Mind the gap: meeting the world's growing infrastructure investment needs

Well-designed, delivered and functioning infrastructure is crucial to achieving economic growth and prosperity in both developed and emerging economies. However, despite these demonstrated benefits, investment in infrastructure is lagging and has been particularly slow to recover since the global financial crisis. The Global Infrastructure Hub (an initiative of the G20) estimates that the world is now facing a $15 trillion gap between projected investment and the amount needed to provide adequate infrastructure provision.

This ‘infrastructure gap’ has the potential to worsen as climate change, technological change, and increasing urbanization will place further pressures on existing infrastructure. Governments and international institutions (such as the UN and World Bank) are increasingly aware of the growing scale of this challenge and are mobilizing to direct more resources to addressing it.

Steer is gearing up to play its part by continuing to build our financial advisory capability in the infrastructure space to provide solutions to both public sector and private sector clients seeking to access investment in their infrastructure projects and businesses. Working as part of cross discipline teams with our engineers, economists and planners, our financial advisory professionals provide a range of services that are crucial in unlocking investment in projects and businesses.

Project Preparation & Structuring

A major obstacle to increasing infrastructure investment is the perception that there is an insufficient pipeline of high-quality, well-prepared projects being brought forward by governments. Governments need high quality advice to ensure the long term success of the project but also to ensure knowledge is transferred to the client, allowing a program of subsequent projects to be developed.

The importance of high-quality project preparation is perhaps most striking when governments are seeking private investment in their projects through Public Private Partnerships (PPPs/P3). Private investors subject projects to stringent due diligence to ensure that stable returns are achievable against an acceptable risk profile. Failure to prepare a project that does not meet investor expectations or alternatively does not provide value for money for the taxpayer has the potential to lead to costly failures in procurement and delivery.

Our experts have vast experience of working for both the public and private side on a range of global PPP/ P3 projects. This ‘dual-side’ experience is important to our offer and provides us with a unique perspective on the deal structuring challenges that always face national, regional or local governments.

Raising Finance & Transaction Services

As demand for their services continue to grow, infrastructure businesses are frequently considering ways by which they can finance much-needed expansion and improvement of their assets. Infrastructure businesses are therefore frequently exploring a range of financing mechanisms to provide the cash and assets to meet their growth aspirations. This includes bond issuances, share offerings, acquisitions and asset disposals. This is accompanied by a growing interest in investors in infrastructure as an asset that can provide long-term, stable and inflation-proof investments, particularly institutional investors such as pension funds and insurers. The combination of these factors has led to a very active corporate finance market in recent years with significant global deal flow.

Steer has been a key player in supporting clients in this marketplace, particularly through our due diligence services. This has seen us recently ranked number one in the inframation league tables for transaction advisors. We are increasingly expanding our offer in this space to provide more financial advisory services, including complex financial and business modeling, valuation and assisting with the finance raising process. We also provide financial model review services to provide third-party assurance around a project or business’s financial forecasts.

Regulatory Finance

Long-term, sustained investment in infrastructure at a reasonable and affordable cost is only possible if there is a stable regulatory environment in place. Transparent and fair economic regulation of infrastructure, particularly large, natural monopolies, is crucial in providing comfort to investors that the prices charged to customers will remain reflective of the costs of developing and maintaining the assets and the risks to which investors are exposed to.

Regulating these assets is complex, requiring in-depth understanding of the relevant pricing mechanisms and detailed analysis of the finances of the regulated entities. Likewise, regulated companies require support in complying with these regulations and optimizing their revenues within the regulatory constraints.Our financial experts work alongside our regulatory economists to provide a range of quantitative services to this market including financial modeling and assistance with price controls and determinations. We have highlighted below three case studies demonstrating our breadth of experience across our global financial advisory services:

Anillo Víal Periférico – Peru

Steer has been appointed by Proinversión, the Peruvian investment promotion agency and infrastructure project promoter, to advise in the financial structuring, demand forecasting and technical due diligence of a large PPP urban toll road in Lima. This is an example of an engagement where our financial specialists work alongside our economists, technical experts, engineers and planners to provide a holistic solution to governments so that they can bring a well-structured and well-prepared project to market and thus maximize the chances of leveraging private investment into the country’s infrastructure. Our work includes shadow bid financial modeling, development of the project risk allocation and value for money analysis, structuring of the public funding contribution (through a complex bond instrument) and assistance in negotiation with the bidders for the project sustainable partnerships with the private sector.

Airport privatizations and transactions

Steer has extensive experience providing advice to international investors (buyside), governments and development institutions (sell-side), and lenders on airport privatizations across all major geographical regions. Taking the buy side as an example, our typical support would cover opining on all technical and business plan issues, and evaluating information provided in data rooms as well as through third party sources to create long term traffic, aeronautical and non-aeronautical revenue, and capital and operating cost forecasts to support the bid. Through developing operating and operational models to best practice standards, we are able to test the robustness of these forecasts against a battery of stress tests. Combining this with the financial knowledge of our team members enables us to have fluent discussions with financial advisers and play a key role in helping shape the structure of cash flows to optimize bid parameters.

Control Period (CP) 6 Charging Review

Steer is lead technical advisor to the UK Department for Transport (DfT) in its implementation of the change to regulated track access charges and performance regime payments from franchised train operators to Network Rail during CP6 (2019-2024).

Periodic reviews are one of the principal mechanisms by which the UK’s rail regulator (ORR) holds Network Rail, the owner and infrastructure manager of the country's rail network, to account and secures value for money for users and funders of the railway. Through the recent 2018 periodic review, ORR determined what Network Rail should deliver in respect of its role in operating, maintaining and renewing its network in the next control period (CP6) and how the funding available should be best used to support this.

Our work involves estimating the impact of the change using the contracted financial models submitted by franchised operators, developing methodology and calculating revised inputs based on the new price lists, and supporting DfT in negotiations.