UK: Outlook For Infrastructure: 2008 And Beyond

Which areas are most likely to help your business survive the economic downturn?
Last Updated: 18 November 2008
Article by Nicholas Bliss and Edward Braham

To view the original report please click here.

INTRODUCTION

We remain cautiously optimistic about the prospects for activity in the international infrastructure market. This is supported by our new study and by the sustained levels of activity since the onset of the credit crunch. However, asset price levels remain uncertain, with buyers' and sellers' expectations significantly mismatched, and this has held back transactional activity.

Several major infrastructure transactions have closed recently, including Future Strategic Tanker Aircraft (FSTA) and the acquisition of Angel Trains. In addition, the long-anticipated Pennsylvania Turnpike acquisition and the BAA refinancing are expected to come to market during the next few months (see page 4). These are market-defining transactions.

Looking ahead, high-speed rail programmes in Portugal and Poland, the ongoing public private partnerships (PPP) road programme in Russia and India and P3s in the US are all in the pipeline.

We believe that origination and trading activities will continue to be driven by the Organisation for Economic Co-operation and Development (OECD) public sector's inability to fund its infrastructure requirements, the infrastructure needs of emerging economies and by the need of infrastructure promoters to release invested capital.

The key conclusions that we draw from our study are:

  • participants are relatively positive about the outlook for the next 12 months;

  • 'traditional' projects – energy and hard transport projects – will continue to attract the greatest attention from investors and credit providers; and

  • energy utilities and renewables are likely to provide the highest levels of activity.

Perhaps the most surprising finding was the strength of the market in the OECD countries compared with that in the emerging economies. People anticipate that the UK will be the most active market over the next 12 months, followed by the US. To encourage private sector investment, the emerging markets need a stable government, a reliable legal system, control of corruption levels and a supportive policy framework.

We commend Outlook for infrastructure: 2008 and beyond to you and hope you will find it interesting and thought provoking.

KEY FINDINGS

We spoke to 100 Europe-based senior executives who are involved in global infrastructure projects and based in Europe. The objective was to find out their attitudes to the global infrastructure market and their views on future market activity.

Despite the credit crunch, participants are relatively positive about the outlook for the infrastructure sector over the next 12 months: 53 per cent are either as optimistic as or more so than they were a year ago.

Energy Utilities And Renewables Are Likely To Provide The Highest Levels Of Activity

  • 'Traditional' projects – energy (including renewables) and hard transport projects (road, rail and airports) – will continue to attract the greatest attention from investors and credit providers. Participants anticipate most activity over the next 12 months in: energy utilities (61 per cent), renewable energy (56 per cent) and roads (53 per cent), with rail and aviation featuring highly at 45 and 44 per cent.

  • The market in the OECD countries is strong compared with that in the emerging economies: the top four countries in terms of expected activity levels over the next 12 months are OECD ones.

People Anticipate That The UK Will Be The Most Active Market Over The Next 12 Months

  • The key factors influencing private sector investment activity in the emerging markets are: a stable government (mentioned by 76 per cent), a reliable legal system (76 per cent), the control of corruption levels (74 per cent) and a supportive policy framework (71 per cent).

  • Clearly, emerging markets need to invest further effort in fashioning robust legislative and policy frameworks to attract and retain the attention and resources of private sector participants.

CAUTIOUSLY OPTIMISTIC

Our view is that market interest in infrastructure and transport assets continues to be strong. However, our relative optimism is tempered largely by constraints within the debt markets: the increasing cost of debt, continued downward pressure on individual credit providers' exposure levels, the tightening of covenant packages and limited accessibility to the capital markets.

Optimism Levels: Number And Value Of Deals

Despite market conditions, a number of major infrastructure transactions have recently closed, including, most notably:

  • FSTA with a £2.2bn senior debt requirement (plus £105m mezzanine and £180m equity bridge facilities); and

  • the acquisition of Angel Trains with a £3bn combined senior and junior debt requirement.

