Nick Martindale 7 Apr 2017 10:00am

How accountants make sure infrastructure projects stay on track

UK infrastructure investment can be a challenging combination of public and private finance and long-term horizons. Nick Martindale examines the vital role accountants play in bringing it together

Caption: UK infrastructure investment can be a challenging combination of public and private finance and long-term horizons.

Spending on infrastructure is often regarded as a bellwether of the health of a country; something that ebbs and flows with the wider fortunes of a nation or the broader global economy. A survey by PwC on global infrastructure spending, for instance, found the total amount spent between 2016 and 2020 may vary by as much as $1.7trn, from a possible high of almost $29trn, depending largely on the fortunes of the Chinese economy.

Yet while finance is essential to making any project work, there are underlying trends that create a continuous demand for investments. “There are a number of mega-trends driving focus on the infrastructure sector, such as rising populations in both the developed and emerging markets, increased urbanisation putting strain on existing infrastructure, and a requirement to build new city-related infrastructure and all the supporting facilities that go with that,” says Neil Broadhead, a partner at PwC who leads the capital projects and infrastructure business. “That leads on to consequential demand on infrastructure in areas such as energy, utility service provision and transportation.”

According to the World Economic Forum’s Global Competitiveness Report 2016-17, the UK ranks ninth in terms of its infrastructure, and spending currently stands at around 1.9% of GDP, according to the Office for Budget Responsibility (OBR), down from 3.4% in 2009. More recently, there has been a renewed push to increase investment in infrastructure, reflected in the creation of initiatives such as the National Infrastructure Pipeline and the Infrastructure and Projects Authority.

High-profile projects such as Crossrail, HS2, the expansion of Heathrow and Hinkley Point have dominated the headlines, but the National Infrastructure Pipeline outlines more than 600 major private and public infrastructure programmes and projects planned across the UK, with an average spend per year of £47.9bn. Energy accounts for most of this, with £23.5bn, while spending on transport infrastructure is forecast to be £17.6bn. In the Autumn Statement at the end of 2016, meanwhile, chancellor Philip Hammond announced a further £23bn would be spent on innovation and infrastructure over the next five years, although the OBR has suggested it could underspend on this by almost £15bn.

“There have been some really positive steps that government has taken,” says Broadbent. “We’ve had the formation of the National Infrastructure Commission (NIC) and the Infrastructure and Projects Authority (IPA) and, for me, that signals a real intent from government around investment in infrastructure.” He does, however, raise concerns over the planning processes which can often delay projects, or scupper them altogether. “This can put a bit of inertia into the system in terms of getting schemes underway and delivering the benefit and the outcomes, which they’re not really intended to do.”

Michelle Hubert, head of energy and infrastructure at the CBI, also supports the long-term approach taken by the NIC, as well as the progress made around initiatives such as Heathrow, Hinkley Point and HS2. But she highlights an underlying concern around confidence in the future, pointing to CBI research which found that, while 44% of businesses believe the UK’s infrastructure has improved in the past five years compared to 24% which believe it has deteriorated, only 27% of companies believe this progress will continue in the next five years.

“There is still that question mark about the future, and whether the UK’s infrastructure is going to potentially hold back its overall competitiveness,” she says. “We’re seeing lots of important announcements and that’s fantastic, but we need to make sure that that’s properly translating into getting a spade in the ground.”

ICAEW also believes the government could do more to ensure rhetoric turns into reality; a point made in its Funding UK Infrastructure paper, published in July 2016. “If we want a sound and stable economy and to secure national competitive advantage to attract people to the UK to do business, and retain the business we have, then infrastructure is a key differentiator,” says Ross Campbell, ICAEW public sector director. He would like to see more investment but also greater initiatives to encourage other sources of finance.

“They could extend and simplify the credit guarantee scheme, which is essentially government support for borrowing for infrastructure purposes, to encourage investors, and they could look at things like co-investing in private schemes,” he says. “I’m hugely in favour of things like sovereign wealth funds; the government missed a trick by not setting one up when we had the oil boom. That would have been a fantastic pot of money to invest in key strategic priorities alongside private money for things that weren’t directly funded out of normal public spending. We need to wake up and start taking this a bit more seriously in this country.”

Attracting alternative sources of finance beyond traditional public sector spending is likely to become an increasingly important part of the overall mix going forward. According to the CBI’s research, 59% of firms are open to more private financing models for the road and rail networks, while infrastructure providers put removing the barriers to private financing of projects as the second most critical priority for the IPA, highlighted by 78% of respondents, ranking it behind only the development of skills (84%).

Greater involvement of pension funds could be one means of doing this, says Campbell, but accountants working within businesses in the sector will also have an important role to play in exploring the different options and helping to ensure projects stack up commercially. “When you’re setting up project finance you’re essentially creating a new business to deliver that project and there is a whole gamut of accountancy disciplines and skills that come to bear,” he says. “It’s not an accident that an awful lot of infrastructure professionals come from accountancy backgrounds.”

A port in a storm?

