through privatisation models? How are we going to deal with development capital? How are we going to use the guarantee scheme?
Because the reality is at the moment we just get announcements. We get an announcement we’re going to have the guarantee scheme extended and we get an announcement that you know, PF2 is back on again and that actually goes back to the supply check point. That doesn’t help the private sector gear up to solve government’s problems.
So what I would love to see and I’d love it if it was embedded in the NIC and then the NIC government having pulled it’s door out and say ‘this is what we’re going to do’, the NIC having the role of reporting to parliament on an annual basis and saying ‘the government said and the government did’ and hopefully those two are very close together.
But what we are lacking and have always lacked through the many, many years that I’ve been involved is that sort of strategic plan of what we are trying to achieve with our infrastructure and we end up, you know I as the person who was involved in the production of the first national infrastructure plan, we end up with a list of projects and we are none the wiser how they are going to be delivered.
That’s what I think we really need. So when a year from now the lady or gentlemen who asked that question, we had an ability to answer because we say well we know it’s going to be schools and think the model of [inaudible audio], or we know it’s going to be around digital technology and we’ve given government’s core principles but, we are operating in the absence of any of that at the moment and that’s what I would love to see: government policy, the NIC and the market work together but …
Could I just, so I’m actually a Dutchman for my sins but the good thing about Holland is some years back they created something called the Ministry of Infrastructure. So they’ve actually created a government department that is in charge of all things infrastructure. I think that’s coming to the point Andy, I think that’s really boosted PF – private finance, PPP - but they don’t have a certain rule for it over there, they’ll do a bespoke, you know, privately funded deal to match the deal.
I think they’ve got [inaudible audio] one government department so they’ve got an integrated approach to the private financing of infrastructure there. Which is probably why their deal flows a lot higher and you know, equally actually they don’t have a department for transport or a highways agency they have a sort of department for all things transport, includes water, includes ports so it’s all integrated. That may well be a thought for us here.
Mark Richards - BLP
Richard, (Abadie), I know you don’t disagree with Andy very much but is Andy’s ambition for that kind of all-encompassing string theory sort of here’s the purpose of infrastructure, this is what we are going to do, is that achievable in the current climate?
I don’t see why not. Erm, people who work with me and that have worked with me in the past do that I have a very short attention span, and that if anything runs onto much more than one page, I’ve got to read it – Andy did that to remind me, I think your first national infrastructure plan probably run into about 300 pages. To this day and to this audience I did not complete reading that document, and that’s part of the problem.
If you do develop a plan, I think the communication part of it should be quite light, quite punchy, quite, you know, quite insightful backing up Andy’s point it needs to be strategic. I think what we do get delivered is a thick tome with all the projects in it and how stuff’s going to be done. I’m with Andy, I would like to see - particularly to attract foreign buyers and investment into the country which we desperately need at the moment.
But I would like to something pretty strategic because with clear direction as to how not only we are going to fund the infrastructure but, you know: What are trade laws we’re making? What is the strategy that we are adopting? What technologies are we adopting? And I would say, I do, because I have been a bit political, I do think Hammond is a breath of fresh air to this process, I do like the simplicity of some of the stuff in the Autumn Statement and I do look forward, maybe strangely enough, to seeing what the next documents are because I would like to see brevity and clarity and strategy coming through anything else that comes back from the commission and the treasury going forward.
I’m just going to be a little bit - whatever the word is – Devil’s advocate, here. So I mean, you know, if you look at the treasury where you guys both worked. We had Partnerships UK in the days when we were all working together. Then we went into sort of Infrastructure UK then we went, now we’ve got NIC; I’m just sort of being a friendly critic here - I’d say, you know, I agree with you about Hammond, I think he needs to grasp the nettle here and we need to set up a real proper body. I don’t even think the NIC will do it, quite frankly. It’s just another committee as far as being a bit naughty.
But I think you know, there’s a chance here, let’s set up a ministry of infrastructure. If it goes well beyond just having an integrated approach, a huge part of this is getting the right skills into government, getting the right skills with which to deliver these finance schemes. You can’t just dream them up overnight, it’s the point you made earlier, you know switching the tap off for six years, you can’t just expect to switch it back on. You’ve got to get the rights skills into government, the right skills in the advisory bodies around government and the right skills for us in Mott Macdonald and CH2M and the others.
So I would lobby strongly to the government, sort this out, you know, whether it be NIC as a statutory body or not is way way down the list for me. Let’s create a ministry of infrastructure.
Mark Richards - BLP
Okay, so thanks Mel. Now, we’ve got a few, three or four minutes left, so I am going to get, my maths isn’t very good, so we are going to go over by a minute or two, but I’m going to get you all to maybe give us a minute on a topic which I know the members are very interested in and I’ll give you my two pence to start with - is on pipeline. Where do we see opportunities for us to earn our day job? I mean, is it the opportunities towards our clients or to work together and where do we see these things?
So, my two pence for what it’s worth is that I think Hammond’s done a really interesting job here; it’s not flashy and he’s almost created a framework and one of those framework impossible ideas is the possibility of actually talking to local authorities about some local authority created and the useable infrastructure. Whether it be Transport for London, Transport for the North and that creates a separate parallel pipeline to the pipeline that we might see in central government. That’s one thing I take away as potentially quite interesting, but I just wanted to get a minute or so from each of you on what your thoughts are.
