Project Finance

There are four basic categories of security interest under English law. These are mortgages, charges, pledges and liens. Charges and mortgages are generally the most important categories of security interest in a project finance context. It should be noted that ‘charge’ is sometimes used colloquially as a generic reference to security interests under the laws of England and Wales.

Often a composite security agreement is used in England and Wales, commonly known as a ‘debenture’ when granted by a corporate, and both present and future liabilities of a corporate chargor can be secured under a debenture (and a security interest taken over both the chargor’s present and future assets). For public policy reasons, it is generally considered impossible to take a charge over all the assets of an individual. A security agent or trustee is often the chargee (ie, the party with the benefit of the charge) in place of the lenders.

Mortgages and charges of land are subject to special rules, but these are outside the scope of this answer.

Charges

A charge is an encumbrance on an asset that does not transfer title to that asset, but rather appropriates the asset to the discharge of the relevant obligations.

A charge is a security interest over specified assets (or classes of assets) of the chargor as security for the performance of the particular obligations of the borrower that have been secured (usually repayment of the debt owed to the lender). Provided that, in the case of corporate third parties, issues such as corporate benefit and transactions at an under value have been dealt with, charges and other forms of security may be granted by that third party.

There are two types of charge: ‘fixed’ and ‘floating’.

A fixed charge attaches immediately to the specified assets (eg, key assets as described in the debenture). Fixed charges are generally preferable to floating charges as they confer greater priority in an insolvency scenario (further below). As the chargee is not taking possession of the property, it will want to both prevent the chargor from disposing of the assets subject to the charge, and to oblige the chargor to maintain the value of the assets - these obligations should be contained in the debenture or other finance documents.

A floating charge (capable of being granted by incorporated entities - such as companies and limited partnerships, but not, generally speaking, individuals) is a charge over a specified class of assets (often identified by a generic description). As with many other types of finance under English law, a floating charge often primarily serves a dual purpose: to provide a security interest over assets of the chargor that may inherently fluctuate (for example, stock); and to provide a catch-all ‘backstop’ security interest - for example, where the formalities of creating another security interest are not properly completed or the assets in question are not subject to a fixed charge. In a project finance context, a properly drafted floating charge over all (or substantially all) of the chargor’s assets may also mean that the chargee is deemed a ‘qualifying floating charge holder’ and so can use the ‘administrative receiver’ procedure (further below).

In contrast to a fixed charge, a floating charge only attaches to the assets in question on crystallisation, when it becomes a fixed charge at the point of crystallisation. This may happen automatically by operation of law (for example, on the occurrence of certain insolvency-related events). However, accepted practice - including both for greater certainty and to expand the crystallisation events by agreement between the parties - is that a list of crystallisation events will be included in the debenture These events often include, on the giving of notice by the chargee, the occurrence of specified - and prohibited - actions and of insolvency-related events.

Finally, on charges it should be noted that ‘control’ is a key determinant and, regardless of whether a charge is described as fixed or floating in the debenture - if the chargee has insufficient control of a charged asset then it is likely that such charge may be redesignated by the courts to be a floating charge. It is possible that the risk of redesignation extends beyond security interests expressed to be charges and may affect other forms of security interest, however expressed.

Mortgages

A mortgage is a security interest (securing the performance of particular obligations), which involves the transfer of title in an asset, on the condition (express or implied) that such title will be transferred back on the performance of the relevant obligations.

Mortgages can either be ‘legal’ or ‘equitable’, with a legal mortgage transferring legal title to the asset (subject to the completion of any formalities), whereas an equitable mortgage transfers beneficial title in the asset. Equitable mortgages arise either where the formalities necessary to create a legal mortgage have not been complied with (and legal title has therefore not been transferred), the mortgage intends to create a legal mortgage at some point in the future or the asset that is being secured is only recognised in equity (ie, there is no ability to have legal title in the asset - eg, beneficial ownership of assets in a trust).

Generally, mortgages over ‘choses in action’ (rights over assets that can only be enforced by action - such as book debts and contractual rights) are taken by way of assignment. Subject to the fulfilment of certain conditions, an assignment can be legal (allowing the chargee to sue the third party in the chargee’s own name, without having to join the chargor in any action), or the assignment can be equitable where the conditions for a legal assignment are not fulfilled.

Pledges

A pledge is a form of security interest for a debt where the creditor takes possession of an asset (hence only where it is possible to take possession of an asset can that asset be pledged). For intangible assets (as opposed to tangible movable assets), these can be pledged if title to the asset can be transferred by delivery of a document of title. ‘Constructive’ delivery (for example, delivery of keys to a property where the asset is situated) may also validly give effect to a pledge.

Liens

A lien is generally a right to retain possession of another’s asset until a debt owed to that person is discharged. The expression is also used to cover similar rights. Liens often arise by operation of law, and are normally not of relevance in a project finance context.

Quasi-security

Whereas a security interest is a right granted over a chargor’s assets to secure performance of obligations (and which may provide an enhanced position for the chargee in the event of the debtor’s insolvency), ‘quasi-security’ is the collective term for financial actions that seek to improve the creditor’s position (on debtor insolvency) without actually creating a security interest. Types of quasi-security include negative pledges, finance leasing, set-off and retention of title.

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Perfection

Perfection occurs through registration and delivery of possession of the asset or notice depending on the type of security interest.

With very limited exceptions, charges (and mortgages) created by a company or limited liability partnership incorporated in the UK (regardless of the governing law of that charge) must be registered with the jurisdiction’s registrar of companies, Companies House, within 21 days from the date of the creation of the security interest. Otherwise the security interest will be void against a liquidator, administrator or creditor, and the debt secured by that charge becomes payable immediately. While registration is not technically mandatory, there are significant negative consequences to not registering a security interest. Registration involves providing Companies House with a completed registration form (usually an MR01), a certified copy of the relevant security document and a small registration fee. It is also possible to register charges and mortgages online (and the fee is reduced).

Security interests over some assets (such as land, intellectual property rights, ships and aircraft) are registrable in specialist registers (where registration fees apply), and priority is generally established by the order of such registration.

Where a security assignment occurs or a security interest is created over an equitable interest, the security interest needs to be perfected by providing the third party with notice.

While pledges are not strictly speaking registrable (though a cautious approach is recommended), pledges are perfected by delivery of the asset.

Priority

Subject to the provisions of insolvency law and certain other qualifications, the priority of security interests is broadly as follows.

Depending on the nature of the asset, security interests in an asset have priority in order of the date of their creation or the date of notice or the date of registration. (Special rules may apply to tacking and further advances.)

However:

• legal interests take priority over earlier equitable interests (including floating charges) if the later legal interest is created in good faith, without notice of the earlier equitable interest and value is provided in return for the interest; and
• fixed charges take priority over floating charges (even if the floating charge was created earlier, unless the floating charge contains a negative pledge).

Further, it should be noted that it is often the case that secured creditors will enter into intercreditor or priority agreements that may either reinforce or contractually amend the priority position regulating their respective security interests.

