2.22 Primary investors play an important role in project development as they lead the structuring of projects. Industry sponsors are a major source of primary equity. They typically have a strong appetite at the bid stage of projects, as their business is the ownership and management of infrastructure assets and the services derived from them. Equity investment by industry sponsors is valuable in supporting the development of projects, giving access to sponsors' experience of delivering infrastructure projects.
2.23 However, the Government is keen to see more investors with longer-term investment horizons, such as pension funds, investing in projects at an earlier stage. These longer-term investors have tended, historically, not to invest directly in projects. In part, this is because they have not developed the in-house skills and resources to manage these investments, but also because they have been averse to the time, risk and cost of bidding for projects.
2.24 The Government will, therefore, implement a mechanism to provide an investment opportunity for these investors. Where appropriate, it will require an equity funding competition after the preferred bidder stage for a proportion of the equity requirement. The timing of such a competition, when project documentation and commercial and financial arrangements are substantially complete, will keep the costs of participation in the competition down and so meet concerns expressed by long-term equity providers. It is also expected that widening access to different types of investor could be expected increase competitive tension, with downward pressure on equity pricing in the longer-term.
Box 2.D: Equity funding competitions A decision on whether to have an equity funding competition will be made on a project-by-project basis. The parameters for the equity funding competition will be set out in the tender documents for each project on a case-by-case basis. The principles on which the competitions will be based include: • the equity funding competition will commence after the preferred bidder stage and be executed in advance of financial close; • it will be run by the private sector with input by and approvals from the public sector; • bidders will compete based on finalised project documentation as agreed at the preferred bidder stage between the preferred bidder and procuring authority. The competition will not allow for re-negotiation of the these documents; and • equity funding competitions may result in a tranche of equity with lower equity return. Savings generated through a lower equity return requirement of the winner of the competition will be passed on in full through the unitary charge. |