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pfi investment editorial - Ireland
1. WYG Ireland WYG Ireland
and the terms are getting more and more borrower friendly.
Crunch Time for Many banking institutions have decided to withdraw from the
PPP market as a whole due to the constraints of the credit crunch
and liquidity which currently exists in the system. Decisions such
as this are not made lightly and will open up the market place for
Public Private Partnership
other private equity companies to take a greater involvement in
the whole infrastructure investment in support of Government’s
development programmes.
The key factors influencing the global economy are the current
and continuing sub-prime crisis and the consequent tightening
Adrian Bolton, Associate Director at Nolan Ryan Tweeds, part of of credit conditions, currency changes, instability in the housing
markets, oil fluctuation and equity market volatility. The sub-
the WYG group, believes that the credit crunch has prompted the prime crisis continues to unfold but there are some signs that the
situation may be starting to stabilise. However, it will take some
infrastructure industry to return to the fundamental rules of project time for global credit conditions to return to normality.
The global interest rate background has become more complicated
in recent months. Central bankers are being faced with the worst
finance. He explains that the current credit turmoil in the Irish possible set of circumstances. Economic growth is slowing, but
headline inflation is rising. Consequently, against a background of
banking system has forced a change in the way PPP/PFI transactions slow recovery, very volatile equity markets, damaging oil prices
I
and tighter credit conditions, it seems clear that commercial
are carried out and in particular a return to fundamental lending. interest rates may increase whilst tightening liquidity conditions
will keep upward pressure on borrowing costs overall. This
n recent reports, economists reflecting on the credit crisis despite Central Banks interest rates potentially dropping. About Adrian Bolton
describe the fundamentals of lending as “structural and The financial magnitude of the sub-prime crisis is resulting in
pricing market flux; pass-through on borrowing; market serious nervousness and volatility in global equity markets. Adrian Bolton is the Associate Director for PPP projects at Nolan
disruption and arrangements on best endeavours”. The pressure on markets is being exacerbated by global credit Ryan Tweeds, pat of the WYG group. He has extensive experience
Economists are once again opening up their training worries, rising energy prices and general economic uncertainty, in the PPP/PFI industry having worked in the UK, Middle Eastern
manuals to remind themselves what these terms mean and but the recent advent of slow growth and high inflation and the and European markets for over 17 years. He has been involved
what they were used for and banks are now returning to their implications for monetary policy, has seriously increased market in a range of different commercial, educational, health and
fundamentals. They are now carrying out comprehensive credit nervousness. public sector projects in Ireland together with the development of
‘I believe that assessments of existing deals and aligning revised pricing
structures accordingly.
The Irish economy is now going through a serious economic
adjustment. The main contributor to the slowdown in the economy
is the adjustment that is occurring in the housing market. The
mixed-use infrastructure projects in the Middle East and Europe,
including the Cork School of Music, Dubai Island Residential
Development, an Urban Drainage Development for Thames
Before the credit crunch there was a shift away from these
fundamentals with banks at the heart of the credit markets boom in the housing market in recent years has been the strongest Water as well as the EDS Regeneration Project in Texas, USA.
the outlook adopting the approach of cutting their lending margins in reaction factor affecting employment, tax revenues, consumer confidence,
consumer spending and overall economic activity. To emerge
Adrian’s experience includes Bid Management, Commercial
Business Development, Senior Project Management, Cost and
to their competitors. The approach of greater risk management is
now being adopted. from the current difficulties in the Irish economy, it is clear that Value Engineering, Contract Procurement, SPV Management
the adjustments will have to run their course, oil prices will have to and CDM monitoring over a range of both traditional and Public
for the current Whilst the credit crunch could not be described as a good thing, I
feel that it has expedited a long overdue correction in the funding Adrian Bolton, Associate Director continue to fall, global credit conditions will have to ease and the Private Partnership (PPP) engineering projects. He is a member
markets. Prior to the crunch, pricing was being charged on loans external cycle will have to improve. Most of these developments of the Institute of Civil Engineers, a member of the Association of
for PPP projects at Nolan Ryan Tweeds.
driven by the excess of credit and liquidity in the market. The will happen, but not before 2010 at the earliest. Project Managers and an Incorporated Member of the Institute of
infrastructure world economists’ view at present on, infrastructure finance – Banks, however, are reluctant within the current economic climate Recent announcements by the Irish government indicate the Water and Environmental Management.
surviving the credit crunch, indicates that the correction was not to get involved in the whole investment cycle of PPP projects intention to cut public spending and involvement of Private
unexpected. Bankers regularly gave presentations comparing the whereby governments are looking to reduce their overall exposure Investments through PPP into the infrastructure programmes by About WYG Ireland
markets in pricing, structure and security of the debt in 2004 to that in 2000,
noting the material change in the market and questioning where it
to the markets by a significant value because of the general
reductions in significant returns. Pre-credit crunch lenders and
over 15% and an overall drop in public spending of 44% down to
€52bn. The €2.3bn cut in PPP forecasts may be largely down to WYG Ireland is an engineering, environmental, planning,
would lead. Their concerns were justified and the bubble of cheap investors have begun to lose their appetite in the present markets planning and procurement delays but it still does not remove the surveying, project management and health & safety consultancy
credit has now burst. because it is becoming too competitive, deals are too narrow, the fact that the worst affected are Education (down 28% on the 2007 employing over 650 people in offices in Athlone, Belfast, Cork,
2009 and It is now evident that project finance markets priced lending tenure of debt is stretching out, coverage ratios are getting thinner predictions), Health, (down 18%) and Local Government (down Derry, Dublin, Kilkenny, Limerick, Naas, Sligo and Waterford.
too low but the banks were not controlling this by improving 15% in the same NDP report). Only Justice has gained on the It works for many of the leading private and public sector
pricing mechanisms. With liquidity now gone they are using the current round of investment reviews, increasing its spending on organisations throughout the island of Ireland.
beyond will opportunity to re-address pricing up to the same level. Predictions the same figures of 2008 to €1.78bn, an increase of 85%.
In the present capital markets, both clients and investors remain
also exist in the current markets which suggest a return to the
position of pre-crunch levels of liquidity by 2012. It is my belief wary, and liquidity remains a challenge for the banking and
Photo courtesy of Warner Corporate Photography
Private Equity industries. With this environmental change, share
show signs of that the almost suicidal pricing that we saw pre-credit crunch is
unlikely to be seen again, or at least not in the average career-span prices of banking stocks across the board have come under intense
of most infrastructure financiers. pressure. Unfortunately, I believe that it will take some time for
growth’
Rather than adopting a totally pessimistic perspective, I believe the confidence and security to return to the markets in any force
that the outlook for the current infrastructure markets in 2009 and we should not expect to see any significant increase in this
and beyond will show signs of growth. Private Investments into profile until 2010.
Public Sector projects are a method where GDP can be maintained This does not however indicate that the Irish economy is
in the present economic climate. The energy and transport returning to the dark days of the 1980s, but highlights that the
sectors are where the most activity is expected, however, energy fundamentals of the economy today are much stronger than in
utilities, renewable energy sources, roads and rail are all viewed the past. Government debt levels are very low and the economy
as attractive investments. Social sector projects are viewed now has a much stronger base of wealth than in the past. The
less favourably with research indicating that just 33 per cent of key vulnerability facing the economical recovery is how the
companies stated that schools would be on their agenda over the government intends to address the investment structure into
next 12 months, 28 per cent have hospitals and only 6 per cent social and commercial markets and how they intend to inject new
said waste and defence. life into the regeneration of the economy. r
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