Security trusts

It is possible (and common) for a security agent or trustee to hold security interests on behalf of the project lenders (and often also themselves as security for their fees). Subject to them having the capacity to act under their own constitutional documents, security agents and trustees do not have to hold any licence specifically to hold or enforce security.

Unlike many civil law jurisdictions, where trusts are not recognised and a parallel debt structure may be used to effect the security trust concept, the jurisdiction recognises trusts and security trusts are broadly not complicated structures.

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Liens are not registrable under the Companies Act 2006 and often arise by the operation of common law or statute, making it difficult to easily ascertain priority. A creditor could review the register of the company in question at Companies House or (if applicable) the relevant specialist asset register for evidence of any contractual lien that had been registered, but inherently this would not provide a definitive answer. However, by their nature, liens are not normally a significant aspect of taking security in a project finance context.

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In the UK corporate bankruptcy is known as ‘insolvency’. Outside of terminal insolvency proceedings (ie, liquidation or winding-up of the debtor), as a preliminary step to potentially enforcing its rights and to avoid unintentionally waiving a breach of any finance document, a project lender should explicitly reserve its ability to rely on and exercise its rights under any finance document (to the extent there is no clear intention to compromise those rights) in all communications with the debtor or its professional advisers.

The rules on corporate insolvency are largely derived from the Insolvency Act 1986 (as amended) and the Insolvency Rules 2016, and corporate insolvency turns on the concept of an inability of the debtor to pay its debts (as determined by section 123 of the Insolvency Act 1986).

In terms of non-terminal insolvency proceedings (ie, self-help or rescue mechanisms, though these procedures often eventually transition to liquidation), a number of mechanisms are available, of which three key procedures in a project finance context are administration, administrative receivership and receivership. Administration is a procedure whereby the primary objective is to save the debtor as a going concern. If that is not possible, the secondary objective is to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration). The final objective, if neither primary nor secondary objectives can be achieved, is to realise property to make a distribution to one or more secured or preferential creditors.

When a company goes into administration, it benefits from a statutory moratorium on creditor action. Appointment of an administrator may be by application to the court or (more likely) by the directors or a qualifying floating charge holder using the ‘out of court’ route. The project lender may, therefore, have the ability to recover monies owing through the debtor being placed into administration.

Administrative receivership is potentially a more beneficial avenue for recovery for a secured project lender holding a qualifying floating charge than administration because it may be a quicker, less expensive process, while the administrative receiver’s role is to realise assets to repay the lender or is to repay the secured debt of the charge holder. While not generally available where the floating charge was created after 15 September 2003, there is a ‘project finance’ exception to this rule (subject to the project in question fulfilling the necessary criteria). The charge holder can appoint an administrative receiver, who can run the business or dispose of assets (or the business itself) to satisfy the debt. Contrasting the objectives of administration and administrative receivership, the latter may arguably be more beneficial to a project lender (though it will depend on the exact circumstances).

Subject to the completion of certain formalities (including the observance of notice or standstill periods), the ability of a chargee to appoint a receiver may arise at common law or under statute when the debt secured becomes due (ie, the power of sale arises). It is, however, often preferable (and accepted practice, including to avoid the standstill periods) that the receiver is appointed under the terms of the debenture. The receiver can then sell debtor assets to satisfy the debt.

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Administration involves a moratorium that prevents a project lender from enforcing its rights over collateral without the consent of the administrator or the permission of the court. An administrator can only sell any assets over which the project lender has a fixed charge with the prior approval of the fixed charge holder or of the court, though it can dispose of assets subject to a floating charge without the consent of the holder of that charge. While initially non-terminal, in practice a company in administration may eventually be placed into terminal bankruptcy proceedings - liquidation.

For (compulsory) liquidations there is also an automatic stay (subject to the leave of the court), which prevents a project lender enforcing its rights over collateral through court proceedings, though it does not prevent a project lender from appointing a receiver or administrative receiver (if it has the right to do so).

In both administration and liquidation, the proceeds from the disposal of assets will be distributed to creditors in the order of their priority (and subject to the terms of any subordination or intercreditor agreement).

Debts with preferential status include contributions to occupational and state pension schemes, certain employee claims for unpaid wages and salary, holiday pay, EU levies on coal and steel production and monies owed to or deposits protected under the Financial Services Compensation Scheme. The amount available to the preferential creditors is, however, recovered from the disposal of assets not subject to a fixed charge (and after satisfaction of the expenses of the administration or liquidation). On the basis that a project lender will usually seek to recover debts under fixed charges in the first instance, these preferential creditors may not have an impact on the project lender’s recovery.

In addition to the expenses of the administration or liquidation and preferential creditors, there is also a statutory prescribed part (up to a maximum of £600,000) that is deducted from floating charge realisations and paid to unsecured creditors instead of the holder of the floating charge.

By default, entities incorporated in England and Wales are not excluded from or immune to bankruptcy proceedings, though their insolvency risk may be altered by the extent of any parent company or government support in a project finance context. However, various infrastructure sectors such as rail, energy and water have amended insolvency procedures (the detail of which is outside the scope of this note, but they broadly provide for varied procedures with the intention of ensuring the continuity of supply of essential services).

Other than liquidation, as detailed above, administration, administrative receivership (subject to certain criteria) and receivership may all provide routes to recovery of secured debts. The exact procedures required to recover secured debts using any of these methods will depend on the relevant statute, common law and the terms of the debenture (including to what extent the terms of the debenture exclude or amend the common law positions).

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While banks and other financial institutions generally charge commercial fees for foreign exchange transactions, subject to any applicable political sanctions regimes (including US and EU sanctions regimes) there are no statutory restrictions, fees, taxes or other charges on foreign currency exchange. Foreign currency exchange contracts are an exempt supply for value added tax (VAT) purposes provided that there is consideration in the contract.

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While banks and other financial institutions may charge commercial fees for remittances, subject to any applicable political sanctions regimes (including US and EU regimes), there are no restrictions, controls or other fees on the remittance of investment returns or on loan payments.

On the taxation of cross-border remittances of investor returns, withholding taxes (currently with a rate of 20 per cent) may apply to debt interest payments to parties in other jurisdictions, though the application and rate of any withholding tax will depend on whether there is a double taxation treaty with the other jurisdiction. It should be noted that withholding tax does not apply in a number of scenarios, mainly (subject to certain conditions) interest paid to or by a ‘bank’ (as defined in the Finance Act 2008, a wide definition including many UK banks, European banks permanently established in the UK and non-EU banks operating in the UK with permission to accept deposits). Any withholding would generally be addressed through gross-up provisions in the relevant loan facility agreement.

No withholding tax applies to distribution payments from companies incorporated in the UK.

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There is no obligation on entities incorporated in England and Wales to repatriate foreign earnings, and no obligation to convert to local currency or any other specific restriction if the project company does choose to repatriate foreign earnings.

