The heart of the matter

PFI 695 - 21 Apr - 04 May
5 min read
Americas, EMEA, Asia

Guaranteeing cash flows is one of the key elements of long term infrastructure financing. How those guarantees are structured can vary from the cast iron to the paper thin. Clients want guarantees to be removed as far as possible from the centre but funders want them as close to the heart as practicable.

When the first private finance initiative (PFI) deals were transacted in the UK in 1997, funders were comforted by a special piece of enabling legislation that "addressed specific concerns in the financial community about the legality of NHS trusts signing PFI contracts, and is designed to put the issue beyond doubt. It sets out that PFI contracts will be certified by the Department of Health in writing and identifies the criteria a contract should meet."

On that basis, a whole host of UK hospitals were transacted. There was no Ministry of Finance or HM Treasury guarantee as such, but the schemes had to be certified by the Secretary of State, ie the government.

Move forward to Dubai Electricity and Water Authority (DEWA) circa 2019. The state-owned utility decided to offer its latest deals – a 900MW solar PV and the Hassyan reverse osmosis water treatment scheme – on the basis of no Ministry of Finance (MoF) guarantee. Given the financial problems Dubai experienced a decade previously during the global financial crisis (GFC), this was expected to be a challenging ask. But last September a range of banks banked the deal – Apicorp, Standard Chartered, Abu Dhabi Islamic Bank, Natixis, Samba, ICBC, Emirates NBD and Warba Bank. Hassyan has yet to reach financial close.

DEWA could be said to have partly followed Saudi Arabia's lead via the Ministry of Finance's Renewable Energy Project Development Office (REPDO) programme. The payment guarantee on its programme has been given to the single buyer of power from the schemes, Saudi Power Procurement Company (SPPC), which is 100% owned by state-owned power network operator Saudi Electricity Company (SEC), and not the generator of power itself, the project company. A range of lenders accepted the proposal on the two pathfinder schemes – 300MW Sakaka solar PV and Dumat wind in 2019 and 2019. Now, even ultra-conservative Japanese institution JBIC is in one of the deals.

Moving forward again, plans are afoot to develop a range of PFI or public-private partnership (PPP) deals in the Gulf. The template can be seen in the first deal to reach financial close, the Saudi schools project. This has been procured via a joint venture with the Public Investment Fund (PIF), Tatweer Buildings Company and the Ministry of Finance. The guarantee comes from the Ministry of Finance, not the Ministry of Education. A challenge once again. The deal has been banked in the pilot scheme, but by local players and not yet by international banks.

The idea is to move the template onto Dubai and Abu Dhabi with letters of comfort provided by the MoF. Interestingly, Abu Dhabi is said to be working on a plan to have a conservative debt/equity funding structure, which will provide some comfort.

The era of cast-iron guarantees is probably behind us. Asset lives are becoming shorter in the digital age. Fibre-to-the-home (FTTH) assets and data centres, for example, represent new infrastructure-style assets. In the energy world, the global market is now in a state of perpetual transition from gas/LNG to solar and onto hydrogen, etc. Who knows what the energy market landscape will look like in even ten years let alone the 25 usually required to see a major capital expenditure asset built and financed.

Rare then to cover an 80-year deal! The residents of Hampshire in England will be sharing their water via a new reservoir, Thicket Havant, via an 80-year concession. Financing has not been a major problem, although the contract will be reviewed every 10 years.

But that really is the exception to the rule. Debt financiers are now thinking more short-termist, along with everyone else. How, for example, to look with certainty at the cashflows from transportation assets – roads, but particularly airports given the events of the past year. That said, the Sofia Airport scheme has now been financed, with the government agreeing to wave the concession fee for the first 10 years.

Infrastructure assets, particularly social infrastructure assets, are long-term in nature. Tailoring a framework where these assets can be financed in the new age is key – adopting the pragmatism of the Bulgarian government, for example, or following the line in the Gulf states where project finance deals have such a good payment track record. But debt funders still need to get to the heart of the matter.