In addition, the long-anticipated $12.8bn acquisition of the Pennsylvania Turnpike and the multi-billion-pound BAA refinancing are expected to come to market during the next few months.

Looking into the future, deals in the pipeline include high-speed rail programmes in Portugal and Poland, the marketing of the Babcock & Brown global windfarm portfolio, the PPP road programme in Russia and India and additional PPPs (P3s) in the US (among other large-scale infrastructure transactions).

Overall, therefore, participants in our study remain quite optimistic about the infrastructure and transport sectors over the next 12 months: the majority (53 per cent) are either as optimistic as or more so than they were 12 months ago. Notably, participants feel that both the number and the value of European infrastructure deals in which they will be involved will either remain at the same level or increase (73 and 69 per cent respectively) when compared with activity over the past year.

Investors (80 per cent) are more optimistic than credit providers (60 per cent) in terms of the number of European deals that they anticipate will be undertaken, but the two groups are closer in their assessments of the value of deals: 68 per cent of investors and 60 per cent of credit providers think values will either remain at the same levels or increase.

Areas Of Most Activity: The Next 12 Months

The areas in which participants anticipate most activity over the next 12 months are energy utilities (61 per cent), renewable energy (56 per cent) and roads (53 per cent), with rail and aviation featuring highly at 45 and 44 per cent. Social infrastructure projects such as schools, hospitals and prisons feature less prominently.

There is a divergence between investors and credit providers over the sectors in which they expect their organisations to be most active, with investors focusing on energy utilities and renewable energy but credit providers identifying roads as their most active sector.

Areas Of Most Activity: The Next Decade

When it comes to the 10-year forecast, investors and credit providers agree that the greatest growth opportunities will be in energy utilities and renewable energy, ahead of transport infrastructure such as road, rail and airports. Perhaps a surprising finding is that opportunities in nuclear over the next 12 months come very low down the scale, although – unsurprisingly – the 10-year forecast shows a much higher profile for this industry.

This focus on energy utilities and renewable opportunities over both the short and longer terms reflects a combination of factors:

  • the high oil price, providing an incentive to invest in energy projects previously regarded as marginal;

  • opportunities presented by the unbundling of the European energy market;

  • governments' desire to achieve energy security;

  • the demand and growth of energy requirements in the emerging markets; and

  • the regulatory and socially driven impetus for the energy sector to respond to climate change (for example, government subsidies and incentives to invest in renewable energy and recently announced changes to the UK planning process that aim to encourage greater investment in nuclear energy).

The continued strength of interest in hard transport infrastructure (road, rail and airports) reflects the attractiveness of the long-term stable financial returns that such assets are capable of delivering to a growing group of investors, including infrastructure funds, pension funds and sovereign wealth funds.

THE CREDIT CRUNCH: PRICING AND VOLUME

The large infrastructure deals of 2006 (such as the Ferrovial-led consortium's acquisition of BAA and Macquarie's acquisition of Thames Water) were sustained by the availability of cheap and readily available debt.

The debt markets have clearly undergone a radical change since August 2007 and a number of themes have emerged:

  • higher levels of equity;

  • vendor loans (to sustain, as far as possible, vendor exit price expectations); and

  • an almost-total closure to infrastructure deals of the monoline wrapped bond market (exacerbated by the recent MBIA and Ambac downgrades) and a consequent increased reliance upon bank debt, higher debt margins, reduced ticket sizes on the part of banks, tighter covenant packages and more conservative financial ratios.

Current high-profile deals in the course of development, such as the bank and bond financing of the $12.8bn Pennsylvania Turnpike in the US and the multi-billion-pound BAA refinancing in Europe, will be the bellwether deals for the infrastructure and transport sectors in the next 12 months.