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Subject to any applicable political sanctions regimes (including US and EU regimes), entities incorporated in England and Wales are able to establish and maintain foreign currency accounts in other jurisdictions and locally.

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While there are no blanket restrictions, fees or taxes on foreign investment in or ownership of a project in the UK (ie, UK and non-UK owned companies are treated equally), there are nuances or additional requirements within industry specific legislation or regulations that apply to companies under foreign ownership. For example, non-EU entities wishing to own transmission systems are subject to articles 11 in Directives 2009/73/EC and 2009/72/EC (‘articles 11’). Consequently, in addition to the ‘unbundling’ criteria that applies to all companies operating in that sector (ie, that the energy transmission network and the energy production and supply aspects have to be operated discretely), articles 11 impose a further requirement on non-EU entities to obtain a certification of ownership from the relevant National Regulatory Authority by proving that such certification would not negatively affect the security of energy supply.

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Effecting and/or carrying out insurance contracts as principal in the UK are regulated activities under article 10(1) and (2) of the Financial Services and Markets Act 2000 (Regulated Activity). Provided that non-UK insurance companies issuing insurance policies relating to project assets in the UK are not deemed to be carrying out a regulated activity, there are no corresponding restrictions, fees or taxes.

There are a number of considerations for determining whether an insurance contract has been effected or carried out in the UK. For example, ‘effecting an insurance contract’ is construed widely and not only includes the underwriting process or entry into the insurance contract, but the term also captures the negotiation process, confirmation of cover and the issuing of the insurance policy. The term ‘carrying out an insurance contract’ is also interpreted widely to encompass activities undertaken in relation to an insurance contract that has been entered into, including but not limited to, the handling of claims, settlement of claims and collection of premium.

If an insurance contract is deemed to be effected or carried out in the UK, a non-UK insurance company would require authorisation from the UK Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), and the insurance policy would need to be compliant with the FCA or PRA rules and regulations. A typical scenario where this would occur is when a non-UK insurance company acts through an agent in the UK. One exception to the above is where a non-UK insurance company is domiciled in the EEA, in which case it would be governed by its own home state regulator. Under this exception, while EEA-domiciled insurance companies would still be bound by the principle of the ‘general good’ (ie, some FCA or PRA rules and regulations would still apply to them so as not to prejudice the application of the FCA/PRA customer protection rules), these companies can carry out a Regulated Activity by establishing a foreign branch in the UK or ‘passporting’ their services into the UK without the need for FCA or PRA authorisation. It should be noted, however, that the ongoing discussions following the UK’s decision to leave the European Union will have an impact on this exception. This, in turn, may see the demand for insurance policies effected and carried out by local insurance companies in the UK rise as the EEA-domiciled insurance companies could receive the same regulatory treatment as non-UK non-EU insurance companies (ie, they will have to obtain FCA or PRA authorisation).

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In the UK, employers have an obligation to ensure that none of their employees are illegally working in the UK. Employers need, therefore, to be aware of the categories of migrant workers in the UK. Broadly, these can be divided into European Economic Area (EEA)/Swiss workers and non-EEA/Swiss workers.

Under the Immigration (European Economic Area) Regulations 2006, which give effect to the Free Movement of Persons Directive, EEA workers have the right to free movement across the EEA, and may therefore live and work in the UK without immigration permission (with the exception of Croatian nationals, who may enter and remain, but not work, in the UK without permission for up to three months, but who require a registration certificate to be permitted to work in the UK). Swiss workers enjoy similar rights of free movement.

Following the UK government’s decision to trigger article 50 on 29 March 2017 (the procedure required to begin the two-year process of leaving the EU), the UK will leave the European Union on 29 March 2019. Following the UK’s departure from the EU, the automatic rights of EEA and Swiss migrants to freely move to and work in the UK are likely to come to an end. At present, it seems likely that there will be a transition period following 29 March 2019, and it is likely that the free movement of people to the UK will continue during this period, but the length and the effect of this transition period are unknown, and therefore this is only speculation. Following the UK’s exit from the EU, the UK will introduce a new migration regime with EEA or Swiss countries, but the details of this policy are yet to be confirmed.

For non-EEA countries, the UK operates a points-based immigration system, under which non-EEA nationals must apply for a visa to live, study or work in the UK. This points-based system operates on the basis of a ‘tiered’ system, comprising five tiers.

• Tier 1: high-value migrants - this tier provides access into the UK for highly talented people who intend to start a business or invest in the UK. Under this tier, the permission belongs to the individual, and they do not require the sponsorship of an employer. It includes four subcategories:
• exceptional talent - individuals who are leaders or emerging leaders (and are endorsed as such by a designated competent body) in the fields of humanities, science, engineering, medicine, the arts or digital technology. Access can be granted for up to five years and four months (with the possibility of settlement after five years), and 1,000 places are available each year;
• investors - individuals who will invest significant amounts in the UK. To be granted access, these individuals must be able to invest at least £2 million into the UK market, and must open a UK-regulated investment account. Access can be granted for up to three years and four months, with an option to extend for up to two years (with the possibility of settlement after five years);
• entrepreneurs - individuals who wish to come to the UK as entrepreneurs. In order to be granted access, the individual must meet strict financial tests, having access to minimum levels of investment capital. Access can be granted for up to three years and four months, with an option to extend for up to two years (with the possibility of settlement after five years); and
• graduate entrepreneurs - individuals who have graduated from a UK university, and are endorsed by a UK organisation as having a genuine/credible business idea. Places under this category are limited. Access can be granted for up to one year, with an option to extend for a further year, after which applicants may be able to switch to Tier 1 .
• Tier 2: highly skilled migrants - this tier similarly provides highly skilled migrants with access to the UK. Tier 2 differs from Tier 1 in that there are a number of minimum requirements that each migrant must meet, such as English language skills, maintenance requirements and a migrant under Tier 2 must be issued with a Certificate of Sponsorship by its employer. It includes four subcategories:
• general - individuals who have been offered a skilled role by a UK employer. This subcategory is limited to an annual limit of 20,700 admissions (divided into monthly quotas, with those applicants scoring higher scores being granted higher priority), and the individual must be sufficiently skilled and paid the minimum level (£30,000 for experienced workers, £20,800 for new entrants or the appropriate rate for the job - whichever is higher)). The quotas do not apply to applicants with an annual salary of £159,600 or above, and the monthly cap varies from month to month. Access can be granted for up to five years, with the option to extend to a maximum total period of six years (with the possibility of settlement after five years);
• intra-company transfer - individuals being transferred by their company to a UK entity that is directly linked by common ownership or control. This can be as long-term staff (a period of up to five years, or for employees earning over £120,000 a period of up to nine years) or graduate trainees (a period of up to 12 months, or however long the training course lasts - whichever is shorter));
• sportsperson; and
• minister of religion.
• Tier 3: low-skilled workers - this was intended to be a scheme for access for low-skilled workers, but was never implemented as the UK government no longer felt the need to have such a scheme, given the free EEA or Swiss immigration. This may change following the UK’s exit from the EU;
• Tier 4: students - individuals who wish to come to the UK to study. These migrants are usually sponsored by their education provider and are usually allowed to work full-time in vacations, and between 10 and 20 hours a week in term time. Students may also take part in work placements, though these must not exceed 50 per cent of the course length; and
• Tier 5: youth mobility and temporary workers - the youth mobility scheme allows young people (aged 18-30) from Australia, Canada, New Zealand, Japan, the Republic of Korea, Taiwan, Hong Kong (Special Administrative Region) and Monaco to live and work temporarily in the UK for a period of two years. The temporary workers scheme allows temporary workers employed in certain sectors (creative and sporting, charity, religion, government authorised exchanges and under international agreements) to come to the UK. Those applying under this tier must be sponsored by their employer.

