Current equity investors in PFI projects are a mix of industry sponsors who have a sub-contractor interest in the project, third party project developers and financial investors, who are generally PFI specific or general infrastructure funds. Project debt is provided by banks or by institutional investors through project bonds.
Pension plans and other long term institutional investors that invest in PFI are usually indirect investors through intermediary funds. A relatively small number of funds currently invest from the outset of PFI projects and through the construction phase; and they generally seek to exit the investment in the medium term. A larger number of funds are active investors in PFI projects when they reach operational stability and they tend to retain the investment for the long term. The relative appetite of funds for investment in the construction or operation phase of projects is influenced by the yield objectives of the funds' underlying investors and their in-house capability to assess development risk. However, feedback from the market suggests that appetite is changing, with an increasing number of institutional investors interested in earlier involvement in projects, from the development and construction phases and over the long term.
Recent developments in the market have seen the launch of PFI debt funds that are targeting institutional investor appetite. Institutional investors have also indicated an appetite for alternative capital structures for projects that would feature a lower level of project gearing or no gearing, enabling them to invest larger volumes of capital in a project and to access both equity and debt like returns.
Ensuring that future projects can access as wide a set of financing sources as possible would have a positive impact on the financial sustainability of a privately financed model for public assets and services.
Question 5: What changes to the current approach to the allocation of risk and the procurement and delivery of public facilities and services would increase institutional fund investment appetite, either directly or through intermediary investment vehicles? Question 6: Would alternative approaches to the current typical capital structure of projects be favoured by institutional investors? What constraints currently exist to adopting these approaches, and how could these be addressed? Question 7: Are there other actions that could be taken, by the public or private sectors, to increase institutional investment in public assets and services, and what are these? What would be the expected implications for cost, risk transfer and value for money? |