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2003 HIGHLIGHTS
BUSINESS STRATEGY
AND OPERATING STRUCTURE
John Laing plc acts as a developer of substantial infrastructure assets utilised in the provision of public services. These assets are privately financed and in general subject to long-term concessions which have a public authority as the counterparty.
 Competitiveness in this market is determined by the ability to offer the public sector value for money solutions and, in the UK in particular, increased emphasis is being placed on the credibility and track record of sponsors in delivering high quality operating assets beyond the construction phase.
John Laing is unique among listed companies in that its core business is creating shareholder value through its role as a focussed developer of PFI/PPP projects and operations. As such the company specialises in originating projects, integrating all the financial and technical elements required for their delivery, and managing the investment phase and the subsequent operational risks.
We invest in accommodation, road and rail. In accommodation we focus on health, education, defence, emergency services, local authority and social housing/urban regeneration sectors. As at 31 December 2003, 92% of the portfolio by value is in the UK but other European markets represent an increasing proportion of current business development activity.
Within the contractual arrangements that underpin such projects, John Laing does not bear construction risk, but rather it works with a range of construction partners with strong track records of delivery and the capacity to adequately guarantee construction outcomes.
Similarly, although such projects are typically highly geared (with debt to equity ratios of 9:1 in relation to availability fee based accommodation projects), debt finance raised by special purpose Project Companies is non-recourse to John Laing.
Projected returns from project investments are subject to performance deductions if required service standards are not met, but service related sub-contracts generally provide for such deductions to be passed through to contracted providers. These arrangements are robust and, while the level of performance deductions is in any case very low in successful accommodation projects, there was no instance during 2003 in which performance deductions impacted on projected cash flows to equity in any of our availability based projects.
John Laing assumes such operational risks in limited circumstances on some police and education projects where Equion FM is the appointed sub-contractor. Equion FM’s capacity and activity assists the Group to price service inputs more broadly and by creating the option of direct provision contributes to risk mitigation across the portfolio as a whole.
The Group is highly selective in its exposure to volume based payment mechanisms and concessions with a significant degree of patronage risk. The principal case in point is our Chiltern Railways investment where both passenger revenues and profitability developed ahead of expectations during 2003.
The Group’s business model places emphasis on rigorous targeting of the most appropriate opportunities and selective partnering to assemble the most suitable response to these opportunities. John Laing adopts active management of projects and the relationships that underpin them in order to both enhance the quality of its partnerships with the public sector and the community, and to preserve and enhance returns on its project investments.
John Laing is a long-term investor, developer and operator of facilities and serviced assets. As such the Group will often take a position of between 50-100% of total equity at financial close and, while it will not generally seek to fully exit from significant operational investments, it may sell down a proportion of its holding in a project once the crucial early phases of risk management and delivery have been successfully completed. In addition it will actively seek to dispose of any non-core interests.
Project delivery, from bidding to the management of operational concessions, is organised through three sector focussed subsidiaries; Equion, Laing Roads and Laing Rail. Equion specialises in accommodation projects.
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GROUP PROFIT BEFORE TAXATION OF £21.2 MILLION (2002 LOSS BEFORE TAXATION – £14.1 MILLION) |
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16% GROWTH IN PORTFOLIO VALUATION TO £250.3 MILLION (2002 – £215.3 MILLION) |
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CASH FLOW DERIVED FROM PORTFOLIO EXCEEDS COST OF ACQUISITIONS AND EQUITY SUBSCRIPTIONS BY £2.5 MILLION |
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PORTFOLIO OF 33 LONG-TERM CONCESSIONS, WITH 22 FULLY OPERATIONAL |
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NET BOOK VALUE OF INVESTMENTS OF £149.8 MILLION (2002 – £119.8 MILLION) PLUS FORWARD EQUITY COMMITMENT OF £58.0 MILLION (2002 – £48.0 MILLION) |
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CONTINUED STRONG DEVELOPMENT OF PIPELINE WITH 18 PROJECTS AT PREFERRED BIDDER STAGE (2002 – 10) WITH RIGHTS
TO COMMIT EQUITY OF £98 MILLION AT YEAR
END (2002 – £35 MILLION) |
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JOHN LAING PLC NAMED DEVELOPER OF THE YEAR FOR ITS PFI/PPP ACHIEVEMENTS(1) |
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| (1) Infrastructure Journal Awards January 2004. Laing Investments also won PPP Developer of the Year in the same awards for 2002, as did Equion for 2001. |
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VALUE BY CONCESSION LIFE REMAINING |
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INVESTMENT PORTFOLIO >
(AT MARCH 2004) |
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PORTFOLIO DEVELOPMENT
As at 31 December 2003, the portfolio included 33 project interests, and a further 3 projects reached financial close in January 2004 bringing the current total to 36 (2002 – 25).