There are also certain non-points based system immigration categories, under which non-EEA citizens can gain access to the UK, which include:

• exempt persons (eg, diplomats or foreign ministers on official business);
• domestic workers in a private household who have been employed by their private household for a year preceding the visa application;
• representatives of overseas businesses posted in the UK and setting up a UK subsidiary;
• Turkish business people or workers (this may change post-Brexit);
• Commonwealth citizens who are able to prove that one of their grandparents was born in the UK; and
• non-EEA/Swiss nationals working in the EU providing services in another member state (this may change post-Brexit).

As set out above, applicants under Tiers 2 and 5 must be sponsored by their prospective employers. To sponsor an applicant, an employer must be registered as a sponsor and obtain a sponsorship licence. If licenced to provide sponsorships, employers are advised to undertake the UK Home Office’s three-step ‘right to work’ checks. These involve:

• obtaining the employee’s original identity documents (which must be documents included on the prescribed list of identity documents set out by the Home Office);
• checking that the documents are valid, unaltered and original and relate to the employee (with the employee present); and
• making a copy of the documents and keeping them securely stored, recording the date of the initial identity check, and any subsequent checks made.

Given the present political climate, in which the government is seeking to limit immigration (both legal and illegal), and with the Immigration Act 2016 placing tighter measures on employers to ensure they comply with their obligations, it is important to be thorough in ensuing compliance. An employer of an illegal worker who has not carried out the necessary checks can face a penalty of up to £20,000.

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The UK does not place any explicit barriers to entry on imports. Importers simply need to comply with the relevant UK and EU import duties and customs, other than in areas such as defence in which there are specific requirements (such as licensing and other restrictions).

One circumstance in which importers may face a barrier to entry is in the event that the European Commission deems a non-EU company to be ‘dumping’. Dumping is the practice of selling goods at an artificially low value (lower than normal market value in its domestic market) in order to damage the industries of EU companies.

In the infrastructure sphere, relevant recent action by the European Commission has included that against China for dumping solar panels and steel on the European market and against Malaysia regarding the dumping of solar glass.

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The UK is generally perceived to have minimal political risk and strong rule of law. On nationalisations, with the exceptions of a small number of rail companies (often interim nationalisations) and, in 2008 during the global financial crisis, the part nationalisation of some banks that may have collapsed otherwise (notably Northern Rock, the Royal Bank of Scotland and Lloyds) - all of which have subsequently been reprivatised or are in the process of such, there have been no material nationalisations since the 1970s.

Nationalisations of assets of significant value require a primary act of parliamentary legislation, which would provide a mechanism for compensating shareholders. Since the 2017 snap UK general election the UK’s main opposition party, the Labour Party, has been strengthened and there is now a realistic possibility of it gaining power. Under Jeremy Corbyn and John McDonnell the Labour Party has moved further to the left of the political spectrum and it is currently Labour Party policy to nationalise a number of key industry sectors (such as the railways) and review all private finance initiative (PFI) initiatives with a view to (most likely) legislating to nationalise some or all of these projects.

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There are currently no tax, or other incentives, which are provided preferentially to foreign investors or creditors.

There are, however, a number of incentives which foreign investors can benefit from such as:

• The Patent Box and Research and Development Tax Relief, which provides tax relief for companies investing in research and development in the UK or who are earning profits from patented inventions to promote innovative services and products.
• Business investment relief, which allows non-UK domiciled UK residents claiming remittance basis taxation who invest foreign income in a qualifying target company to avoid the payment of tax on foreign income that is invested.
• The Venture Capital Trust, the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme, all of which provide tax relief to investors interested in investing in qualifying small, early-stage and higher risk businesses.

The UK also has double tax treaties with over 100 countries, which ensures that economic activity is not taxed more than once.

Foreign businesses considering investing in the UK may find helpful HMRC’s Inward Investment Support Service, which aims to give clarity and certainty to non-resident businesses about the tax consequences of significant investment in the UK. To qualify, the investment has to be ‘significant’ - a total of £30 million or more unless the investment is of particular importance to the national or regional economy.

Foreign investors investing in the UK will be subject to the same taxes as UK investors, which include stamp duty, stamp duty land tax and corporation tax.

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Most projects are likely to involve some form of development resulting in the need for planning permission, possible environmental permits and other sector-specific approvals. These are examined below after briefly covering two of the government’s key agencies involved in infrastructure planning and development.

Key public agencies

The National Infrastructure Commission (NIC) is an executive agency of HM Treasury, established to provide impartial advice and make recommendations to the government on economic infrastructure.

The NIC is tasked with:

• setting out its assessment of long-term infrastructure needs and providing recommendations;
• carrying out studies into the UK’s infrastructure challenges; and
• monitoring the government’s progress in delivering projects and programmes recommended by the NIC.

The Infrastructure and Projects Authority (IPA) is the government’s centre of expertise for infrastructure and major projects. The IPA works with the Cabinet Office and HM Treasury to support the successful delivery of all types of infrastructure and major projects.

Planning

Since 27 March 2012, the National Planning Policy Framework (NPPF) has governed planning policy in England. The NPFF sets out the government’s planning policies for England and how they are expected to be applied, and must be taken into account in the preparation of local and neighbourhood plans.

The NPFF does not, however, apply to Nationally Significant Infrastructure Projects (NSIPs) or national waste. NSIPs are governed by the Planning Act 2008 and relevant national policy statements.

Major infrastructure projects in England are likely to be considered NSIPs and so will need a development consent order as well as planning permission from the relevant local authority. The Planning Inspectorate runs the NSIP application process. In Wales, developments will need consent from Welsh Ministers if considered to be a Development of National Significance under the Planning (Wales) Act 2015.

Comprehensive consultations requirements will need to be met for most projects, often involving the Environment Agency, Natural Resources Wales and Natural England (among others, depending on the nature of the project). This means the planning process can be lengthy and expensive compared with that of many other jurisdictions.

Environmental consents

The environmental regulator in England is the Environment Agency, while Natural Resources Wales (NRW) carries out the same function in Wales.

