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Innovative solutions required to finance new infrastructure

The convergence of affordability issues and heightened levels of demand for new infrastructure, has led to financing issues taking far greater significance in the delivery of new infrastructure projects, says Simpson Grierson. The law firm says that both at a regional and national level, significant pressure to reduce or maintain debt levels is driving a need to explore alternative financing solutions for the delivery of large-scale infrastructure projects.

“This is particularly acute at the local government level, with many local authorities at or near debt funding limits and facing further funding constraints presented by an ageing population,” says Simpson Grierson Partner Simon Vannini. “This means that innovation in the structuring of procurement solutions to address funding constraints will continue to be a key focus point throughout 2018.”

The firm believes that some level of legislative change to facilitate new solutions may also hit the regulatory radar – with the Government about to set up a working group to explore new financing solutions, such as “value capture” models that leverage future rating increases attributable to infrastructure development.

Vannini says that in light of financing issues, local authorities will be considering the development of structures that allow private money to be applied in a manner that does not offend public policy. To this end, public, private partnerships have become increasingly common worldwide and he expects “BOOT” models (build, own, operate, transfer) to remain an attractive option for local authorities.[1] Simpson Grierson notes that however projects are paid for, authorities and financiers will have heightened concerns around the capabilities of chosen contractors to complete projects on time and to budget.

The causes of the capability issues are complex, says Vannini, but a key factor is that construction contractors are operating in a fiercely competitive market. As a result, many enter into dangerously unfavourable contracts offering them almost zero margin and giving their customers very favourable payment terms. The result has been mounting debt and, in the extreme case of Carillion in the UK, corporate failure.

“In our experience, it is fundamental to carefully structure these complex infrastructure arrangements. Service scoping, delivery timelines, KPI’s and funding triggers are all areas where we see the need for careful focus. With examples all over of people being burned, now is not the time to take on unintended risk.”

[1] Under a typical BOOT model, the private partner (or a consortium of partners) builds the infrastructure and is granted a concession to operate for enough time to generate a commercially attractive return on its investment. At the end of the concession period, the asset is transferred to the public authority.

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