Five ways to attract developers and investors to infrastructure schemes
There has been a great deal of debate about how to marry the needs of both public and private sector players when considering how to pay for infrastructure deployment on major schemes. Since the property industry is more often than not the beneficiary of good infrastructure provision the idea of capturing and sharing the future raised value of land and housing to fund the roll out of infrastructure is, on the face of it, a good one, but the question of how best to do it remains problematic.
There is no single infrastructure company model in existence yet which can act as a general model. Schemes and scheme components will always be different but what has truly hampered the roll out of acceptable financing models is the way value is considered.
The issues for developers and investors around infrastructure financing relate to more than securing the initial investment. Just as public investors tend to look at multiples of earning in the stock exchange so most developers and infrastructure analysts pay little attention to price; they look at revenues, costs, investment requirements and cash flow well into the future.
Many potential development schemes are led by politicians keen to gain agreement within the timeframe of the current political cycle, but discounted cashflow over a longer period than the political cycle remains a stumbling block for many.
A long term project can take up to 20 years to complete, during this time there might be two or more property cycles to negotiate for which values might have to be adjusted down. Longer term securitisation of income is a concept potentially vital to attracting investment but which has also proven difficult to measure so far.
Transparency is an issue for some developers, community benefit is often a difficult concept to translate into cashflow, and measurements of ‘uplift’ are difficult to agree. A developer wants to understand where his money goes and what the benefit will translate into on the public sector side.
The timing of release of capital can also be a critical consideration for developers.
All of these factors will influence a developer or investor when thinking about where to take forward a scheme.
It may be that the tide is turning slowly as some ground breaking initiatives do exist:
Milton KeynesThe Milton Keynes Partnership (MKP) Committee is the local delivery vehicle charged with delivering growth in the Milton Keynes area up to 2016. Over 30,000 new homes are planned together with the appropriate social and physical infrastructure to attract and grow employment.
The solution for Milton Keynes is a tariff-based Section 106 agreement between the MKP acting as the local planning authority, and developers and landowners collected as a fixed cost with each successful outline application. English Partnerships acts as a banker for the scheme and provides advance funding for improvements in roads, education, health, community services and parks. The £300m fund also seeks to attract other inward investment.
The developers’ tariff equates to £18,500 per residential dwelling and was derived from work that looked at first defining the nature and scale of the developments and supporting infrastructure, and then costing up the physical and social infrastructure identified in the plans.
English Cities FundAnother English Partnerships initiative that seeks to unlock infrastructure is the English Cities Fund. This fund, in conjunction with Amec and Legal & General has raised about £100m targeting mixed use projects in areas where local economies fall below the EU average. Returns will potentially be secured by demonstrating that significant uplift values can be achieved or from associated commercial returns.
OnedinOne North East Development Initiative (Onedin) seeks to develop a property regeneration partnership to manage and develop its regional land holdings. Among the many objectives cited by Onedin are the promotion and initiation of regeneration projects through development activities undertaken by private public partnership.
Barnet Financing PlanAnother scheme recently proposed, yet still requiring a number of hurdles to be overcome is in the London Borough of Barnet. This scheme has been devised by Barnet Council and identifies locally generated revenues or taxes that would be retained within Barnet that could then be used to raise finance directly from either public or private sources. There are five potential sources of revenue – business rates, stamp duty, council tax, ground lease negotiations and a car parking levy. Although some of these sources would require government approval, in theory they could raise over £30m per annum that could then be used to attract prudential borrowing or funding from private sources.
Utilities schemesSome public and private sector partners have come together to establish Energy Services Companies (ESCos). These are special purpose vehicles whose core business is heating, cooling and power at a community or district level. Centralised generation of heat and power through the National Grid is increasingly seen as inefficient and wasteful. In the future community networks which use distributed energy might be the norm. There has been a relatively slow take up however from investors and major energy companies, most won’t get involved until market conditions are better, and in the current set up they protest that there is too much regulation.
One step beyond the ESCo has been the development of MUSCos, (or Multi Utility Service Companies), adding data or TV or other services to the energy offer. The MUSCo acts alongside the master development partner to plan, design, construct, finance and operate the plant and infrastructure required to service a major scheme sustainably. These combined utilities achieve economies of scale, eg one plant operation, the same trenching or ducting systems, to reduce cost and risk. One example that has been working successfully around the UK since 2001 is the EcoCentroGen model.
Sustainability is the key driver behind the proposed establishment of these models but, arguably, only major regeneration schemes such as the planned Elephant and Castle development are capable of attracting serious investment and translating the concept into a significant delivery vehicle in the UK in the current market conditions. The potential use of these models within the Eco Towns initiative will be interesting and a potential catalyst for wider take up.
The near futureA ‘true’ infrastructure company that manages to meet the current range of political, financial and technical demands put upon it as described above, and which conforms to general acceptable criteria, does not yet exist.
The structures that have developed so far have been bespoke to the environment for which they have been planned. Developers are playing their part in the evolution of these structures but the market context is currently a complex one.
However, a few of the major investment banks have substantial capital available to invest via their dedicated infrastructure funds. These funds are able to forward fund large regeneration schemes and deliver the mechanism and financial structure to ensure that they are brought to market more quickly than the established route. The potential is especially topical in the current nascent environment of Local Asset Backed Vehicles and Local Housing Companies.
Taking the market forward will require companies well used to operating in the central government, local authority, developer and investment worlds with individuals who are able to manage the process and the differing drivers of the pubic and private sector stakeholders. If the language of infrastructure finance is more readily understood by all sides of the deal map then the vision of realising the latent value in its roll out can be achieved.
Brian Fitzpatrick is partner and head of highways at consultancy EC Harris