The Environment Agency and NRW both are responsible for reviewing and authorising projects where there are any environmental impacts. This is usually evidenced by the issue of an environmental permit. The Environment Agency and NRW will also enforce compliance with permits and relevant legislation.

Health and Safety

The Health and Safety Executive (HSE) fulfils important statutory functions, including providing the appropriate regulatory frameworks and assessing major hazard safety reports and inspecting certain establishments.

Sector-specific authorities

Oil and gas

All petroleum resources vest in the Crown under the Petroleum Act 1998. However, the government may, via the Oil and Gas Authority (OGA), grant exploration or extraction licences for both onshore and offshore resources (including fracking licences).

The Department for Business, Energy and Industrial Strategy (BEIS) is the competent authority for decommissioning. The OGA works with BEIS to assess decommissioning programmes on the basis of cost, future alternative use and collaboration.

Most offshore works will require consent from the Marine Management Organisation in England or the Welsh government in Wales.

The UK government has had no equity interest in offshore oil and gas production since 1986, following the sale of its oil and gas assets to British Gas.

Minerals extraction

Following the privatisation of the coal industry in 1994, the ownership of almost all coal now resides with the Coal Authority, which grants licences for coal exploration and extraction.

The Crown holds the rights to gold and silver. The mines of these metals are known as Mines Royal and the Crown Estate is responsible for granting lease options of Mines Royal.

Other minerals are privately owned, and, although there is no national licensing system for exploration and extraction, planning permission must be obtained from a mineral planning authority for their extraction.

Water treatment

Ofwat is the economic regulator in England and Wales and grants licences for water and sewerage undertakers. A company can also be granted an infrastructure provider project licence to carry out a large or complex water or wastewater infrastructure project that has been specified under legislation (such as the Thames Tideway project).

The provision of water and wastewater services in England and Wales was transferred from the state to the private sector in 1989 by the sale of the 10 Regional Water Authorities. The potable water supply and sewage disposal functions of each RWA were transferred to new, privately owned companies.

Power generation and transmission

Regulation of power generation, supply, transmission and distribution is via a statutory licensing regime under the Electricity Act 1989. The electricity and gas regulator is the Office of Gas and Electricity Markets (Ofgem), an independent national regulatory body, recognised by EU Directives. The power generation, supply, transmission and distribution markets were privatised in 1990.

Ofgem also accredits power generation stations for the purposes of receiving various government subsidies, including the feed in tariff and the renewable heat incentive.

Transportation

Highways England operates, maintains and improves England’s motorways and major A roads. Highways England works with the Department for Transport. Highways England is a government company formerly known as the Highways Agency.

Highways England does not manage all roads. Local roads in England are managed by the relevant local authority, London roads are managed by Transport for London and all Welsh roads are managed by the Welsh Assembly.

Network Rail owns and operates all railway infrastructure in England and Wales. Passenger services are divided into regional franchises and run by private companies. These companies bid for contracts to run individual franchises. Most contracts are awarded by the Department for Transport.

British Rail operations were privatised between 1994 and 1997. Ownership of the track and infrastructure passed to Railtrack (subsequently transferred to Network Rail), while passenger operations were franchised to individual private sector operators.

The Office of Rail and Road (ORR) regulates the rail industry’s health and safety performance, it holds Network Rail and High Speed 1 (HS1) to account and is tasked with ensuring that the rail industry is competitive and fair. ORR monitors Highways England and has regulatory functions in relation to the Channel Tunnel.

The ORR is an independent statutory regulator, operating within the framework set by UK and EU legislation. It is accountable through Parliament and the courts.

Ports

The majority of port operations are administered by statutory harbour authorities, each governed by their own legislation.

For new harbours and ports, both a works order and marine licence are likely to be required. These will be processed by the Marine Management Organisation.

From 1 April 2018, Welsh Ministers took over responsibility for port development policy for harbours wholly in Wales apart from major trust ports.

Telecommunications

Ofcom is the UK regulator of the telecommunications industry in the UK. This includes TV, radio, video-on-demand, telephone lines, mobiles and postal services, plus the airwaves over which wireless devices operate. Ofcom is accountable to Parliament and sets and enforces regulatory rules for the sectors for which it is responsible. Ofcom also has power to enforce competition law in those sectors, alongside the Competition and Markets Authority.

Mobile network operators and satellite service providers will need a licence under section 8 of the Wireless Telegraphy Act 2006, unless the government has exempted the particular use from the need for a licence.

The Telecommunications Act 1984 abolished British Telecommunications’ monopoly of running telecommunications systems and established a framework to safeguard the workings of competition.

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Water

The Environment Agency controls how much, where and when water can be abstracted, in accordance with UK and EU law, through their abstraction licensing regime. A number of parties (including, but not limited to, landowners and manufacturers) can apply to the Environment Agency for an abstraction licence, with different types of licences available dependant on the type of abstraction to be conducted. Whether a licence is granted or not depends on the amount of water available, after the needs of the environment and existing abstractors are met, and whether the abstraction is justified.

The Environment Agency also has the power to amend or revoke an existing licence where abstraction is damaging the environment. The duration of the licence is usually between six and 18 years for a new licence and 12 years for a renewal licence. The Environment Agency also has the power to grant short duration licences where they think that there may be issues with water availability in the long term, and permits the trading of water rights. An abstraction licence is not required for certain abstraction activities such as abstractions of 20 cubic metres or less per day, filling ships or boats with drinking water and, as of 1 January 2018, various ‘low risk abstractions’.

The Environmental Permitting (England and Wales) (Amendment) Regulations 2013 regulate activities that could harm the environment. An environmental permit is required from the Environmental Agency for discharge of liquid effluent or waste water into surface water (such as lakes or coastal waters) or onto/into the ground. If the discharge of water is part of a waste, installation or mining operation then this can be conducted through an ‘installation’ or ‘waste and mining’ permit.

Natural Resources Wales is responsible for the management and use of water in Wales. Similar to the Environment Agency regime, a licence is required for water abstraction and impoundment.

Minerals

There is no national licensing system for the exploration and extraction of minerals. However, planning permission must be obtained prior to their extraction. The owner of the land will have the right of ownership to minerals found or extracted from their land (provided that these rights have not been excepted or reserved under a previous title transfer or by legislation).

UK onshore

Coal

The Coal Authority grants licences for coal exploration and extraction. The rights of ownership, in almost all coal, belongs to the Coal Authority.

Gold and silver

Gold and silver are classed as ‘Mines Royal’, therefore rights of ownership in gold and silver vest in the Crown. Permission must be sought from the Crown Estate Mineral Agent for commercial exploration of these metals. If the Crown does not own the land in question then permission must be sought from the landowner. Planning permission is also required to mine the metals.

Oil and gas

Ownership of oil and gas located in United Kingdom vests in the Crown in accordance with the Petroleum (Production) Act 1934. The Petroleum Act 1934 is supplemented by the Energy Act 2016 and the Infrastructure Act 2015. A licence must be obtained from the Oil and Gas Authority for the exploration of oil and gas. The licence grants the licensee a non-exclusive right to explore (but not produce) the acreage outside the areas of any other exploration licence in place at the time. Any licence granted does not include rights of access, the licensee is therefore required to obtain the consent required for access and any planning permission necessary.