Growth in the number of signed projects to date, since 1 January 2003 has arisen as a result of 8 John Laing originated bids reaching financial close and project interests entering the portfolio through acquisition. 4 project interests were sold during the period.(1)
Projects reaching financial close and entering the construction phase during 2003 included the E39 Norwegian road, Newham Schools, Enfield Schools, the DARA Red Dragon aeronautical facility and Wakefield street-lighting. In addition Newham Hospital, Sirhowy Way and the Sandwell Local Investment Financing Trust (‘Sandwell LIFT’) projects achieved financial close in January of 2004.
The projects acquired during the year have all performed to expectation, both in terms of operational experience and value growth. The 6 new project interests which were acquired from Amey and which remain in the portfolio were integrated into the subsidiary company and overall portfolio management structure, in line with the anticipated timetable. The portfolio acquired from Amey also included an interest in Modus (the Project Company for the MoD Main Building), raising our shareholding of the project from 40% to 50%.
Disposals during the year were undertaken where opportunities arose to exit from under performing legacy projects at above carrying value (National Physical Laboratory, Manchester Metro), or to realise significant premiums from sale of interests in a non-core sector to secondary investors (Adelaide Airport, and Northern Territories Airports). All disposals were achieved at prices in excess of the 2002 portfolio valuation.
As at the end of February 2004, the portfolio included 22 fully operational projects (2002 – 19), 8 part operational projects where construction completion is occurring on a phased basis (2002 – 4), and 6 projects in the construction phase (2002 – 2).
(1) In addition, the A19 interest was both acquired from Amey and disposed of through pre-emption rights during the period.
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THE MARKET>
The signature event of the year as regards UK PFI/PPP was the publication by the Treasury in July 2003 of ‘PFI: Meeting the Investment Challenge’. This substantial review of the sector explained the Government’s perspective on private finance as a whole and was particularly useful in drawing together evidence to date concerning the value for money (‘VFM’) being obtained by the public sector from PFI. As such it also addressed a series of misconceptions about both the public sector’s motivation for utilising private finance and the impact on particular services and the broader public finances.
In parallel with this development of the policy framework, 2003 saw innovation in procurement with various initiatives including the roll out of the LIFT programme (42 area based concessions for local health facilities put to market over 18 months), initial development of framework funding mechanisms for bundled projects, and an initial batching of 3 acute hospitals into a single phased procurement exercise. Innovation in procurement is expected to continue with an aim of increasing its cost-effectiveness and presenting market participants with greater certainty as to the parameters of future deal flow.
The PFI debt market rose from £4.9 billion to £8.2 billion in 2003, with debt for new projects (as opposed to refinancings) rising from £4.4 billion to £6.7 billion.
The volume of bond deals rose markedly to the point where they amounted to over a third of all project financings. However, the reduction in PFI debt margins (accompanied over the six years to 2002 by falling long-term rates, increased bank/bond competition and an increase in the number of debt providers), has now moderated and to some extent reversed. To the extent that banks may deliver higher pricing and potentially adopt a more cautious view of PFI project credit going forward, and that limits to the supply of bond finance may be tested and that it is not in any case universally appropriate, Government innovation to sustain a diversity of funding sources, and trial new structures, should be welcomed.
2003 also saw increased secondary trading of both PFI related debt and equity, an expected development considering that PFI/PPP deals valued in excess of £40 billion have now reached financial close in the UK. A number of vehicles targeting acquisition of equity in operational projects announced commitments or initiated fundraising during the year, with announcements indicating intentions to acquire some £1 billion of PFI equity. Some sponsor sales followed, although a gap between vendor expectations and purchaser yield requirements is evident. This gap is expected to close as the market matures and competition to acquire assets is accompanied by a wider understanding of the attractions of this asset class.
Turning to the market for PFI/PPP in other European jurisdictions, a significant number of opportunities are now emerging and where John Laing’s specialist development capabilities position it well for pursuing new opportunities in association with strong local partners. The Group has prioritised selective bidding within the European Union over pursuing further opportunities in Australia. Initial developments in other national markets are focussing on transport related infrastructure, usually roads, with some examples now of Governments making preparatory moves to facilitate PFI-style investment in social infrastructure.
The Secretary of State for Transport announced a review of the structure of the UK Rail sector on 19 January 2004. The review process is targeting improvements in the regulatory environment, reduction of complex interfaces in the rail supply chain, and greater cost efficiencies in order to improve both customer satisfaction and VFM for the taxpayer. These are all issues requiring urgent attention, and both Chiltern Railways and Laing Rail Projects are well placed to take advantage of a successful outcome to the review process.
