UK project bonds part 2: the Mersey groans

Mersey Gateway bridge impression (pic: Mersey Gateway Project)

Mersey Gateway bridge impression (pic: Mersey Gateway Project)

George Osborne, the UK’s Chancellor of the Exchequer, loves the Mersey Gateway bridge project. He wouldn’t shut up about it in autumn 2011 when the BBC’s Andrew Marr was interviewing him at the Conservative Party Conference; every time Marr tried to discuss spending cuts, Osborne mentioned the bridge. Not surprising. The conference was in Manchester. The Mersey Gateway bridge is to be built just half an hour’s drive away in north Cheshire. The party was trumpeting the project as evidence that, in the midst of imposing public spending cuts, they wouldn’t ravage the north-west of England, where support for the Conservatives is relatively low.

But Osborne’s embrace of the bridge is proving suffocating. The project is now three months overdue for contract signing, on the estimates of the consortium chosen to build and finance it. Merseylink was picked as preferred bidder last May (though the announcement was delayed for a month) and the past ten months have been taken up with the contracting authority, the Department for Transport, the Treasury, the project investors and the dozen or so well-paid advisers to these various organisations thrashing out the extraordinarily tortuous financing structure.

The bridge is to be financed by the private sector, albeit with a portion of government subsidy. Nothing unusual there. The idea is that cost of the bridge will most be refunded with toll revenues, and the grant funding bridges the gap between the toll revenues over a 30-year period and the total cost.

However, the private sector doesn’t want to take the risk that toll revenues will be enough (see penultimate paragraph here) so the government is taking that risk instead, and is helping the local authority meet the cost of the regular payments to the private consortium. It is providing a funding facility which, in extremis, will cover the entire cost of the payments in the event that nobody wants to drive over the bridge and pay a toll. That’s £1.7 billion, the DfT confirmed on Monday.

But it doesn’t stop there. The consortium is setting up not one project company, as usual, but two: one funded by these payments and another by toll revenue. The idea is to allow the local authority, Halton Borough Council, which is small and poor, to invest in this separate company and share in the toll revenues. Trouble is, it will also then suffer losses if toll revenues are worse than expected – and this company reintroduces toll risk by the back door.

Financing arrangements are just as complicated as funding. There will be five, yes five separate layers of debt, mezzanine debt and equity. And here’s where George Osborne’s suffocating embrace comes in. Instead of allowing the bank markets to finance all the bridge’s debt – manageable at about £550 million – the Treasury and their Infrastructure UK unit have insisted on imposing a debt guarantee on the project, allowing for a bond to be issued which is as low-risk as a government gilt. This is complicated, and it requires structuring. Which suits IUK fine. They spent over a year setting up the UK Guarantees scheme and hiring dozens of bankers to run it. They have to justify it by imposing it on projects, even if it means wasting time and money.

It didn’t have to be like this. The DfT and Treasury could have left it to the bank markets, which managed to cough up over £1.5 billion of debt last year for the Thameslink rolling stock project. Or they could have done what the Scottish government did with its recently closed motorways project and baked a possible project bond solution into the project from the start – with the result that the road took six months to close.

But they didn’t. And as the advisers’ fees get fatter and fatter, we’re still waiting for the bridge.


About René Lavanchy

You can contact me at rene dot lavanchy at googlemail dot com.
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