Where a coal operator needs to capture natural gas during coal mining, they will require a Methane Drainage Licence. The Oil and Gas Authority will consult with the Coal Authority to ensure that the operations to be carried out are in line with the Coal Authority’s regulations.

UK offshore

The seabed, beneath the seabed and beyond territorial waters (with a 12-mile limit) is known as the UK Continental Shelf (UKCS). These are the areas over which the UK sovereign exercises rights of exploration and exploitation of mineral resources. The Department for Business, Innovation & Skills grants licences in respect of oil and gas on the UKCS, and the Coal Authority grants permission to enter or drill through coal seams for coal bed methane and coal mine gas.

The rights of title to the natural resources is dependent on the owner of the land. The same rules will apply in relation to foreign investors; there are no rules that exclude foreign investors from holding title to these natural resources.

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Profits made from the extraction of oil and gas in the UK or the UKCS attract tax, which currently comprises (i) Ring Fence Corporation Tax (RFCT) of 30 per cent (ii) a Supplementary Charge (SC) of 10 per cent and (iii) Petroleum Revenue Tax (PRT) of zero per cent.

RFCT is calculated in the same way as corporation tax that applies to all companies. RFCT comprises a ‘ring fence’ around profits made from oil and gas extraction in the UK and the UKCS, preventing these taxable profits from being reduced by losses from other activities or excessively high-interest payments. In addition to RFCT, a company is charged an additional SC of 10 per cent on its ring-fenced profits. Finally, individual oil fields that received development consent before 16 March 1993 attracted PRT on their profits. However, this tax has now been permanently set to zero per cent (but has not been abolished). The marginal tax rate payable on oil and gas profits is 40 per cent. Various reliefs are available in respect of these taxes such as the investment allowance, cluster allowance and onshore allowance, which apply to the SC, and the ring-fence expenditure supplement, which applies to RFCT among other available reliefs.

Businesses that exploit aggregates (sand, gravel and rock) in the UK will be subject to an aggregates levy. This will apply to aggregates that have either been dug from the ground, dredged from the sea in the UK waters or imported. A levy of £2 per tonne of taxable aggregate is payable, with less payable on smaller amounts (eg, £1 on half a tonne) each as of the date of drafting).

Companies that receive royalties for mineral extraction are charged corporation tax of 19 per cent. Terminal loss relief may be applicable to reduce the tax payable on the royalties by offsetting the loss against the other gains or profits of the business in the same accounting period.

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Customs procedures and taxes generally apply to the export of natural resources from the UK.

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Government approvals for a typical project finance transaction may include: planning permission (generally within the remit of the local authority unless the project is an NSIP - see further above) and environmental approvals and permissions from various governmental agencies and bodies. Further detail on governmental authorities is given in the answer to question 16.

If the project finance transaction is public infrastructure being privately financed (eg, through PFI/PF2/MIM models), then HM Treasury approvals are likely to be needed if the value of the financing transaction exceeds the delegated authorities of the public body procuring the infrastructure.

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Subject to the need to register debentures at Companies House to ensure that the security interests are not void against a liquidator, administrator or creditor, and the debt secured by that charge does not become payable immediately (see above - while not technically a requirement, failure to register accordingly has very serious practical consequences), there are as a matter of course no requirements to register or file any financing or project document, nor any other similar legal formality (outside the document’s due execution) to ensure that it is valid and enforceable.

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The English courts are supportive of arbitration and will generally seek to uphold contractual agreements to arbitrate. The UK is a party to the New York Convention and the Geneva Convention relating to recognition and enforcement of foreign arbitration awards. The UK has ratified the Washington Convention (ICSID) and has enacted the Arbitration (International Investment Disputes) Act 1966, which provides for the recognition and enforcement of ICSID awards. Most types of commercial disputes can be arbitrated. There are some very limited cases in which disputes are not arbitrable, including employment (where an employee has statutory rights to have his or her case heard before an employment tribunal), and insolvency proceedings that are subject to the statutory regimes set out in the Insolvency Act 1986 and criminal matters. There no types of commercial disputes that are automatically subject to domestic arbitration. The Arbitration Act 1996 governs all arbitrations seated in England, Wales or Northern Ireland, both domestic and international.

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While not mandatory, both project and financing agreements are typically governed by the laws of England and Wales where the project is based in England or Wales. Where the project is based in Scotland or Northern Ireland, the real estate elements of the project (eg, leases) will be governed by the domestic law of that jurisdiction (though often the other project and finance documents will be governed by the laws of England and Wales). Real-estate-related security interests should also be governed by domestic of the relevant jurisdiction in which they are located.

There are some other statutory restrictions on governing law (including public policy requirements), primarily that the constitution of an entity incorporated in one of the jurisdictions in the UK must be governed by the law of that jurisdiction, and that both employment and insolvency-related matters will be governed by the domestic jurisdiction. English law is also often used for financing agreements (though not necessarily security agreements) for projects based outside the UK.

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Submission to a foreign jurisdiction to settle disputes under a commercial contract is a valid choice under the laws of England and Wales, and the judgments of that foreign jurisdiction may be effective and enforceable subject to the relevant formalities. Broadly, the judgments of other EU states are enforceable under Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil commercial matters, known as the ‘Recast Brussels Regulation’. In the case of Denmark, the regulation is applicable by separate agreement rather than it having direct effect. Iceland, Norway and Switzerland (ie, the European Free Trade Association members excluding Liechtenstein) reciprocally recognise the jurisdiction of other European states through the (similar but less developed) 2007 Lugano Convention.

There is also a separate regime for the simplified recognition of Scottish and Northern Irish judgments under the Civil Jurisdiction and Judgments Act 1982, while the judgments of some (mainly Commonwealth states and UK Overseas Territories) are (subject to formalities) recognised variously under the Administration of Justice Act 1920, Foreign Judgments (Reciprocal Enforcement) Act 1933 and Civil Jurisdiction and Judgments Act 1982 (Gibraltar) Order 1997. The judgments of the courts of Mexico and Singapore (for example) can be recognised in the jurisdiction through the operation of the Hague Convention on the Choice of Court Agreements. In the absence of any specific reciprocal arrangement (for example, most notably in the United States, Russia and China) foreign judgments may only be recognised and enforced by separate proceedings in the domestic jurisdiction.

Sovereign immunity under the laws of England and Wales is primarily derived from the State Immunity Act 1978. Subject to the relevant domestic law (and whether this permits the sovereign entity to waive immunity), and provided the clause is properly drafted, immunity from adjudication and enforcement can be effectively waived and enforced. Though in practice there are few differences to the State Immunity Act 1978, it should be noted that the UK is also a signatory to the United Nations Convention on Jurisdictional Immunities of States and their Property, though it is not yet in force under the laws of England and Wales.

