Electric-powered trains, highways, bridges - even a sports stadium - it’s hard not to be impressed by the pictures of infrastructure projects that surround chief executive Olivier Brousse in John Laing’s (JLG) West End boardroom.

From this base, Laing’s reach spans far and wide and from the mundane to the monumental. From street lights in Croydon to railways in the US or health facilities in Australia, John Laing’s civil engineering specialists are on the case.

Public Private Partnerships (PPPs) may not be among the most celebrated of UK exports but they are a system of funding public works projects that are gaining traction with governments across the globe.

In 2013, President Obama delivered a speech from a Miami bridge funded through a PPP and called his plans to revamp the country’s economy as ‘a partnership to rebuild America’.

Revolutionary approach

John Laing, with roots in nineteenth century Britain, is an expert in this type of model.

‘There would not have been an industrial revolution without PPPs,’ says Brousse. ‘They were not called PPPs at the time but they were exactly the same.

‘When you look around the world today, all the countries using PPPs use the legal and financial framework which was first used in the UK. It’s really interesting to see and it’s the reason the country became Great Britain in the 19th century - because of these partnerships between the public and private sector.’

Laing operates at the riskier end of the infrastructure industry, known as primary stage investing, a phase which takes projects from concept to completion.

Pension funds and institutional investors are not very interested in the risks associated with building a bridge or motor highway. Once complete, the predictable and long-term cash flows associated with maintaining and operating the assets makes them natural owners of infrastructure assets.

These long-term investors form a secondary market in which primary stage infrastructure funds attempt to onsell their completed projects.

‘Today in the world you have a once in a lifetime, maybe once in a century opportunity, whereby you have pension funds or sovereign wealth funds chasing yields with government bonds yielding 2% in some countries, less than 1% in Germany,’ says Brousse.

‘So if you’re a pension fund and you need to invest your money with stable returns over 20 years and governments want to pay 2% then what can you get for 3% or 4%?

‘Infrastructure is a good proxy because it is not a government bond but once the asset is built it is more or less a public bond and it runs for 20-25 years.

‘So today there is an enormous amount of money that does not go anywhere because there is no yield and inflation.

‘What is missing are projects. Projects for 25 years at least on social infrastructure or roads have to be decided by governments. There’s a huge opportunity today because governments have needs: population is growing, climates are changing. They know they have to do things.’

Brousse is working hard to make sure these projects come to fruition. As well as meeting the demand of pension funds and long term investors, this should also generate a tidy profit for John Laing in the process.

Returns on equity at John Laing averaged 20% annually over the last seven years, Brousse claims, though he admits similar results will be tougher to achieve in the future.

Competition is stronger and a bolder approach is now required.

Greater sophistication

‘If we want to deliver those returns, we have to go for - and we can go for - more sophisticated projects,’ says Brousse.

‘Those kinds of returns on a simple school PPP... I think today they would be unachievable because the risk is not that great. Everyone knows how to deliver schools now whereas in the 1990s it was probably different.

‘Now if you look at John Laing we are working on more innovative projects like the Intercity Express Programme, the train fleet for the Eastern and Great Western lines. We’re going for process plants like the Greater Manchester waste-to-energy plant. This is where the transfer of risk and the sophistication of the projects justify the margins.’

As well as project diversification, Brousse is working on building Laing’s geographical reach. Following on from President Obama’s infrastructure pledges, Brousse says there is a growing opportunity in the US.

Discussions with some of the leading US construction firms have been positive and Brousse says they are keen on working with Laing on PPPs in the country.

The model used in the US is ‘almost exactly the same as the one used in the UK’.

‘If you are a governor of a state in the US and you are staking part of your reputation on the success of a PPP project, you had better take people who are competent,’ says Brousse.

Infrastructure is ‘complex’ Brousse admits. It requires high quality people on both sides - the private sector and the public sector - to design projects that work. Building and operating assets is not straightforward and nor is financing the projects and marketing them for sale on completion.

More complex projects are needed to make decent returns.

This complexity within infrastructure is something that has put us off John Laing in the past despite the clear of appeal of infrastructure assets themselves. Perhaps hardest to understand for ordinary investors is Laing’s financial structure.

The business was recently sold by asset manager Henderson (HGG) on to the stock exchange via an initial public offering (IPO). And understanding the assets on Laing’s balance sheet is not easy.

Valuations of all of its investments are calculated by estimates which we understand are fairly rigorous. They must be approved by the company, lawyers, accountants and so on, meaning they will be a reasonable estimate of the current market value of the roughly 40 projects it operates.

But they are only estimates, known as Level 3 fair value measurements in accounting speak. They are ‘derived from valuation techniques that include inputs to the asset or liability that are not based on observable market data’.

Brousse says this should not be too much of a concern for prospective investors, arguing the valuations are conservative. During the initial public offering process, the argument was made to Shares that Laing’s asset valuations were more conservative than its already-listed peers, though this may simply be because its projects are higher risk.

Within the individual projects, as in all infrastructure and private equity funds, there is a large amount of debt which is not shown on Laing’s balance sheet.

But the project investment vehicles are non-recourse units meaning if they fail Laing loses only its investment and is not liable for the debt within the vehicles, Brousse says.

Biography

Olivier Brousse

Chief executive officer

Joining Laing in 2014, Brousse has held leadership roles in a number of companies at least as distinguished as the one he now heads. Prior to taking the top job at Laing, Brousse was chief executive officer at Saur, a France-based public services firm. Brousse also worked for Compagnie Generale des Eaux, founded by Napoleon Bonaparte’s son and predecessor to three of France’s best known businesses: construction outfit Vinci (DG:EPA), waste management firm Veolia (VIE:EPA) and media giant Vivendi (VIV:EPA).

John Laing (JLG) 191p

SUMMARY

Exiting the construction business after a financially disastrous involvement in Cardiff’s Millennium Stadium project, John Laing is now squarely focused on the project management of early stage infrastructure projects (primary markets). This means building consortia of construction and support services contractors, raising finance and bidding for infrastructure contracts. Once the projects are complete and operational, Laing seeks to onsell its stake to pension funds or other investors (in secondary markets).

Bull case

• Active secondary market

• Project wins at acceptable margins

• Solid track record

Bear case

• Secondary market dries up

• Reduced availability of bank credit

• Riskier projects backfire

Market value: £702 million

Prospective book value per share Dec 2015: 232p

Prospective dividend yield: 4.7%