Many emerging markets are looking to attract investment to improve their infrastructure, and in some places this can provide the platform for further economic and social growth.

“Very often a road can transform a local economy because it means people can get their produce to market, whether to ports or another country, and you can see the economic impact of that,” says Ross Campbell, public sector director at ICAEW. “People need clean water to drink, sewage to be processed and houses to live in as well, so it’s a broad spectrum.”

Examples of such projects include significant investments in Kenya in airports, drainage and electricity; a £42.5bn investment in Côte d’Ivoire through a combination of public and private finance; and a huge broadband rollout in Indonesia on the back of a $73m loan.

Such projects can carry different levels of risk from those in more developed markets, says Campbell, including political upheaval and exchange rate fluctuations, and accountants can help to determine whether such projects are likely to pay off.

More generally, the UK needs to ensure it remains competitive when bidding for such projects, often in the face of competition from other countries. “UK expertise in infrastructure development, design and delivery is universally admired, but when the Chinese will offer to build a road, power station or port for a knockdown price, how are we going to position ourselves to compete?” asks Campbell.

“Markets like Asia and Africa are dominated by Chinese money and delivery so, if we want to retain something which is an important export to the UK and something we’re good at, then we need to think very carefully about how we conduct dialogues with other countries and how we ensure that our people get a piece of the action.”

On the ground: the accountants making sure infrastructure projects stay on track

Elliot Renton, chief financial officer, London Luton Airport Group

Running a growing airport presents challenges which may not arise in businesses in other sectors, says Elliot Renton, chief financial officer for London Luton Airport Group.

“With infrastructure you have a stakeholder group that is larger than a lot of other businesses,” he says. “Certainly at Luton, but also for infrastructure in general, the local population has a stake, and there will be regulators in addition to pensioners, staff, unions and shareholders.” A successful CFO in this space needs to be able to speak the language of these different groups, he adds.

An important part of his job is identifying whether projects are viable. “In infrastructure you have very long-term cash flows,” he says. “You have to put a lot of the investment in upfront, and it may only give you returns over 10 or 20 years.”

Renton has developed what he terms the “grandmother test”, which he applies to any documentation around infrastructure. “If my grandmother could have looked at it and said she understood the issues, and then on top of that someone who understands the area gets the risks, then that document is good enough to persuade me that I should invest the money,” he says.

It is the sheer variety of the job that makes it so attractive to Renton. “An airport is a mini-city so we have the whole gamut of activities, from passengers to control authorities and retailers,” he says. “I’ve de-iced the runway in blizzards at 3am, refinanced £320m of debt and negotiated an extension to the concession. I don’t think I have had two days the same in 10 years.”

Andrew Wilkins, finance director, VolkerRail

Railway infrastructure services company VolkerRail undertakes projects for a range of rail clients, including Network Rail but also major transport firms such as Transport for Greater Manchester. Finance director Andrew Wilkins works closely with the firm’s managing director and commercial director to identify which projects to bid for. “There’s a lot of competition with these major projects, and there are significant costs in tendering for them,” he says.

“My role is around setting the framework of those decisions, so working out which contracts we’re prepared to bid for and which we won’t. That includes the contractual terms and risks within the contract.”

The unpredictable nature of when projects will come up for tender during the five-year cycle on which Network Rail operates can also prove challenging, particularly from a staffing perspective. “Sometimes we’ve spent time bidding for contracts, which haven’t gone ahead,” he says. “That’s an issue not just for our business, but for the whole of the rail sector.”

“Infrastructure tends to be very commercially and finance-driven, and it’s vital to provide accurate, timely management information so that the business understands how it’s performing,” he says.

“Cash management is key; we need to generate cash returns for our shareholders so we need to ensure that we don’t have lots of cash tied up in working capital. Having a finance background helps you see the bigger picture.”

Working in the sector can also be very rewarding. “There’s a feeling that you are playing a part in making the day-to-day lives of people travelling by train better,” he says. “I get a sense of pride from that.”

Susan Davy, chief finance officer, Pennon Group

Pennon Group is a listed company that owns and operates South West Water and waste management firm Viridor Limited.

Chief finance officer Susan Davy says her role is two-fold: to make sure the business case for any investment stacks up internally; and then set out to secure this externally, through either debt or equity; or a combination of the two, as with its new energy recovery facility in Avonmouth. On the water side, any business case needs to reflect the fact that the business is regulated in terms of what it can charge customers, too.

Most of the finance for projects is sourced privately, says Davy, but some energy recovery facilities were originally financed under PFI arrangements. “One of the big supporters of infrastructure has been the European Investment Bank,” she adds. “With the whole Brexit situation there is a question mark as to what happens with that in terms of investing in the UK, and that’s something that we need to consider with all purchases going forward.”

As well as making the finances stack up, Davy is conscious of the organisation’s wider responsibilities. “One of the things I’m really passionate about is making sure that we are taking on board what the future environmental implications might be, for climate change for example, and that we’re making decisions now that will last for the future,” she says. “As a CFO it really is about getting the balance right between making sure that we are financially sustainable and that we can serve our communities.”