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Environmental matters in England and Wales are regulated by a complex mixture of increasingly stringent legislation and common law. Health and safety is often considered alongside environmental matters but is governed by separate laws and regulations.

While there are several relevant bodies to the regulation of environmental matters, the key regulators are the Environment Agency (for England) and Natural Resources Wales (for Wales). Other bodies thatmay be relevant depending on the project include:

• Natural England, which is responsible for biodiversity, wildlife and habitats;
• the Marine Management Organisation, which is responsible for marine activities; and
• local authorities that can have a number of roles primarily relating to regulation of emissions, planning permissions and waste disposal.

The main environmental laws relevant to projects include the following.

• The contaminated land regime contained in Part 2A of the Environmental Protection Act 1990. Under this regime liability for remediation of any contamination (which includes investigation, mitigation and monitoring of contamination) sits primarily with those who caused or knowingly permitted the contamination. However, this liability can rest with landowners or occupiers, regardless of whether they are aware of the contamination if those who caused the contamination cannot be found.
• The environmental permitting regime which is set out in the Environmental Permitting (England and Wales) Regulations 2016. Under this regime if certain activities are being undertaken, the party carrying them out must hold an environmental permit. There is a wide range of activities covered and they tend to be those activities that release emissions to land, air and water or that involve waste.

If a project causes contamination, pollution or a nuisance, a party (including a company) who has suffered loss as a result may be able to bring a civil claim in court under the common law of nuisance or negligence. The main aim of such an action is not the remediation of the issue but to compensate the party for its loss.

Any project involving waste (whether it is the production, collection, holding, storage and handling, processing, reuse or disposal) will be subject to statutory regulation.

If a project is an installation in an energy-intensive sector (such as manufacturing facilities, oil refiners and powers stations) the EU Emissions Trading System may be applicable. Under this scheme an installation must surrender an amount of emissions allowances corresponding to the amount of carbon dioxide produced. The is also a mandatory emissions trading scheme (known as the CRC Energy Efficiency Scheme), which applies to large non-energy intensive businesses and public sector organisations. However, this scheme will end in October 2019.

Biodiversity, habitats and wildlife are also protected by legislation. If the site for a project is a designated site or if there are protected species on the site, there are likely to be significant limitations on the activities and developments that can be carried out on the site.

Breaches of the above laws can have a range of consequences including:

• criminal liability and sanctions including fines or imprisonment;
• civil penalties under the specific regime, which can include fixed monetary penalties, discretionary requirements or stop notices;
• payment of damages as part of civil court actions; and
• requirement to carry out and cost of cost of remediation.

Health and safety matters are extensively regulated through common law and statutory obligations with the basis of the statutory obligations set out in the Health and Safety at Work etc Act 1974. These obligations are regulated and enforced by the Health and Safety Executive.

The core obligation on employers is to, as far as reasonably practicable, ensure the health and safety of their employees and those affected by their activities. The qualification means that employers do not have to take measures to avoid or reduce risks affecting health and safety if they are technically impossible or if the time, effort and cost of implementing such actions is grossly disproportionate to the risk. Employers also have obligations in relation to the assessment, monitoring and auditing of the health and safety risks associated with its business and must appoint a competent person to implement the measures required to ensure compliance.

Breaches of the statutory health and safety obligations is a criminal offence by the company with a range of accompanying sanctions including:

• improvement notices requiring an issue to be remedied;
• prohibition notices requiring an activity to cease;
• individual liability for directors, company secretary or a manager if the offence was committed with their consent, neglect or connivance; and
• corporate manslaughter charges.

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Typically a project company will be structured as a special purpose vehicle (SPV), often known as the ProjectCo, though the sponsors will hold equity in the ProjectCo’s sole holding company (the HoldCo) for operational efficiency, limited liability and equity transfer reasons. Usually the SPV is a limited liability company, but it may also be structured as a limited partnership (often for tax efficiency and transparency reasons). The ProjectCo may alternatively be a public limited company if it intends to raise bond finance (often through the use of a separate SPV, often known as a FinCo or DebtCo). The ProjectCo will contract with the relevant authority/concessionaire via the project agreement/concession and will then subcontract the building and maintenance obligations to specialist subcontractors (often, but not always, parties related to the sponsors). The ProjectCo will aim to pass down liability for obligations to the relevant subcontractor with the aim of minimising the residual liability remaining with the ProjectCo (and this residual liability may be addressed using insurance as applicable).

The principal sources of financing available to project companies are as follows:

• equity: Both ‘pure’ equity and subordinated shareholder loans (often predominantly the latter by value. Equity will be passed down the corporate structure from sponsor to the HoldCo to the ProjectCo. A project’s leverage will be dependent on the industry sector and the particular situation of that project, but leverage is typically between 75 per cent and 90 per cent for projects located in England and Wales;
• bank/institutional debt: while finance from institutional investors is becoming increasingly common, bank still play a significant role in financing projects;
• bond finance: some projects, especially those with long-term debt requirements or those with minimal or no construction risk may look to raise finance through public or private bond placements. This may also take place as a part of a ‘bridge-to-bond’ financing structure; and
• leasing: projects where the asset in question is primarily equipment rather than building-based often contain some lease financing.

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PPP has been a government policy for over 25 years and state contracting entities (for example, NHS trusts, central government or local authorities) have had the power to enter into such arrangements under general existing legislative powers. Unlike many other jurisdictions, there is no overarching PPP law under which such projects are mandated. The PFI was the driving force behind PPP projects in England and Wales and was a policy implemented through the Cabinet Office and HM Treasury. However, there is legislation that assists with the bankability of UK PPP projects such as the Localism Act 2011, which extended powers to local government, or the National Health Service (Private Finance Act) 1997, which enabled NHS Trusts to enter into development finance agreements. Furthermore, the form of contracts used by government entities to enter into PFI (and now PF2 contracts) was made more consistent through the Standardisation of PFI Contracts suite of documentation that is now in its fourth incarnation (SOPC4) and forms the bedrock of bankable PFI transactions in England and Wales.

PFI is an evolving initiative, most lately re-emerging in the form of PF2 primarily to fend off accusations that PFI represented poor value for money for the tax payer. The key changes in the standardised documentation and guidance included:

• reduction in the length of the tendering process;
• removal of soft facilities management (which produced a rich source of profits for PFI sponsors);
• public sector equity stakes in the PFI vehicles; and
• open book accounting and gain share mechanism for life cycle funding.

Although none of these changes represented legislative change, they did represent a marked change in government policy in its approach to new PFI projects.

It is, however, worth noting that the procurement itself of PFI/PF2 contracts is also regulated by general procurement regulation in England and Wales. This regulation is found primarily in the EU’s Public Contracts Directive 2014/24/EU, but was implemented in the UK by the Public Contracts Regulations 2015. The majority of PFI projects will be caught by the most stringent procurement regulations requiring a fully regulated procurement process including OJEU notices and detailed rules regarding the running of the tender competition itself.

