Comment: Infrastructure funding rocked but not rolling

INFRASTRUCTURE is the new rock and roll. Or, at least, it is in those circles whose members still use the term “rock and roll” as opposed to most youngsters these days, whose musical tastes have moved on to include genres such as “dub-step”, “crunk” or “post-hardcore emo-
electronica”.

But when it comes to building things, or at least the infrastructure that sometimes literally paves the way in order that the private sector can build things, the process to fund them is at a standstill. The problem, in a nutshell, is that which the outgoing chief secretary to the Treasury, Liam Byrne, pointed out in a note to his successor David Laws: “There’s no money left”.

The knotty problem of how to fund the big, sexy high-speed train lines, road and bridges that will pump money into the economy and create jobs is still being worked out. Chancellor George Osborne is making attempts to get his hands on some capital by attracting bond investors into the sector, without mentioning the poison acronyms PFI and PPP. But he has not got terribly far, as the risk for potential lenders still seems too great – because no matter how good the word of any contemporary chancellor is when it comes to promising to pay enough to meet promised returns, people and politics change rather more quickly than the 30-year investment time frames expected by the investors.

But in the meantime, north of the Border at least, there has been the Scottish Futures Trust (SFT). Each year it publishes a report which says how much it has saved the tax-payer on building schools, houses, roads through its own particular application of canny Scottish tightfistedness, planning and streamlining. If a school works in one local authority, then the same design can well be used in another, is just one example of its ways of thinking.

But the trust specialises in “alternative funding structures” so that government and local authorities can keep spending “off balance sheet”. It is capital derived from borrowing, but not the straight 4/4 rock and roll beat that comes from wealthy government coffers. Instead it is a more complicated, syncopated way of borrowing that relies on the future value of income streams through rents, rates or, in the case of the £750 million worth of non-profit distributing (NPD)-funded projects, an alternative to PFI that relies on private sector lending, but not by trading equity in the projects.

There were sceptics about whether or not NPD would be successful, but SFT can point to its growth to prove the model has its fans – such as the Wellspring Partnership, working with SFT in the west of Scotland, which has as its backers Morgan Sindall and Apollo Capital Projects.

In the next year, the NPD budget is going up to £1.2 billion, and SFT expects it to more than double over the next few years to £2.5bn.

There are also seven tax incremental finance projects, which are complicated – see how a change of ownership in Ocean Terminal shopping centre saw the City of Edinburgh Council pull back on plans to borrow £84m to spend on Leith waterfront. But SFT insists this, along with other controversial projects in Aberdeen and Glasgow, will go ahead.

But the scope of these projects, and thus size, is necessarily limited – too big, or too political, and you will scare the money away. And while many have wondered if SFT will be the next stadium-rocking Rolling Stones, in terms of infrastructure, they are still very much playing to much smaller venues.

For preference, banks will up stakes and run

SPEAKING of off-balance sheet funding, the mystery of how a bank – let’s call it Lloyds – can do a debt-for-equity swap yet not seem to increase its equity, has been answered.

Yesterday, that bank wrote down a further £50m of the debt owed to it by Tulloch Homes, and yet its equity remained at 40 per cent. Except the way the bank ups its stake in these deals is to take its stake in terms of a special class of share that ranks ahead of all the others – preference shares.

There are as many as 30 other shareholders in the Tulloch business, but it is highly questionable what these stakes are actually worth.

And, if the debt gets sold to another investor – as both Lloyds and the Royal Bank of Scotland have been keen to do of late – then, through preference shares, it still benefits from an upside when the company one day recovers its value and is sold.