So Richard, I’ll ask you first. Any thoughts on big opportunities for Mott McDonald and for business generally coming out of the Autumn Statement?
Well, nothing new out of the Autumn Statement. I mean it’s against the background where we are looking at opportunities, innovation and ideas where things join together, so it’s reflected back to this idea of kind of Dutch and whatever the organised infrastructure and aggregation of different things to bring greater benefits so that’s an area that we are looking at as a place for innovation.
We are looking at getting into really the area of being the asset deliver on the promise and the actual delivery of social and economic outcome, so asset performance through life is something we are interested in and that links me to data and digital and getting a grip on data and actually coming to realise the value of that. So those are things kind of we are already looking at. So, I just look specifically at this, it doesn’t really say anything new to me about where we should be focusing but I think aggregation of government there and looking at things in a more systemic way through an integrated approach, would enable us to do that better, so hopefully they can take that forward.
Mark Richards - BLP
I mean again, if the question is for this audience, what are the options coming out of the Autumn Statement, I would say follow the money and the answer therefore must be, in my view, housing and digital.
I think the local people, that the transport is largely going to be through local authorities to Scotland, Oxford- Cambridge and Milton Keynes- we’ve got eh blockages and I don’t think that is going to create a lot of opportunities for what I would imagine to be the majority of this audience. So very interesting, again, but probably not for this audience. So I would say housing and digital, on the narrow question you asked, for this audience from the Autumn Statement and those would be the two.
I’d say devolution. I’d say devolution to local authorities and municipalities. I’d say devolution to supply chain and ultimately I’d say devolution to the citizen and behind that would sit to the citizen would be infrastructure, investment in technology so that the citizen can work from anywhere. The local authority would be devolution as we discussed earlier around sort of abilities to raise money, take their own decisions on economic infrastructure and for the supply chain I think a very well made point that, you know, giving us a more intelligent interface and more integrated and organised interface with government to get this sort of private investment in infrastructure going.
Mark Richards - BLP
It’s difficult to sort of disagree with anything that the guys that have commented; I agree with everything they have said. I’m sure we will have a list of projects at some point in time coming out of this thing. Maybe to take a slightly different perspective, on a personal level, having travelled quite a lot recently and seen infrastructure stability in other countries and having seen this long term and relatively low capital spending forecast from government. I’m increasingly of the view we can’t rely on government to deliver our infrastructure and I think we are going to have to move- and this is maybe not imminent- but we are going to have to move the situation with the private sector identifying the infrastructures investments needed and comes up with schemes and ideas that are then to- reverse process where you take it to the government and say ‘this is what the country needs’ they are prepared to support, places like Australia and they have unsolicited tender processes and single bidder processes, I’m not a great fan of them, but it has got to be a better way to harness the experience and the expertise of the private sector. What we’ve got in front of us now does not change this country.
Mark Richards - BLP
Sorry, just to add to that because I am running out of time, does that mean that having more devolution to the local authorities creates another channel of discussion like the one you’ll have with central government?
Yes it has to be.
Mark Richards - BLP
And John, you get the last word, so any thoughts on opportunities for the Autumn Statement?
Yeah, I guess as somebody who works as a political consultant, for me the opportunities are; those to talk to government and I think in that case a lot of what has already been said which is, I think, the private sector has still got a massive job to do to educate government about how the private infrastructure market works and how that amount of capital that’s out there waiting to be put to work can help the government to solve its own problems and you know, it’s early days for national infrastructure commission, I know it’s not just a department for infrastructure but we have to deal with the world as we find it and I think there are opportunities ahead to do that.
Mark Richards - BLP
John, that’s extremely valuable advice, which I’m sure the members are going to really benefit from so thank you very much. And that draws the webinar to a close, so I’m going to hand over to Rachel and thank you again to the IPFA for allowing me the opportunity to host and thank you so much to the panellists; it’s been a really interesting debate. I think there has been some positives coming out of the Autumn Statement but also, well also a bit of let’s wait and see. Over to you Rachel.
Rachel - IPFA
Thanks Mark and thank you to all of our panellists as well. This session has been recorded and will be posted on the IPFA website afterwards for members to access. When you exit the survey, sorry when you exit the webinar, you will be taken to a survey and we would be so grateful for any of your feedback to help us develop these webinars in the future. You can also keep an eye on the IPFA website for any future webinars. So thank you very much and have a good afternoon.
After having time to digest the Chancellor’s Autumn Statement, IPFA hosted a perfectly timed webinar to review the key announcements that could impact the UK Infrastructure and Project Finance market.
The discussion was chaired by BLP’s Mark Richards, Head of Project, Energy and Infrastructure Finance. Panellists included:
The panel considered, will this be the predicted boom in spending for Infrastructure? Who are the winners and losers? And can we use the Autumn Statement to predict future commitments for the infrastructure market?
*The speakers and IPFA all agree and understood that Chatham House Rule did not apply for this webinar. It is simply a standard footer for the IPFA.
Head of Projects & the Infrastructure Finance Team with extensive experience in providing multi-disciplinary advice to public and private sector clients. Clients include Amber Infrastructure,…View Mark Richards's full profile