8.12 Government has already responded positively to these conditions with a number of interventions to ensure that projects are not delayed as a result of an ability to raise finance at affordable pricing. These initiatives are set out in Box 8.A below.
| Box 8.A: Government initiatives to promote delivery of infrastructure • The UK Guarantees programme to avoid delays in nationally significant infrastructure projects caused by constrained credit conditions. Guarantees are available to infrastructure projects meeting the Treasury's criteria including nationally significant, ready to start construction, financially credible, dependent on a guarantee to proceed and good value to the taxpayer. • Co-lending to support PFI projects, lending alongside other lenders on commercial terms to ease capacity constraints in the market. • Increased capital contributions to PFI projects and phased during the construction period to reduce financing costs and ease debt capacity constraints. This has been approved on several projects in procurement. • Signed a memorandum of understanding with the Japanese Bank for International Cooperation (JBIC) to promote investment in infrastructure projects, further deepening and developing economic relations between the UK and Japan. JBIC has invested in the Intercity Express rolling stock programme and committed to fund renewable energy projects including offshore wind. • The Green Investment Bank (GIB), capitalised with £3 billion, has been established to address market failures affecting green infrastructure projects in order to stimulate a step up in private investment. It is already actively involved in a large number of projects. • The Government is also working with the Association of British Insurers through the Insurers' Infrastructure Investment Forum to understand and address the issues facing this investor group. • Housing guarantees to assist construction of new homes in the affordable private rented sector and social housing providing much needed support to the construction industry and help meet demand for homes. • The NAPF and PPF signed a memorandum of understanding to create the Pension Investment Platform (PIP) last year. It forms part of plans to encourage private sector finance for UK infrastructure. Seven of the largest UK pension funds have now signed up to the PIP which is expected to launch in the first half of 2013. • A Government proposal to double the amount that UK local government pension funds may invest through limited partnerships (from 15 per cent to 30 per cent) to enable more investment in key infrastructure projects and unlock additional funding for housing, road and high speed rail projects. |
8.13 However a number of these measures have a finite lifetime and, therefore, PF2 needs to be built on the solid foundations to enable a long-term sustainable financing model.
8.14 Banks have continued to present proposals to finance projects with shorter-term bank loans including both soft5 and hard6 mini-perm options. Government considers that a short-term bank debt approach is not appropriate for future projects for the following reasons:
• budgetary uncertainty of any public sector underpinning of refinancing risk and future affordability issues where cost of finance is not fixed;
• complexity of separating out market risk (general changes to market interest rates) from performance risk (changes to interest rates as a result of project performance);
• the limited appetite of the private sector to accept this risk and potential for windfall gains where it does take this risk in return for a premium;
• the potential negative impact on lenders' due diligence focus over the long project life; and
• a desire to maximise the investment of long-term sources of capital at the outset in PF2.
8.15 PF2 seeks to address the project flexibility and cost of equity issues caused by financing whilst at the same time providing solutions to adverse debt market conditions and capitalise on the appetite of institutional investors to invest in UK infrastructure through long-term debt. This is set out in further detail below.
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5 Longer contractual date of maturity although refinancing is heavily incentivised through margin ratchet mechanisms and cash sweeps to repay debt in advance of contractual date of maturity
6 Shorter date of maturity enforcing a refinancing of the project