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From a legal perspective, public bodies are broadly able to contract private sector participants (subject to certain formalities). At a macro-level, public sector procurement such as PPP transactions are generally subject to EU procurement rules and processes. These include the requirement to follow the OJEU notice procedure where the Public Sector Procurement Directive (Directive 2014/24/EU, as implemented by the Public Procurement Regulations 2015) applies. It should also be noted that there are specific procurement processes for the award of concession contracts (Concession Contracts Regulations 2016); utilities (Utilities Contracts Regulations 2016) and defence (Defence and Security Public Contracts Regulations 2016), each of which require certain processes to be followed if the procurement meets the relevant value threshold (largely determined by the type of services being procured).

PPP transactions in the jurisdiction take a range of forms, but where the private sector is to provide finance (generally PFI transactions, subsequently taking an updated standardised form, PF2, though there are other models - notably the Welsh government’s Mutual Investment Model), the finance procurement is overseen by HM Treasury where the value exceeds the relevant public body’s delegated authority spending limits, and the project will need to follow HM Treasury’s approvals processes.

At a more micro-level, projects contracting with a local government entity should be aware that the capacity of local government bodies to contract is derived from statute, and these powers are narrowly interpreted. As a result, it is often necessary to obtain certificates pursuant to the Local Government Contract Act 1997 (LGCA certificates) from the relevant local government body certifying that the relevant actions are within its capacity (subject to very limited circumstances where a certificate can be challenged, meaning that the relevant contract will not be declared void as a result of being outside of the capacity of the local government body in question).

The actions of public bodies are reviewable (within a limited period of time) on the grounds of illegality (including that the public body acted outside of its proper capacity), irrationality or procedural unfairness. The risks posed by a judicial review process (for example, in relation to planning permissions) is often dealt with through conditions precedent.

From a practical perspective, the major limitations on PPP transactions are broadly political - the Labour Party (the UK’s main opposition party) has a stated policy of opposition to PFI/PF2 (and are generally antipathetic to all forms of private investment in the public sector), and intend to conduct a review (if elected - currently a realistic possibility) of existing PFI/PF2 projects with a view to potentially nationalising the equity in some or all of these projects. The insolvency of Carillion, a key PFI contractor, has also heightened antipathy towards PPP (in particular to PFI) and questions remain as to the value for money of the PF2 structure. No PF2 projects have reached financial close since 2016 and, while high government debt and the comparative lack of public funding may suggest future infrastructure investment may need to be privately funded, political antipathy may well be a significant obstacle to this investment.

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In the UK there has been a very small number of greenfield ‘new money’ PPP transactions in 2017 - Q1/Q2 2018. Arguably, also very few are notable in terms of size, complexity or novelty. In contrast, the UK PPP and infrastructure debt financing market has been dominated by a large number of complex/large acquisition finance and refinancing transactions. At the time of writing, market conditions for debt are very favourable for project sponsors (in terms of pricing, tenor and terms), enabling refinancing opportunities (ie, forthcoming M25 PPP refinancing scheduled to close in Q2/Q3 2018) and contributing to a perceived high point in asset valuations.

The UK market has witnessed insurance, pension and institutional fund debt investors advancing funds to a wide range of infrastructure projects to both investment and non-investment grade credits.

We have also noted the emergence of the use of HoldCo debt whereby debt is advanced typically above regulated operating companies or project companies to create leverage opportunities against junior debt and dividend cash flows (ie, UK High Speed Rail 1 acquisition and the Inter City Express PPP acquisition) in the context that many perceive infrastructure asset class as generally being conservatively leveraged. Indeed, we are seeing potential leverage opportunities to be advanced to infrastructure equity funds, rather than at an asset level.

It is also worth noting debt raising on a deferred basis allowing sponsors to take advantage of current positive debt conditions (ie, Thames Tideway raising green bond finance to be issued in 2021/2022 for their construction financing requirements) from institutional investors.

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Brexit

At the time of writing the UK is set to leave the EU on 29 March 2019, though it is expected that throughout a transition period (presently likely to last until some point in 2021) there will be minimal change to the UK’s legal relationship with the EU.

Further, and assuming both that the UK does leave the EU and that there is a relatively short transition period (with the possible exception of the employment and immigration law referenced above) there is no stated ambition from the UK government nor (given the complexity and relative lack of resources and parliamentary time available to the UK government) any likelihood that any of the law around project financing in England and Wales will change significantly in the near term as a result of Brexit .

Political risk

There is increasing political antipathy towards PFI/PF2, both from ideological and ‘value for money’ perspectives. This antipathy may manifest itself in two ways. The first is that there is currently a restricted pipeline of greenfield private finance infrastructure projects in the UK (with the possible exception of the Silvertown Tunnel in East London and the A303 tunnel project in the South West of England). This restricted greenfield pipeline is likely to continue. The second is that it is the stated policy of the Labour Party (the main opposition to the UK government) to review all existing PFI projects with a view to nationalising the equity in these projects.

A Labour government is now a realistic possibility in the near future, so any nationalisation may increase risk premium required to finance infrastructure in the UK to account for additional political risk.

Jeremy Corbyn, the current leader of the Labour Party, is also a long-term supporter of government subsidisation of industry. However, despite indications from him that any Labour government would seek to amend state aid rules (potentially as part of a Brexit settlement with the EU), the likelihood of the EU agreeing to any relaxation of state aid rules in respect of the UK while agreeing to a comprehensive (tariff-free) trade and customs agreement is extremely remote.

Carillion

The January 2018 insolvency of Carillion plc (a major PFI contractor) has further hardened public sentiment towards private finance initiative projects. In particular, the Midlands Metropolitan Hospital, Royal Liverpool Hospital and Aberdeen Bypass were all significantly behind schedule and over budget at the point of Carillion plc’s collapse.

In addition, major contractors have increasingly moved away from large fixed price construction contracts (a key risk transfer aspect of PFI) owing to their often wafer-thin margins and the systemic risk they represent to these contractors. Both the upward pressure on construction costs and relatively expensive financing costs (noting the risk transfers involved) have increased ‘value for money’ concerns and, while some Welsh MIM model projects may come to market soon, the pipeline of new private finance projects is likely to remain limited.

Secondary markets and whole business securitisation

While, as noted above, the pipeline of primary transactions has been limited, with high liquidity, low debt costs and investment fund allocations to infrastructure increasing, there is a strong M&A and project refinancing market, and this has included whole business securitisations as part of acquisition finance.

In the context of a relative paucity of primary market opportunities, competition has driven valuations up, debt costs down and increased the range of assets that infrastructure investors are willing and able to invest in. A key example of the expanding scope of infrastructure project finance is the increased interest in broadband internet infrastructure investment. While, traditionally, this may have been regarded as too risky to project finance, as the UK market matures there may be a significant increase in broadband internet infrastructure being project financed (as has been seen in a number of jurisdictions in continental Europe).

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