ACE | G Pontin

Category Archives: ACE

Publications from my time at ACE

ACE – Performance of PFI: 1996 – 2010: lessons learned

This paper is the first of a new series of infrastructure financing papers from ACE. It looks at 15 years of Private Finance Initiative experience in the UK. The paper establishes the lessons learnt, both positive and negative, that must inform new thinking on project financing if the public and private sectors, and most importantly the taxpayer, is to get the best possible value for money earnings and policy.

Key findings:

Reviewing the PFI model
PFI’s lack of public trust demonstrates that there needs to be a clear and transparent link between capital liabilities, operational liabilities and the expected rates of return for private companies within financing public projects.
Within the review of the PFI procurement model Government must look to retain the benefits that a successfully procured PFI project can deliver as it develops new financing models.
The focus of the debate must be to develop a successful public-private model moving forward, ensuring efficient investment in the UK’s long term economic growth.
The effect of the recession and financial crisis:
The financial crisis and recession have had a significant effect on the financial sector. Lending has been constrained, confidence between banks, consumers and business has been shaken.
There have been significant changes in the cost of capital; the cost of government borrowing; the difference between the two; the private sector’s ability to raise funds; and attitudes to risk. These factors call into question the assumptions within the PFI model, resulting in a weaker less sustainable case for its usage.
New issuance in a range of primary debt markets, global issuance of leveraged loans and issuance of high-yield corporate debt have all undergone a challenging year in 2011. This means it has been harder for companies to raise funding.
The financial crisis has changed attitudes to risk, with companies moving towards cash rich positions, paying off debt and re-enforcing balance sheets. This has fed through into the PFI model, with fewer companies able to take on the risks, and raise the finances required to make projects successful.
A continuing aversion to risk will impact on the long term growth and investment potential of projects in the UK from the private sector. however, it is important to recognise that attitudes to risk are also aligned with the pricing of finance. For example, the recent decision of RWE and EON to abandon their UK nuclear build programme shows how difficult it is to raise finance given
uncertainty with regards to risks, earnings and policy.

Company website:
http://www.acenet.co.uk/

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ACE – Barriers to Investment

ACE’s Barriers to Investment report explores a wide variety of aspects that act as barriers, or significantly change the risk profile of an investment project. These processes are important within the investment cycle and should be understood by all parties involved.

By facilitating wider debate on these issues it is hoped that the UK can open up new and existing avenues of funding to help address the infrastructure challenges we face moving forward.

Investment in infrastructure is currently considered as a key policy objective of most developed and developing nations. The goal is a simple one, given the financial crisis, reduced demand conditions and concerns regarding sovereign debt, capital spending is considered a method of facilitating economic growth.

However, these conditions have meant that financial markets are less willing to invest, and their risk profile is considerably lower (reducing their willingness to take risks). This is unfortunate given governments willingness to transfer both the financing and risk of delivering infrastructure projects into the private market.

This paper has identified three key areas where improvement is required to facilitate more activity within infrastructure investment.

The risk associated with the construction phase of infrastructure is not understood, and is considered of significant risk by investors. This phase of projects needs de-risking.

The public/private sector need to outline clearly what risk each party are prepared to accept and the return associated with such risk.

There needs to be a dialogue between government and industry to move the debate surrounding the barriers that are in place with a view to designing practical solutions.

Company website:
http://www.acenet.co.uk/

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ACE – Introducing competition into the water market

This paper has been produced by ACE to explore the potential of regulatory and market reforms within the water sector.

In particular this paper looks to address the relatively low levels of consumer competition, supply competition, the inadequate levels of investment and the environment under which investment takes place.

To resolve some of these issues the paper makes the following recommendations for the government’s water white paper, suggetsing it should consider:

Introducing competition into the consumer and supplier markets by allowing private companies to run and compete in these areas;

Creating of an independent (ownership unbundled) network system operator(s);

Requiring non-discriminatory third party access to the network from network system operators;

Allowing price signals to guide investment;

Breaking the current investment cycle, allowing network investment to occur over longer periods according to detailed investment plans, whilst companies that own private water producing/treatment facilities invest on a rolling basis given market price signals and consumer needs;

Creating conditions that would allow new entrants to enter the market, and create competition between existing water suppliers. For example, companies outside of the water sector may wish to enter to provide bundled services (gas, electricity and water);

Putting in place regulatory conditions that create an easy switching environment, to encourage switching rates;

and having the water regulator oversee the operation of the market and ensure competition and standards are met, rather than directly setting investment and consumer pricing signals.

Company website:
http://www.acenet.co.uk/

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ACE – Signals to invest

There has recently been an increased level of debate as to how the structure of the railways operates and the manner in which franchises are provided. Whilst this paper does not look at the franchise mechanism itself it does pose the question as to how we could further incentivise train operating companies (TOCs) to invest in the system on which they operate.

