The way home for Irish PPPs
Ireland is hoping to reach financial close on seven PPPs in 2015, only a year after exiting its eurozone bailout. Brian Murphy, head of procurement authority the NDFA, talks about how frustrations in the capital markets and the role of the EIB are new concerns. By Colin Leopold.
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A few days after another conference in Dublin promoting investment opportunities in Irish infrastructure, Brian Murphy, the head of the National Development Finance Agency (NDFA) public procurement agency, is in reflective mood about the state of the market. It has been just over two years since the country’s Stimulus Package was launched under a dark cloud of high unemployment, empty government coffers and rock-bottom confidence in the economy.
Fast forward to the end of 2014 and investor days and project presentations are not only attracting international bankers in their hundreds, but have captured the attention of the capital markets and large European institutional investors since the €550m N17/N18 road was financed in May.
Ireland’s long and difficult road out of financial crisis has not been easy but, according to Murphy, it has been engagement with the market at every junction along the way that has been responsible for the positive noise now common at the majority of international credit committee meetings.
“When we launched the Stimulus it was met with some scepticism, and understandably so,” says Murphy, speaking on the phone from Dublin. “The big questions were: How are you going finance this and can the construction sector deliver, as it had taken a serious battering over the past few years. We sought to address these issues over time and spoke extensively to the market. Projects were cancelled in 2009 and 2010, so we had a big job to do convincing people that this programme was deliverable and we meant what we said.”
The government is days from announcing a second Stimulus Package or capital spending review. Government body the National Roads Authority (NRA) has already identified a potential pipeline of road PPPs worth more than €1bn. Potential PPPs for 2015 include an upgrade between Westport-Turlough in Mayo and Collooney-Castlebaldwin in Sligo, which could cost €300m; the Ballyvourney-Macroom and upgrade of the Dunkettle Interchange in Cork (€250m–€300m); Cork to Ringaskiddy road (€150m–€200m) and Limerick-Foynes (€240m–€400m).
The NDFA plays an advisory role to the NRA and is responsible for the procurement of social infrastructure with clients such as the Health Service Executive, the Department of Education and the Courts Service. Murphy describes the NDFA as a “project taker” and there is an unmistakable “can-do” attitude in the way he talks about projects.
“We’re very pragmatic people and we want the process to be as uncomplicated as possible. We want to be seen as a very professional public sector procurement authority,” he says humbly.
It has been a testing year for Murphy and the authority and not surprisingly he is optimistic going into 2015. Ahead of a new pipeline of projects, the government has already announced a €2.2bn three-year plan for social housing in its October Budget, which is expected to rely heavily on off-balance sheet funding. It plans to deliver 2,500 new homes next year, and more than 6,700 by 2017.
At least €300m worth of projects will be procured through PPPs and the EIB is line to provide €150m for the plan. Borrowings will also be raised using the new state-owned bank, the Strategic Banking Corporation of Ireland, and potentially also the Strategic Investment Fund (ISIF), the fund that replaced the National Pension Reserve Fund and is now headed by former Bank of Ireland project finance head Donal Murphy. The ISIF is located in the same building the NDFA but Murphy says there is a strict Chinese Wall policy between the two organisations to prevent any conflict of interest.
“They have a very diverse role,” he says. The sovereign development fund is directed at opportunities in the Irish economy across all parts of the risk spectrum: equity, debt, mezzanine and across all sectors. It has a double bottom line – a minimum financial target and developmental role and it can’t displace Irish lenders – and is representative of some of the new thinking that has recently going into tackling the funding shortfall of only a year or so ago
New pipeline aside, Murphy is confident that social infrastructure will remain a key part of Ireland’s capital spend.
“One area where there is an emerging need is nursing homes and step-down facilities in the medical area. Another potential area where there’s a pressing need in Dublin is student accommodation. And of course the continuing need in education. The demographics are such here that we have a bulge at each end of the spectrum,” he says.
For housing, in the longer term the government is expected to work with the local authorities – particularly the four Dublin authorities – to reform the local housing associations to allow them to play a bigger role in raising finance. Ireland’s flagship social infrastructure project at the moment is the €230m Grangegorman university campus PPP in Dublin. Murphy expects a number of student accommodation projects to follow from the same site, possibly as PPPs. Similar schemes are also expected from Trinity College, Dublin and Dublin City University for their growing student base.
But the Grangegorman project is also interesting for another reason. According to Murphy, more than 20 funders attended the investor day for the project, but it is also true that many have previously expressed frustration at the size of the debt tickets being offered on this, and indeed other PPPs in the current pipeline.
The European Investment Bank (EIB) has offered to fund €110m for Grangegorman, nearly half the project cost. It took 50% of the senior debt on the N17/N18 and has roles on many more to follow. Is Murphy concerned it may be crowding out the international lenders returning to the market?
“[Working with the EIB is] a purely commercial decision,” he says. “We just look at the value-for-money. There are sectors EIB doesn’t support – courts, police. They are also increasingly looking at a minimum ticket size as well and some of our deals may be just that bit small.”
With the police PPP cancelled and only one courts bundle in the market, expected to close in 2015, this may not be enough to appease commercial lenders trying to play a role. With an average debt requirement of around €60m per deal on current projects, minimum ticket sizes are an understandable concern and have already being identified as an obstacle to further participation by those in the capital markets.
“We don’t have that many very big deals,” admits Murphy. “The capital markets people have minimum ticket sizes of €40m or €50m and in some cases €100m, so it is conceivable you could have one private placement funding a deal. That’s not out of the question where we are looking for €50m or €60m in debt. There is a huge learning exercise going on with these investors and they are quick learners.”
The EIB’s Project Bond Credit Enhancement (PBCE) instrument is also an option and is on the table for the N25 road project, awarded this month to a BAM/Iridium consortium. This may also be one of the last projects to be funded at preferred bidder stage, as the NDFA considers removing authority-generated term sheets introduced post-crisis when bank appetite was at its lowest.
“What we will do is, when the new pipeline is launched, we will certainly look at a revert to normality for funding competitions as the market can support it,” says Murphy.
It is too early to say what effect this change may have, but with pricing already below 300bp – down around 100bp since 2013 – many are wondering how much lower it can go. Can Ireland’s domestic banks compete with stronger European names?
Murphy contests that there are absolutely no liquidity concerns in the Irish banking sector but is less clear on the role they will play in 2015. Bank of Ireland has always been a proficient project finance lender and Allied Irish is lending into BAM’s Schools 4 bundle alongside KfW. Ulster Bank is now also looking at deals again, adds Murphy.
An abundance of banks jostling for a place on deals is a nice problem to have for the authority, but it is as much a symptom of limited opportunities in the European project finance market as of Ireland’s resurgence.
“There is a weight of money out there looking for assets as there’s a lack of activity elsewhere. There is also renewed confidence in the market and growth has returned. We’ve a bit of a pipeline, Scotland has a bit of pipeline and so does Benelux, but apart from that very little is happening. So there is a huge frustration out there around where to place money,” says Murphy.
Seven Irish PPPs are due to close in 2015. With N17/N18 seen as a possible template for institutional investors and the EIB growing ever-keener to support infrastructure, it will be interesting to see how the final projects of the current pipeline are funded.
Post-crisis, the NDFA was criticised by many for being too ambitious. This ambition has paid off with only the School 5 bundle slipping notably behind schedule. “Closing seven projects next year will be a big challenge for the market but we’re pretty confident we can do it,” says Murphy.