Many argue that increased involvement by institutional investors in infrastructure is essential, with an estimated $57tn needed by 2030 to finance energy, water, transportation and social projects globally, according to McKinsey, the consultancy.
Meeting this requirement is proving a giant problem, with many governments facing budgetary constraints and banks retreating from financing long-term projects.
Previous initiatives, such as the UK’s Pension Infrastructure Platform, have struggled to gain traction with institutional investors even though the steady predictable cash flows of this asset class appear a good match for the long-term liabilities of pension funds and insurers.
Even if institutional investors provide $200bn a year to finance infrastructure spending, that would still leave an annual funding gap of $500bn (assuming government allocations maintained at around 3 per cent of global GDP), according to Standard & Poor’s, the rating agency.
The G20 action plan includes the creation of a global infrastructure hub to help match potential investors with “shovel-ready” projects that can be started without lengthy delays.
Arthur Rakowski, senior managing director in the infrastructure and real assets division of Macquarie Group, the world’s largest infrastructure manager, says the initiatives announced by the G20 are helpful in raising awareness of the need to increase infrastructure spending but the challenge lies in translating these plans into concrete actions.
“The ‘hub’ should assist in the delivery of infrastructure globally by providing lessons from successful developments around the world,” says Mr Rakowski.
Hansjörg Germann, head of investment management strategy development for Zurich Insurance, says there are limits to how much pension funds and insurers can invest in infrastructure. “Every insurer and pension fund only has a certain capacity to invest in long-term investments that is determined by the structure of their liabilities and how stable these liabilities are,” says Mr Germann.
Insurers have to back their investment risks with capital and require adequate compensation for taking on those risks. But if the risks are unclear because the legal and regulatory framework is uncertain, then more capital is needed and the financing of infrastructure becomes more expensive, he says.
Michael Stirling, founder of Stirling Capital Partners, a London-based private equity manager and infrastructure adviser, says governments seem to struggle to understand what investors want from infrastructure.
“Large institutional investors generally want to co-invest in brownfield [existing] projects as these tend to be lower-risk assets that offset their long-term liabilities. Governments should seek to do more to shoulder part of the risks and to make sure that greenfield [new] projects are properly prepared”.
The European Commission last week took steps towards addressing those concerns by announcing plans to create a breed of infrastructure funds seeded with public money.
The plans have yet to be finalised but one important proposal is to use public money as a “first-loss tranche”.
This will require the EU or European Investment Bank (EIB) to shoulder more of the risks. It should encourage private investors to consider a wider range of infrastructure investments.
Gerry Jennings, global head of infrastructure at AllianceBernstein, says that bringing institutional investors together in co-mingled infrastructure funds will remain challenging.
“Insurers, pension funds and sovereign wealth funds may well have different views on the risks and returns of infrastructure assets on top of facing different regulatory requirements in different jurisdictions.
Investors, says Mr Jennings, are exercised by the lack of a unified playing field in Europe and the fact that they face different legal, regulatory, accounting and tax standards in each country.
“Uncertainty surrounds which legal framework applies if a transaction does go wrong and a restructuring is required,” he says.
Mr Germann adds that infrastructure debt competes for attention with other assets, such as real estate debt, where the legal framework has been thoroughly tested in downturns. This will leave infrastructure at a disadvantage to other asset classes until similarly robust legal frameworks are established.
But with new capital and liquidity rules constraining banks’ ability to provide long-term financing, a structural break has been reached in the infrastructure market, according to Nicola Beretta Covacivich, head of infrastructure finance at ECM, the London-based credit manager that is currently seeking to raise €750m for a European infrastructure debt fund.
With infrastructure debt offering higher yields than government bonds as well as consistently lower default rates than corporate bonds, Mr Covacivich says more institutional investors will be drawn to this asset class.
Max Castelli, head of strategy for global sovereign markets at UBS GAM believes a “grand bargain” could be achieved if multilateral institutions such as the EIB, World Bank or the new Chinese development bank are willing to act as co-investors alongside sovereign wealth funds and other institutional investors through specifically designed vehicles.
Such vehicles could attract hundreds of billions from SWFs and other investors as well as drawing the attention of central banks in developing countries that are increasingly interested in finding new ways to diversify their foreign exchange reserves, says Mr Castelli.