Most franchises in Great Britain are awarded by the Department for Transport (DfT), following an invitation to tender. Companies that tender do so according to a number of service criteria and targets that are outlined by the DfT to be achieved during day-to-day operation.

However, as with most regulated industries the franchise model is not without its flaws. Some companies perform well, others do not. There have been instances of fare increases significantly above the rate of inflation, with questionable service provision and improvements taking place. There is also anecdotal evidence that the confusing terms and conditions and negotiations within the franchise system making performance achievement hard to measure and value hard to judge.

Part of the reason for such occurrences is a reduced willingness to improve an infrastructure asset which the TOC does not own.

As we have seen from the government‟s recent announcements in the Comprehensive Spending Review, the level of subsidy provided to the companies that operate these franchises is due to fall, and fares rise. This will not please rail users unless service levels continue to improve and investment continues to take place to upgrade Britain‟s ageing rail network.

The questions once again arise: are franchise companies willing to invest in the network, are they able to invest in the network, and are they willing to make these investments given the current length of the franchise agreements and that they do not receive the full market return for the investment that takes place?

There is a willingness among TOCs to invest in physical assets. Virgin, for example, has bid for the design, build and operate contract for the new Tampa to Orlando high speed line in Florida. Train operators in the UK have invested in station refurbishment, while alternative models (such as “adopt-a-station”

schemes) have been applied to harness alternative resources and community efforts.

Other solutions have been proposed which include lengthening franchises to encourage franchise operators to take a long term view of investment, or privatising the system allowing all decisions to be made on a cost/profit basis with ownership of the asset under private hands. However, privatisation holds the potential for the formation of an uncompetitive monopoly and brings into question how the asset is treated in terms of its national efficiency, importance and strategic value.

Ways in which such investment issues could be alleviated include creating regulatory frameworks which incentivise investment (effectively subsidising the TOC) and extending the term of franchises to extend the period under which a return is made.

As well as the financial issues explored in this paper, there may be other obstacles to bringing private investment into the physical rail network. These include issues of planning law, compulsory purchase mechanisms and regulatory and procurement processes, all of which would impact private sector efforts to build new railway infrastructure. This paper only considers the financial mechanisms by which investments could be encouraged.

Company website:
http://www.acenet.co.uk/

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ACE – Is tax taxing?

ACE has produced a new paper looking into some of the administrative and cost issues that SMEs face when dealing with the tax system.

The paper raises a number of ways that the system might be simplified for the benefit of small firms. It recommends;

The government should combine PAYE and NIC. This will reduce the size and cost of administering these taxes to all businesses.

The government should raise the VAT threshold because the level of administrative burden changes significantly once companies pass this point. Raising the threshold would ensure that a company had enough resource to deal with the burden imposed by VAT.

Government should look to simplify the definitional aspects of the tax system. This would make the calculation and understanding of the system much simpler for companies.

Considerations need to be made for SMEs. Currently, tax rules are targeted more towards the larger and multinational companies.

Reduce corporation tax for small businesses.

The tax system should recognise that the level of tax burden changes significantly across small to medium enterprises.

Initiatives such as the Business Payment Support Service should be extended, as these help SMEs by allowing businesses facing financial difficulties to spread tax payments over a timetable they can afford. Cash flows for small businesses that employ fewer than ten people would often prefer a range of payment options that remove the need for paying lump sums.

Providing certainty within the tax system is key to business with regards to assessing their liabilities and future investment potential. Tax reforms should be published as part of a larger roadmap outlining key steps and actions that will take place over the next 15 year period.

Government should further explore the possibility of underwriting SME overdraft facilities. This would help to address some of the cash flow issues experienced by SMEs without the need for radical tax reform. Criteria could be put in place in relation to the percentage available based upon a business‟ current credit conditions, turnover, staffing, and spending patterns.

Flexibility support on VAT introduced during the recession should be a permanent feature of the tax system.

Company website:
http://www.acenet.co.uk/

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ACE – Infrastructure: a case for funding 2010

This report from ACE aims to review and analyse a range of material that is openly available (such as economic papers, cost benefit analysis and case study evidence) in an attempt to ascertain what effect infrastructure investment has on the economy. This paper will not however go into the mechanisms that would fund such projects but attempt to demonstrate the scale of potential the contributions the construction and infrastructure sector could make.

The economic rationale behind investment decisions has not been as important as it is during this economic cycle given the recent recession, tightening credit conditions and proposed public sector cuts. Projects need to demonstrate that they will improve the future growth prospects of the UK.

The return upon infrastructure investment was found to vary significantly not only between projects, but also across countries. Theory suggests that achieving a positive economic effect from investment relies on the current level of provision in respect to that of the optimal (equilibrium level), maintaining the long run competitiveness of the economy, investor certainty, access to capital, accounting for externalities and market failure, and creating a conducive regulatory environment.

Company website:
http://www.acenet.co.uk/

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