Despite the recent downturn and uncertainty in the European markets, investment in both mature and "greenfield" infrastructure assets in the UK continues to be an attractive option. Whilst deal activity in the sector has generally been quiet, the UK Government has made a strong statement that it sees infrastructure increasingly as one of the key drivers for the UK’s economic recovery, both in the short and long term. One of the main pillars of this initiative is the UK Government's push to make the sector more attractive and “investable” for private sector investors from the UK and overseas.
In total, around GBP250 billion is expected to be spent on new UK infrastructure over the next five years (not taking into account prospective projects such as HS2). Greater emphasis is being put on economic infrastructure projects as opposed to the delivery of social infrastructure. Big infrastructure players remain interested in the UK given its status as a mature market with a stable and transparent regulatory environment, whilst banks are reasonably comfortable to continue lending, albeit typically at shorter tenors.
As in much of Europe, the UK has seen the announcement of infrastructure privatisation programmes. Whilst the initial timetable was perhaps optimistic, it is expected that several key assets (e.g. Dover Trust Port; National Air Traffic Services (NATS)) will come to market during the course of this year.
The National Infrastructure Plan 2011
The National Infrastructure Plan 2011 (NIP 2011), announced on 29 November 2011, sets out an initial roadmap of the UK Government's proposed support for initiatives to speed up the development of UK infrastructure projects. It consists of a ten year GBP30 billion package of new infrastructure projects which are expected to be funded principally by the private sector.
Nationally Significant High Impact Projects
The NIP 2011 provides a cross-sector view of the UK infrastructure market, and identifies a pipeline of over 500 new infrastructure projects for development throughout the UK "over the next decade and beyond". Commitments include improving the performance and capacity of the UK’s transport network and achieving a secure, diverse and reliable energy supply (as well as focusing on communication systems and environmental systems). The UK Government has also identified a "priority" list of projects which will contribute to economic growth, are of national significance, and can attract significant private sector investment.
From this "priority" list, a number of "nationally significant high impact" infrastructure projects have been designated, primarily in the road and rail sectors. These "high impact" projects are intended both to support the economy now and enhance productivity in the longer term, and will be financed in the period to 2015 by way of an additional £5 billion in confirmed public sector funding.
Government Delivery of Key Infrastructure Projects
The Government has stated that it will take an active role in ensuring that the NIP 2011 is delivered on time and efficiently. In particular, 40 major programmes and significant individual projects (across all sectors) have been identified where investment is considered critical to push forward economic growth. A selection of these projects is highlighted below. The Government has committed to deliver these "as efficiently as possible" with backing from the private sector. Reform of the planning system is also expected to help tackle one of the largest sources of delay to UK infrastructure projects.
Co-ordinating public and private investment in the UK
Almost 66% of infrastructure investment in the UK between 2011 and 2015 is expected to be publicly funded. However, the UK Government is committed to utilising new sources of private sector funding to finance the majority of the UK’s future infrastructure needs. Initiatives to encourage investment include exploring new and innovative sources of revenue (such as tolling) to support investment and the possibility of statebacked guarantees to cover certain specific risks on major projects. However, the NIP 2011 remains short on detail as to the nature of the long-term funding mechanisms which are being considered to induce investment.
Whilst the main aim of the NIP 2011 is to encourage increased participation from institutional investors in the UK, it is clear that the UK Government is also looking closely at the overseas private sector for additional investment. It is understood that the UK Government recently held exploratory talks with overseas institutional investors and sovereign wealth funds, including Marubeni GIC, Canadian pension funds, Cheung Kong Infrastructure Holdings Limited (CKI), and the Abu Dhabi Investment Authority (ADIA).
A "Memorandum of Understanding on Enhancing Cooperation in Infrastructure" was recently signed with the Chinese Government, and it is possible that others may follow. Momentum on the buy-side is already starting to build as a result of the drive to attract sovereign wealth, with CIC's and ADIA's recent purchases of, respectively, 8.68% and 9.9% interests in Thames Water being the prime example.
UK Infrastructure: Sector focus
The NIP 2011 identifies several rail projects as being priority infrastructure investments, including Crossrail, the East Coast Main Line, and the London Underground Northern Line extension. The High Speed 2 rail link (HS2), a proposed Y-shaped national high speed rail network linking London to cities further north and costing an estimated GBP 32 billion, is one of the most anticipated infrastructure projects in the UK in recent years.
The White Paper on Rail has been delayed until early 2012. Expected reforms include longer franchises (15+ years) and closer integration between infrastructure management and train operations, with the intention being to encourage private sector investment in railway infrastructure. Following the reforms, existing train operators may therefore seek to bid for franchises jointly with entities with specific expertise in the infrastructure sector.
The NIP 2011 sets out the UK Government's vision of a secure, low carbon and affordable energy system, which has been given added impetus by the need to replace around one-fifth of the UK's generation (around 20GW) over the next decade. New nuclear build, carbon capture and storage (CCS), and renewable energy have all been specifically targeted by the UK Government. The Renewables Roadmap published in mid-2011 is being developed in order to accelerate renewables deployment, provide stable financial support for renewables technology, and support innovation and supply chain development. This approach will be complemented by the market-wide "Electricity Market Reform (EMR)" proposals currently being delivered by the UK Government. The key elements are (i) implementation of a capacity mechanism; (ii) introduction of a floor price for carbon in the electricity generation sector; (iii) Feed-in Tariffs contained in Contracts for Difference; and (iv) an Emissions Performance Standard.
Increased activity continues to be seen in the UK electricity transmission networks market. Recent transactions include CKI's acquisition of EDF's networks in Southern England for GBP5.8 billion in October 2010 and E.ON's sale of its Central Networks distribution business for GBP 3.5 billion in April 2011. There has been speculation that other similar network assets in the UK, for example those owned by Scottish Power, may also come to market in the near future.
The UK water industry has seen a recent revival in M&A activity. In addition to CIC's and ADIA's investments in Thames Water, CKI carried out a GBP2.41 billion takeover of Northumbrian Water in August 2011 and Capstone (the Canadian infrastructure fund) acquired a majority interest in Bristol Water in October 2011 for USD 206 million. Severn Trent has been reported to be a potential GBP3.5 billion takeover target for some time, whilst the NIP 2011 identified the Thames Tideway Tunnel as a critical infrastructure project (but was otherwise light on proposals for the water industry).
However, new entrants should be encouraged by the publication of the White Paper on Water in December 2011. The White Paper is principally focused on environmental issues and sustainability, but it also contains proposals on increasing competition and gradual market reform which are potentially of real significance. Whilst the White Paper has received a mixed reception, the general view appears to be that the reforms are seeking to maintain investor confidence in the water industry as a safe haven for long-term debt and equity investments.
Call for Evidence on PFI / PPP
The announcements in the NIP 2011 will be complemented by the outcome of the Call for Evidence in relation to the Private Finance Initiative (PFI) / Public Private Partnership (PPP) model which has been so prevalent in UK infrastructure over the past 15 to 20 years. The consultation finished on 10 February 2012, and the UK Government is expected to publish results during the first half of 2012.
The NIP 2011 has so far received a broadly positive reaction in the UK, as it indicates a willingness on the part of the UK Government actively to look for new solutions to fill the infrastructure funding "gap". However, a realistic analysis of the impact of the proposed changes on the UK infrastructure sector cannot be undertaken until further details of the outline proposals are made public during the course of 2012. It therefore seems reasonable to expect that, in the short term at least, the market will remain largely unchanged.
Further information and the full text of the NIP 2011 are available at www.hm-treasury.gov.uk/as2011_index.htm.