Infrastructure: Conduit may bypass expensive bank lending


Louise Bowman
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The UK Treasury is understood to be considering the establishment of a conduit-style fund that would source investment directly from institutional investors such as pension funds and insurance companies to fund its infrastructure investment programme. The UK government would own the conduit and take the first-loss risk in the vehicle. Management of the conduit would be outsourced to a third party – insiders suggest that one of the monoline guarantors is being considered. The conduit could be launched in the next three to six months.

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The sharp rise in the cost of bank lending to infrastructure PPP/PFI deals in the UK has prompted the UK Treasury to examine radical new solutions to the funding requirements of its pipeline of upcoming projects. The PPP market has been hit by the disappearance of the monoline guarantee companies and the sharp reduction in bank liquidity. When the PFI concept was first launched in the early 1990s, deals were being done at 140 basis points over Libor – today banks are looking for between 250bp and 350bp to take similar risks. At the height of the boom deals were being priced as low as 40bp over Libor.

"The government is getting concerned about the terms of private money," says an expert close to the situation. "There are several different ideas being worked on which flow from the premise that bank finance is too expensive." The idea of a conduit-style funding vehicle for PFI is not new. Sir Adrian Montague, then chief executive of the government’s taskforce on PFI, is believed to have considered a similar scheme in the late 1990s.

Andy Rose, executive director of Partnerships UK, which was set up in 2000 to succeed the Treasury taskforce, declines to speculate on bank funding costs. "The ultimate decision is made on a value-for-money basis," he tells Euromoney. "You have to ask for each deal if it is value for money. The all-in cost of funds hasn’t increased as much as you would think. You have to remember that the all-in cost of PPP involves a base cost [which has fallen substantially] as well as a margin. There are still banks lending and we are starting to see signs of a levelling off. There is a danger in speculating on the outcome of changes in bank lending. Deals are still closing and the key issue is to concentrate on them to make sure that they still close."