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ACE staged its second investment roundtable on 9 May, bringing together members of the Treasury, TfL, URS/Scott Wilson and a number of major investment firms.
The event looked at the role of private finance initiatives and the prospects for alternative funding models in the years ahead. There was recognition of the successes and failures of the models tried in the past, and the fact that they result in a clean balance sheet for the public sector.
Alternatives to traditional PPP models discussed included on balance sheet borrowing, new systems for taxation and straight public funding. A multisource package was highlighted as the likely route forward. This has been seen with Crossrail, which is funded through a mix of PPP, RAB finance, on balance sheet and government grant.
Along with questioning whether existing capital could be mortgaged, there was some discussion of the use of Business Rate Supplements to fund capital works. Concerns were raised that the scope for its use in other cities may be limited despite its use in London, largely because of the capital city’s unique business landscape.
Pitfalls were also seen in tying funding to eventual revenue generation. Where a new rail project is undertaken, future ticket sales might support financing. However, this left investors open to risks, particularly if a recession reduced the eventual demand for tickets.
As at the previous roundtable, the possible role for pension funds was raised. It was agreed that pension funds might see their entry point as an investor either being at the very start of the project, or otherwise only at the very end by buying the finished asset.
That said, there was also recognition that the conventional view - that construction risk was too high for investment, while operations made for safe investment - was not entirely true.
Looking at some of the details of construction risk, it was agreed that risk was in part connected to the duration of the project, and in part was political as public support could have a major impact.
This, the group agreed, contrasted with conventional construction risk, which could generally be pushed down the supply chain by investors. Indeed, it was suggested that the private sector is comfortable with market risks and did not expect guaranteed returns. Rather, it was uncomfortable with the political risks.
The group also discussed the rising recognition of longevity and functionality of the asset. Value in operation and management was of importance to investors. This in turn led to a discussion of an asset register for the UK, which would help to prioritise assets and look into who might buy them.
It was concluded that government should concern itself less with mitigating financial risk and instead work to control political risk or compensate for it.
Attendees
Duncan Hale, Senior Investment Consultant, Towers Watson
Gareth Elliott, Senior Policy Adviser (Infrastructure), British Chambers of Commerce
Andy Matthews, Managing Director, Barclays Infrastructure Funds
Jerome Munro-Lafon, Group Managing Director, UK & Ireland, URS/Scott Wilson
Nelson Ogunshakin OBE, ACE Chief Executive
Gavin Reid, Special Adviser Trade Finance, BP Oil International Limited
Doug Segars, Infrastructure UK, HM Treasury
Julian Ware, Joint Acting Director of Corporate Finance, TfL
Matthew Woodeson, Managing Director, Macquarie Capital Funds (Europe) Ltd
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