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Thursday, 20 February 2020

Invaluable perspectives – Chris Elliott

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Chris Elliott, managing director of Barclays Infrastructure Funds, sounds relaxed as he ponders the state of the infrastructure investing industry. By Adrian Murdoch.

To view the digital edition of this report please click here.

“It is an enjoyable industry to work in, it is one that is almost completely devoid of ego and offers limitless variety. Working at the interface of the public and private sectors is very stimulating,” he says.

It is hard to think of anyone else with a perspective as valuable. One of the best-known names in the industry, Elliott has, after all, been in it since the beginning when he joined Lloyds Bank International in 1974. An almost 40-year career has taken in stints at Lloyds Bank International, Bank of America International and BZW Corporate Finance, Barclays Infrastructure Funds, where he has been at since 1989.

Although Elliott has been involved in numerous ground-breaking deals, including Tagus Bridge, PFI Hospitals at Norwich, Swindon, and South Tees, and schools across Britain, he made his name and reputation on two projects: the Dartford River Crossing when he was at Bank of America in the mid-1980s and the Second Severn Crossing, which was completed in 1996, by which time he had joined BZW.

It is sometimes forgotten how ground-breaking these deals were and the extent to which they have shaped the industry. As Elliott recognises, “these two deals were watershed transactions”.

The Dartford River Crossing, the £120m 3km bridge that links to the M25 and connects Kent and Essex, to all intents and purposes kick-started the private sector involvement in public infrastructure projects. Although project finance had been applied to the mineral and oil markets, nothing like this had been done before. As Elliott says: “This was a new application of traditional project finance, hence lenders were apprehensive.”

With justification, he appears even more proud of the Second Severn Crossing, the M4 motorway bridge over the River Severn between England and Wales that was opened in June 1996. The entire junior capital, a listed £131m index-linked loan stock, was underwritten by BZW.

“People could have said that the Dartford River Crossing was a one-off. But the Second Severn Crossing proved that similar techniques could be applied where the economics of the investment were not so strong and that markets could adapt,” says Elliott. The Severn paper was placed with institutional clients in the London market, for the most part, he says, pension clients that were drawn to the index-linked nature of the investment.

From September 1994 to December 1995, Elliott was seconded to the Private Finance Panel under the chairmanship of Sir Alastair Morton. Established by the then British finance minister Kenneth Clark at the end of 1993, the panel comprised 15 senior representatives of the City, industry and the civil service to introduce private finance into all aspects of the public sector, including health, prisons and education, not just into large construction projects like motorways or bridges.

The panel remains controversial, but Elliott speaks positively of his experience in the role, where he sat in the middle ground between client, sponsor and adviser, as a poacher turned gamekeeper. While on the panel, Elliott was responsible for projects in Scotland, Northern Ireland, transport and general finance

“It got deals into the market. It provided solutions by working on real deals and getting them done – you can’t solve problems in a vacuum,” he says. More broadly he goes on to explain how the panel “broke down caricatures of the public and private sectors”. Using the analogy of a Venn diagram, he also points to the fact that it broke the commonly held view that the public and private sectors cannot work together.

This is not to say that he is unaware both of the criticism or indeed the drawbacks of the panel’s work and the private finance initiative (PFI) in general. The difficulties and the media attention – what he calls the “how much to change a light bulb” publicity – appeared after original deals were refinanced. In particular, he mentions the equity or refinancing gains that emerged from having done the original deals when interest rates were high and that were then refinanced when they were low.

With several years’ distance he reckons now that the panel might have been over-politicised. The banker in him reckons there should have been less gearing and greater flexibility within deals, but the Treasury, perhaps inevitably, wanted to reduce the cost of capital. “High gearing distorts performance, when all goes well it is great, but when it goes wrong the effect is distorted,” he says.

Elliott returned to BZW to found the Barclays UK Infrastructure Fund when his stint on the finance panel finished, which is where he has remained. His perspective is such that he was on the Advisory Committee to the Dutch Ministry of Finance on the development of PFI across the Channel.

With domestic deal flow initially slow under the British government led by David Cameron since 2010, more has been seen on the Continent. “Many countries are adapting and adopting the private finance model for themselves,” he says. One recent deal is Prisons Batch A and B in France. This is the largest PPP transaction signed by the new government, with capital expenditure of about €390m and in which Barclays Infrastructure Funds invested €25m.

While the procurement rules of every country are, inevitably, “idiosyncratic”, he speaks positively of countries that use the Napoleonic Code, which emphasises the concept of balance in a consortium perhaps more than in Britain.

The PFI industry has, of course, been through significant changes. At its most basic level the debt profile alone bears no resemblance to where it was before. That for Dartford was around 12 years. By 2007–08 it had swelled to 27–28 years’ tenor. But what has not changed is Elliott’s belief in the use of independent equity investment for infrastructure projects, which he pioneered at Barclays Infrastructure Funds.

It is a theme he has returned to repeatedly throughout his career. Back in PFI Issue 60 he wrote about the need to develop an independent equity and long-term debt market for the funding of infrastructure. He emphasises that infrastructure equity is now more about yield than capital churn. And that under PF2 he believes that equity should take a greater role.

It is a point to remember as the market wakes up. “The market is coming back slowly,” he says, though the hot sectors are infrastructure and energy. “All types of energy,” he says, mentioning the British government’s offshore transmission owner (OFTO) programme. Barclays Infrastructure Funds has reached financial close on two OFTO transactions and preferred bidder on a further two, with total capital across the four schemes of more than £800m and an expected total investment of more than £60m.

Elliott is pleased not just that there has been the development of infrastructure as an asset class, but that economic, social and core infrastructure are beginning to be addressed independently.

“With the public and private sectors working together, you should get better infrastructure that is better maintained as well as developing financial instruments which are especially attractive for pension funds. The sub-division of infrastructure assets into social, core, and economic classes is very beneficial as they have different risk and return characteristics,” he says. “More deals and less talk will be beneficial for everyone.”

Elliott is putting his money where his mouth is. He has raised six funds, Barclays UK Infrastructure Funds; Barclays European Infrastructure Fund; Alma Mater Fund; Infrastructure Investor and, Barclays European Infrastructure Fund II. But perhaps the most interesting is the most recent, Barclays Integrated Infrastructure Fund, which pulls all of Elliott’s strands of experience together. It also tries to square the circle that while the major project finance equity infrastructure experience and expertise tends to be in the fund managers and banks, the capital will need to come from the institutional market.

A £680m infrastructure fund, to invest in recession-proof social infrastructure projects such as schools, hospitals and prisons, was completed in October 2010. The fund has been structured as a 15-year fund with the ability to convert into an evergreen structure and has a portfolio of more than 90 concession-based projects whose operating life runs up to 25 years. It differs from the previous funds in that it plays to Elliott’s belief in the importance of yield, focusing on generating long-term yield of around 10% as opposed to the capital appreciation model seen in its previous five infrastructure funds. It is hard to see how it can fail.

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