Market Pricing And Activity Levels

We asked participants whether they feel that market prices have adjusted in the light of the credit crunch. Although the overwhelming view is that sellers' price expectations are too high, the study is inconclusive over whether asset prices have actually undergone a correction (48 per cent feel that prices have reduced, 42 per cent feel either that prices have not reduced or that it is too soon to tell and 10 per cent believe prices have actually increased).

What this split of market sentiment demonstrates is a general air of pricing uncertainty – whether to be a buyer or a seller? – and this, taken with the general tightening of credit availability and terms, has led to a reduction in post-credit crunch deal activity. Dealogic's records of global infrastructure transport deal flow over the past 18 months show a 40 per cent drop in the number of deals completed for Q1 and Q2 2008 compared with the same period for 2007. There was a 34 per cent drop by value over the same period.

As for anticipated sources of funding for deals over the next 12 months, bank debt and infrastructure fund equity lead capital market products by a significant margin. However, it is clear that participants see the capital markets as an important source of capital: 57 per cent identify them as such, although 85 and 82 per cent of participants identify, respectively, the use of bank debt and equity.

GLOBAL DEMAND FOR INFRASTRUCTURE

The BRIC emerging economies have been heralded as the infrastructure and transport sectors' fertile new ground.

However, as the 2006-7 OECD report Infrastructure to 2030 highlighted, OECD countries continue to be the most significant players in these sectors. This is because insufficient public funding is available in OECD countries to satisfy the competing demands for improving and expanding existing infrastructure and responding to the health and social needs of aging populations.

Recent US P3 experience has clearly borne out the OECD report's findings, both in terms of numbers of deals closing and their value and in the development of P3 policies in the infrastructure and transport sectors.

The OECD countries' role in infrastructure and transport investment reflects where the survey participants' organisations are prioritising their activity over the next 12 months. The top four countries in terms of expected activity levels are OECD ones: the UK, the US, Germany and France.

Only 7 per cent of participants nominate the Middle East as the area of greatest activity for their organisations, with 13 per cent identifying Russia and 8 per cent India as countries of greatest activity.

These findings can be explained by the comparative maturity of the UK market and the sheer size and scale of the development and investment opportunity available in the US where, in addition to the Pennsylvania Turnpike, a number of big-ticket deals are expected to come to the market over the next four to six months (including Chicago Midway Airport, Chicago Parking Meters, Long Beach Courts and various road schemes).

Emerging Economies: Issues Of Concern

As expected, India, Russia, China and Eastern Europe are named as the emerging economies most in need of infrastructure investment.

We asked participants to identify the bare minimum requirements for their organisations to become involved in an infrastructure deal in an emerging economy. The responses illustrate why their organisations are not prioritising the emerging economies ahead of the OECD countries: 76 per cent identify the need for a stable government and a reliable legal system, closely followed by 74 per cent identifying the need for corruption levels to be controlled and 71 per cent for supportive government policies.

Clearly, emerging markets need to invest further effort in fashioning robust legislative and policy frameworks to attract and retain the attention and resources of private sector participants.

Russia emerges as the country that is perceived as the most difficult in which to develop an infrastructure project. The Russian public sector is aware of this issue and is seeking to address it – as demonstrated by the Russian Federation's enacting the Federal Law on Concessions in 2005 to encourage PPPs in infrastructure and transport projects and the amendments to that law, which will be enacted in the near future. There are four toll road projects, a light rail project and an airport project competing for foreign investment. The closing of a Russian toll road transaction will undoubtedly assist in encouraging market participation.

ABOUT THE SURVEY

The survey was carried out by conducting 100 telephone interviews with senior executives in the European infrastructure and transport industry who are regularly involved in global infrastructure projects.

The majority of participants are investors and credit providers, with the balance being consultants or industrial players who operate across all sectors, from traditional or 'hard' infrastructure, such as energy and transport, to social infrastructure such as hospitals, schools and prisons projects.

Interviews were carried out between 22 May and 3 June 2008.

To view the original report please click here.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.