OUR PEOPLE>
The high calibre and skills mix of our people is the cornerstone of our success. Clarity about the skill sets needed to transform the John Laing Group into a unique player in the PFI/PPP sector has been at the forefront of our strategy and we have been successful in attracting and retaining talented people with the aptitude and desire to grow with the business.
From this skills base we provide the right mix of technical, professional and managerial skills to select and then work alongside the most appropriate joint venture partners and contractors for each project. This mix is crucial to our success in managing projects through the mobilisation and operational phases.
As an employer we seek to continually demonstrate our commitment to developing our employees. Whilst in part this is addressed through formal training and development, and less formal initiatives such as topical lunchtime seminars, we believe the best development opportunities lie in supported experiential learning on bids, live projects and working responsibly with our public and private sector partners. The flexibility that this approach provides in resourcing bids and projects creates a dynamic learning and delivery culture, and one to which our staff respond enthusiastically and with considerable commitment. Furthermore, it enables every one of our employees to know the value and importance of their contribution.
OUR PARTNERS >
We have built on our own strengths and abilities through forging strong relationships with joint venture partners with whom we co-invest and who bring to the PFI Project Companies their skills of construction, facilities management and financing.
Due to the long-term nature of the PFI projects we select our partners with care paying particular attention to the added value they contribute to the specific projects and sectors in which we join forces.
We work with a broad range of partners and in the past year we reached financial close on projects with Amey, Costain, Laing O'Rourke, Skanska and Wates. We are also currently bidding with Innesfree, Sodexho and Pinnacle and have formed joint ventures with GNER Holdings, Kier and HBOS amongst others.
VALUE CREATION>
(AT 22 MARCH 2004) |
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EMERGENCE OF BETTER MANAGED, BETTER DEFINED PIPELINES OF OPPORTUNITY BENEFITS SECTOR |
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EMERGING DEAL FLOW WELL MATCHED TO JOHN LAING’S SECTOR FOCUS, CAPABILITIES AND SPECIALIST ROLE |
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COMPETITION AND INNOVATION DELIVER RECORD LEVELS OF FINANCE TO THE SECTOR |
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SECONDARY MARKET FOR PFI EQUITY ATTRACTS GREATER LIQUIDITY AND DELIVERS AN INCREASED NUMBER OF TRANSACTIONS |
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CLEAR, BUT UNEVEN, PROGRESS IN DEVELOPMENT OF PPP ACROSS EUROPEAN MARKET |
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UK RAIL REVIEW TO CONFIRM ROLE OF
PRIVATE OPERATORS AND STRUCTURE OF INDUSTRY AS A PPP, BUT FORESHADOWS NECESSARY ORGANISATIONAL AND REGULATORY IMPROVEMENTS |
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| Key features of the Government’s strategic statement included commitments to: |
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PURSUE PFI FOR VFM REASONS, NOT ‘OFF BALANCE SHEET’ FINANCING OR OTHER REASONS |
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PROMOTE MORE SOPHISTICATED PROCESSES FOR EVALUATING POTENTIAL VFM ACROSS GOVERNMENT AND ITS AGENCIES |
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PLAN FOR 10-15% OF PUBLIC SECTOR CAPITAL INVESTMENT TO BE DELIVERED THROUGH PFI/PPP MECHANISMS ONGOING |
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CONTINUE WITH UTILISATION OF PFI IN SECTORS SUCH AS HEALTH AND EDUCATION WHERE SUBSTANTIAL PROGRAMMES OF ACTIVITY ARE REQUIRED |
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CEASE USE OF PFI IN AREAS, SUCH AS INFORMATION TECHNOLOGY, WHERE EXPERIENCE SUGGESTS THE MODELS UTILISED TO DATE HAVE NOT WORKED AND TO GENERALLY AVOID SMALL PROJECTS OF £20 MILLION OR LESS WHERE TRANSACTION COSTS MITIGATE AGAINST VFM |
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EXPLORE A SIGNIFICANT MEDIUM TERM EXTENSION OF PFI TO SECTORS SUCH AS SOCIAL HOUSING, URBAN REGENERATION AND WASTE |
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PLACE EMPHASIS ON OBTAINING QUALITY OUTCOMES FROM PROJECTS PROCURED ON A SUSTAINABLE BASIS |
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UTILISE FINANCIAL INNOVATION (SUCH AS CREDIT GUARANTEE FINANCING) TO ENSURE AN OPTIMUM MIX OF DEBT FINANCE WHILE PRESERVING THE CRUCIAL ROLE OF PRIVATE SECTOR EQUITY IN PROJECT DEVELOPMENT, DELIVERY, RISK TAKING AND RISK MANAGEMENT |
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