The attached paper, written 4 years ago, examines how typical PFI/PPP infrastructure special purpose company (SPC) boards are structured and whether they are fit for purpose. Little has changed since the paper was written and arguably, the collapse of Carillion and the impact of Covid have only served to heighten the risks to investors.
Whilst the use of independent non-executive directors (NEDs) in most asset classes are common, this is much less prevalent in infrastructure/PFI SPCs. SPCs tend to be thinly managed with light-touch board oversight. Directors tend to be sourced from the original sponsor organisations and equity providers. These investments are generally considered low risk, with revenues being highly regulated or backed by quasi-government covenants. So that’s OK then isn’t it?
Well no! These companies tend to be highly geared (90% debt funding is typical) and despite being ‘relationship contracts’ with public sector or regulated clients, there is a distinct trend towards more combative and confident approach by client bodies. The imposition of performance penalties is becoming more common. These can quickly erode equity margins and cause debt covenant breaches. Failure can be catastrophic resulting in complete equity write-off.
Thinly resourced management structures are ill-equipped to flex to meet the increased demands caused by performance failures. Boards tend to be staffed by sponsor and investor nominees who often hold a portfolio of directorships, have other corporate roles to fulfil, little time to devote to these board roles and little appetite to be associated with a failing investment. They may not have the appropriate breadth of technical and operational experience to deliver effective oversight, provide appropriate management challenge or foresee pending problems before they arrive.
Independent and impartial NED’s that provide an inquisitorial approach combined with a wide range of technical, operational and financial experience can bring a fresh perspective to company performance. They can objectively monitor and report on investment and operational performance, foresee future risks and avoid potential conflicts of interest arising from previous investment decisions. Yet the appointment of an NED tends to be seen as an unnecessary additional cost despite it equating to a just small proportion of the management overhead (typically 5%). Case studies have shown operational performance and equity value restored at a cost of 1.5% – 3.0% of the valuation gain.
Investment in infrastructure is a specialised asset class requiring specific expertise. The timely appointment of an appropriately qualified NED can help navigate the investment challenges, avert impairments and help safeguard or build equity value. Do infrastructure investments need them? You bet!
To read the full paper by Nigel Brindley – Click Here