A consortium of 80 of the world’s largest pension funds is ready to provide funding for infrastructure projects under the government’s new £40bn guarantee initiative announced yesterday.
Equility Capital, representing the US-based consortium has been lobbying government to introduce this initiative for the past year. The long established Capital Lease Infrastructure Program (CLIP) is already in use by governments and municipalities around the world.
Equility Capital CEO David Rose said:
“The Chancellor’s announcement that HM Government is going to place the UK’s AAA credit rating behind borrowing for infrastructure projects is to be welcomed. However, it should be made clear that the funds will not actually come from government, but from private lenders. This highly significant initiative will allow infrastructure contractors to borrow the necessary funds for projects, from the private sector, which will then be underwritten by the government.”
The process, from application to delivery of funds, takes no more than 120 days. The funder takes ownership of the asset for the duration of the funding term but leaves its operation entirely to the client with no additional charges for management contracts and other loadings that previously came with PFI funding.
The infrastructure contractor becomes the borrower by leasing the ‘to be built’ asset through the CLIP process with HM Government underwriting the lease payments. The funders seek only the return of the capital through the capital lease program on a monthly or quarterly basis. Deal values of £50 million to upwards of £1 billion can be funded through the CLIP program at current total cost of funds including interest, insurances, fees and all other costs of c5.5%, against the UK’s AAA rating with the term out to 25 or 30 years, depending on the nature of the project. On completion of the funding term, the asset is passed back 100% to the borrower.
The intiative is likely to be of particular interest to UK local authorities. According to Equility, currently only 4 out of a total of 433 authorities have credit agency ratings - Kensington & Chelsea with Standard & Poor's AAA, Greater London Authority with S&P AA+, Cornwall Council with Moody’s Aaa and Birmingham with Moody's AAA and S & P's AA+.
According to Equility, all UK local authorities "can be certain of securing top-tier ratings" that will give them immediate and direct access to the lease-based infrastructure finance programme. The funding would available to UK local authorities entering the process with a ‘shovel ready’ project, where the only outstanding requirement is the finance itself.
The water companies themselves may also be interested in the scheme - the proposed Thames Tideway Tunnel has already be specifically referred to as a potential recipient of the funding.
In turn, the relatively low-risk water sector may be of particular interest to the investors backing the CLIP infrastructure programme - which have capital equivalent to the UK’s GDP to invest in projects that present them with a long term, predictable return expect cost of funds in the order of +/-5% with terms to 20 or 25 years in some cases. The minimum deal value is £50m.