The next game changer that Finance Monthly had the privilege of interviewing is Mark Swindell – the founding partner of Rock Infrastructure. Mark has over 28 years of experience of working in the City of London, New York and Europe. For the last 20 years he has specialised in developing innovative funding, financing and procurement strategies for major infrastructure projects and has worked on most of the groundbreaking PPP transactions. He has worked in the interests of the public and private sectors across the transport, energy, defence, healthcare and social infrastructure sectors to create long-term, privately financed projects with incentives which reward success against output driven objectives and which create public sector value for money.
Mark created and led DLA’s Commercial and Projects group, which grew to 130 lawyers. This group completed over 160 PPP projects in ten different territories over ten years. He became global head of the Infrastructure and Defence Sector at DLA Piper in 2007 and was the principal editor of the five DLA Piper European PPP Reports published between 2005 and 2010. The last of these was sponsored by EPEC and the European Investment Bank.
In April 2011 he left DLA Piper to form Rock Infrastructure. Rock Infrastructure now focuses on developing new infrastructure businesses including setting up Rock Rail Holdings Ltd, which successfully financed the acquisition and leasing of rolling stock on both the Govia Thameslink Railway’s Great Northern "Moorgate” route in February 2016 and Abellio’s East Anglia franchise in October 2016.
As a professional working within Private Finance going into large infrastructure transactions - what has previously happened in the Private Finance Industry?
Globally, governments wish to provide infrastructure in their countries, since this is a way of growing and kick-starting their economies. Donald Trump promises that about 600 billion dollars will be invested into the US infrastructure market. In the UK, the chancellor recently discussed his plans to spend £24 billion on infrastructure projects in order to kick-start the UK infrastructure market - the UK Government has just given its approval for the nuclear power station at Hinckley Point, there’s the plan to expand Heathrow, and we have also been working on High Speed 2 (HS2). Across Europe, the European Union is expanding its seed funding in order to invest money into European Union countries’ infrastructure. Countries like South Africa, Australia and emerging markets have also done a lot of infrastructure work in recent years. The model that many governments across the globe have been following for funding infrastructure projects is the Private finance initiative (PFI). This is a way of creating Public-Private Partnerships (PPP) by funding public infrastructure projects with private capital. It basically means that the Government itself spends a lot of time and money on consultants, advisors and contractors at the early preparation stages of procurement projects. While I was still working as the Global Head of Infrastructure and Defence in DLA Piper, this model worked for the public sector, as well as the private sector and the banks that were investing into the market. At this time there was a high level of standardisation. What the Government didn’t like however was the fact that these procurements were taking too long – it was taking 3-4 years to get into a contract, which was before the building phase even started. 4 years, in the cycle of politics, is a long time to develop a piece of infrastructure, before the spade even touches the ground.
In a nutshell, the PFI/PPP system was highly complex and very inflexible in its ability to meet changing needs. Despite being widely used by the public and governments, the system wasn’t solving a lot of the infrastructure related problems that they were seeing. With the financial crisis, another issue was that banks, who were well used to structuring these types of transactions, did not want to lend for a long period of time. This resistance to long tenors was at odds with the whole of PFI/PPP market which is based around 20 years+ tenors. During that time, the governments were saying that they were not sure that the model was really working for them since the 3-4 years before construction took place was very risky and, at the same time, the banks were saying that they didn’t want to lend their money to PFI projects with such lengthy tenors.
While this way of delivering infrastructure really started in the mid-90s, it had begun to struggle by the end of 2010. Another big concern of the industry during that time was the lack of a pipeline. Professionals believed that they’d got a strong industry that they knew what they were doing and yet, all that everyone was waiting for and chanting about was a new Government pipeline. There was plenty of equity and plenty of debt waiting for a pipeline, in order to be put to work in infrastructure. Many of the pension funds performances were not as good as they once were. At the same time, a lot of interested parties were starting to think they should be allocating some of their resources to infrastructure since infrastructure continued to pay a constant and regular yield. As a result infrastructure became an alternative asset class that pension funds started to look at more and more. The pension funds and the insurance companies were looking for products and the Governments wanted them to put money into the products without creating more of the PFI and PPP products. This made a lot of people turn to the secondary market. This secondary market was post-construction so all the big risks were gone. Now they were just buying, remortgaging and refinancing the book and the value for money out of those secondary market deals soon came down.
Today most people don’t even consider buying a secondary market since the value isn’t there anymore. By the end of 2010 there was a lot of equity and debt therefore waiting to be locked and invested in long-term infrastructure, for the benefit of governments around the world to allow people to use and similarly benefit from essential, core infrastructure. People were looking for the right model to do that.
Could you talk FM through the establishment of Rock infrastructure and how this has proceeded to the birth of Rock Rail Holdings and its role in the public sector?
When I got involved early on in PFI, a lot of the early PFI transactions were pioneering, innovative transactions and you had to work quite hard to find where was the good value for money for the Government to transfer risk and where it wasn’t good value for money. The best way to achieve this is by working with all the members of a party – as part of a dynamic process happening on a real-time basis and resulting in the successful delivery of the project.
What I realised around 2010-2011 was that it was the right time to get out of the tank and get into a little speed boat and start to look for the new pioneering innovative strategy to reconnect the Government so it starts stimulating investment in infrastructure and, at the same time, to allow the industry to come together in a way that makes sense for all parties. From the Government’s perspective, it had to be done quicker and it had to be less complex. The Government shouldn’t need to interfere – the markets should make the project work or not. Finally, it had to deliver value for money and be structured in a way that is attractive to pension funds and direct investment into the market.
The real long-term advantage of infrastructure and the one that I believed stakeholders would be interested in is connected to the Government’s long-term interest and the pension funds’ long-term investment horizon. Thus, in an attempt to put these two large stakeholders together and try to minimise the time it takes and the cost that is taken out of it – I created Rock Infrastructure in April 2011. Its mission from the very beginning was to create infrastructure businesses which would be able to efficiently deliver direct investments from pension funds into Greenfield and Brownfield projects. I don’t look at secondary markets, and I don’t look at sales of assets or already constructed assets. I look at trying to bring efficiency in the way that the industry works. There was a large dissatisfaction with the way that current markets were working, so my plan was to come up with a more efficient approach to restructuring the way that the industry stakeholders talk to and deal with each other. It was a new attractive proposition for bringing in new sources of funding and creating new relationships between the parties, while we develop the way that the sector operates.
In relation to the railways sector - all of the UK rolling stock back in the mid-90s had been sold a number of times to organisations that were efficient at leasing trains to train operators. However, they were not adept at delivering value for money nor financing new trains into the marketplace. The UK Government therefore did two big deals in relation to bringing new trains into the network. One of these was called Intercity Express Programme and I got to work on it with Hitachi for 4 years. The Intercity Express Programme was a pioneering rail procurement project. The second was Trainlink. Both those projects took 5 years to get financially closed from beginning to end. Clearly, it took a long time, a lot of cost from the Government side and from the private sector side, and a lot of effort to get the deals finalised. After their completion however, the Select Committee expressed concern about the Government interfering in the rail market and that it was basically giving a 20-year guarantee to say that these trains would definitely be used for the next 20 years. The operators were also told that they would need to use these new trains.
This is when we created Rock Rail Holdings as a part of Rock Infrastructure. Rock Rail was established to focus on better procurement and funding of essential rail infrastructure, enabling better alignment between the investors, the tax payer and fare paying passenger; a funding solution which is off government balance sheet; and offering better value and affordability. Rock Rail started to compete against financial organisations and in providing new trains. It’s taken us about three years to achieve this but we have arrived at a place where it takes us 6 months to close a deal – from an announcement of a franchise which will involve new trains to finalisation. The value for money is palpable and there is now direct competition.
We are providing significantly better value for money so the Government, the train operating companies and the pension funds that have invested in our projects – Legal & General, Standard Life, Sun Life of Canada, and Aviva among others – are happy with the deals and have invested directly in the rolling stock assets. Once the deal is completed, we then manage the construction process. We don’t get paid any fees, since we’re not a consultancy. We invest equity into the transactions and we invest into the assets and therefore we get a minority stake in the businesses, which is normally between 6-10%. Clearly therefore, we get complete alignment of our interest with those of the pension funds. Once the trains are delivered and we release them, the value of this investment goes up which results in our value going up too. What also makes our business a game changer is that we do the deal and then we stay with the deal until its conclusion.
We finalised the Moorgate trains transaction valued at £300 million in February, and we also did another £700 million worth of trains for East Anglia in October – which adds up to £1 billion pounds worth of trains in 2016. We’re currently bidding for another £1 billion worth of trains next year and we expect the same from 2018. Rock Rail Holdings is also particularly interested in getting involved in HS2 trains.
We are also looking at creating a number of additional separate businesses including plans in wind farms, offshore wind and financing OFTO Build. Network Rail – financing electrification, signalling, depots and stations, is another business area we are currently working on as well as business opportunities in roads, tunnels and bridges. At Rock we don’t wait for a pipeline - we go to governments directly and we talk about what we think a proposition could look like, from a value for money point of view. The public authorities help us manage significant risks and for that we’ll be quite happy to offer them more money in return. We are getting value on the risk transfer, and this is the way to go, rather than how the private sector funds operated in the past.
We are now planning on investing in other markets and are looking forward to a very productive two to three years to come in creating new and pioneering infrastructure businesses.
As a game changer in the field of infrastructure development, what is your advice to project developers and their approach to funding?
Since there’s no revenue stream, managing a business as a project developer is quite hard, because you don’t have a regular cash-flow. This means that as a project developer you have to go very deep into a deal or a particular business stream. You do kick a lot of frogs and you have to be quite decisive and flexible. You need to be passionate about changing a particular area. You have to listen a lot, you have to be very focused and not embark on many different projects at the same time. And last but not least, you have to be entrepreneurial – changing your approach, completely adapting and then always keeping ahead of the game by changing the way you see things and by learning from what you’ve done to try to be better next time.
