martes, 17 de noviembre de 2015

martes, noviembre 17, 2015

Infrastructure: Bridging the gap

John Authers

Why is there still an annual $1tn shortfall in spending for public sector projects?

 
Politicians and investors agree: there is an “infrastructure gap”, it is global, and it approaches $1tn each year. From the US through Europe to the emerging world, there is a backlog of projects that are needed to drive growth, while institutional investors are desperate to find investments — like infrastructure — that offer them a return that is not related to the volatility of the stock and bond markets.
 
Yet the deficit remains. The World Economic Forum estimates a global need for $3.7tn in infrastructure investment each year, while only $2.7tn is invested, mostly by governments.
 
According to the World Bank, 2015 is on course to see flat, if not declining investment compared with 2014.
 
The consultancy McKinsey estimates that in the next 15 years the G20 nations’ need for infrastructure projects, at $60tn, will outstrip the money invested in them by at least $20tn.

“The challenges are as much on the side of projects as on supply of capital,” said Bertrand Badré, the World Bank’s managing director, at its annual meeting in Lima last month . “There are simply not enough viable projects out there.”

For anyone who has dealt with power outages, bought bottled water from street vendors or battled gridlock in emerging market cities, the idea that there are too few projects is mind-boggling. In the US, the American Society of Civil Engineers estimates that ageing and inadequate infrastructure — from power problems to hours lost in traffic jams — will have cost every American family $28,000 in income by 2020 if investment trends stay the same.

Much US infrastructure dates to the big building programmes of the 1930s and 1950s, and a lot of it is in an embarrassingly poor state. Last year US vice-president Joe Biden notoriously complained that someone led blindfolded through LaGuardia airport in New York would say “‘I must be in some third world country.’ I’m not joking.” Local authorities are now trying to raise money for a huge redevelopment, including the demolition of the central terminal building, through a public-private partnership.

In the emerging world, spending on infrastructure has become a geopolitical issue, with China proposing to launch the Asian Infrastructure Investment Bank to compete to fund projects. For many countries, projects in transport, power, water, sanitation and internet connectivity are vital to development. Even in Europe, where public infrastructure tends to be in better condition, private investment has fallen over the past 10 years, according to Standard & Poor’s. The obvious need, however, does not always translate into projects in which the private sector can or will invest.
 
Investment incentive
 
“There’s absolutely zero correlation between the scale of need for infrastructure and addressable opportunities for the private sector,” says Jim Barry, head of infrastructure at BlackRock, the world’s largest asset manager, which started investing in infrastructure in 2012 and now has $8bn in the sector.
 

Critics say governments often come up with a list of projects but fail to do enough work to convince risk-averse investors that the project will happen, or make the returns needed. As a result money stays bottled in institutions, projects remain unbuilt and the infrastructure gap widens.

“It’s really a public policy obstacle. It needs to be paid for, and governments need to find a revenue stream,” says Cherian George of FitchRatings. “If there were a sustainable financial and fiscal framework, funds and debt would be there overnight.”
 
“Pension and private equity funds are saying we have the cash — give us the projects,” says Rohan Malik, head of Ernst & Young’s emerging markets practice. “The question is how do you help governments get projects ready?”

For governments, dealing with the private sector presents a basic political dilemma — charging the public for goods that they previously regarded as free is unpopular.

Ivory Coast took the bold decision to raise its infrastructure spending from about 2 to 6 per cent of gross domestic product last year. This makes it harder to pay for redistribution programmes, but in a country with only 43 per cent electricity coverage and where only 8 per cent of roads are paved, the government decided it was essential. Over the next four years, it is aiming to implement 94 projects worth $25bn, although only 14 of them are eligible for PPPs.

Chart - where infrastructure investment has flowed

“Inviting the private sector in is important, but we must be able to cover the cost of these projects with a good pricing structure,” said Nialé Kaba, economy and finance minister of Ivory Coast. “In my country very often public infrastructure was free of charge. There are many pressure groups.”

This means, she says, that the private sector has to be reasonable in its expectations for income, and that politicians have to sell their projects to voters. “If this dialogue isn’t frank enough, the government won’t be able to set adequate pricing. We also need to sensitise the local population and tell people that these PPPs are necessary.”

That danger is more acute for investors in the era of social networking on sites such as Twitter.

“Pressure conveyed through social media is the main source for governments  . . . [of] what people call ‘political risk’,” said Thierry Déau, whose Meridiam Group runs three large infrastructure funds for institutions. “Civil society is awake and so it is important for governments and the private sector to engage.”


There are many potential potholes. Mispricing a project can lead to financial disaster. Toll roads built in Mexico in the 1980s and 1990s with private finance ended up defaulting as the public balked at high tolls and used slower alternative free roads.

The public sector also generally needs to come up with some money before it can approach the private sectorbut infrastructure needs are increasing just as public spending is being curbed by austerity and credit woes. S&P, in a report last month, found that between 2003 and 2012 16 eurozone countries cut transport investment amid rises in overall government debt and private-sector credit to government as a share of gross domestic product. Affordability and austerity were cited as the main reasons for these funding shortfalls .
 
Then there is the problem of politics. The lifetime of a piece of infrastructure is likely to be much longer than that of the average democratic government. So for World Bank officials it can be easier to sell the idea of infrastructure projects when investors can be sure that no change of government is in the offing.

Political headwinds

Even without upheavals, there is the risk that politicians might seek to rewrite the terms of a deal. In Europe, Spain retrospectively slashed subsidies for solar power producers, to the anger of pension funds, France tried to reduce autoroute tolls and Norway changed the regulations for income from oil pipelines shortly after raising funding from investors.
 

But governments are rightly nervous about making the long-term commitments that investors demand, with big payments to private companies continuing years after facilities have been built. The UK private finance initiative successfully raised finance but incurred long-running political unpopularity.

The demand to invest in infrastructure from institutions is clear. A survey last month of large pension funds by the Create consultancy in London found that 38 per cent intended to increase exposure to infrastructure over the next three years — making it more popular than private equity, hedge funds or most kinds of equities. Insurance companies alone have targeted an allocation of $80bn a year for infrastructure.
 
Amin Rajan, who produced the Create report, says one of the main obstacles to turning demand into reality is the tendency of “governments to change goalposts all the time”. Pension funds are not prepared to take on the complex political risks involved, he says, if they cannot get the necessary undertakings from governments.

“Governments will make a ‘scout’s’ honour’ soft undertaking, and I can’t see that raising the hopes of pension plans,” says Mr Rajan. “The paradox is that there’s huge interest in infrastructure but it’s taking a long time to happen.”



The risk is not so much political turmoil as the possibility that governments will have second thoughts about long-term contracts and try to transfer extra risks to investors who are primarily interested in infrastructure solely on the basis that it is seen as low-risk.

“People looking at infrastructure tend to compare it to fixed income [having a low risk and return], not private equity,” said Gavin Wilson, head of the International Finance Corporation’s asset management arm. “People aren’t impressed by high returns because what they really want is lower risk.”

That is a serious problem, especially in emerging markets where a new port or highway is an exciting opportunity for a high return — but scarcely a low-risk investment that can be compared to a bond.

At the same time infrastructure, with income that tends to rise in line with economic activity, is viewed as a hedge against inflation, which makes it harder to attract investors when, as now, investor sentiment is that prices could stay low for some time.

Another problem is that infrastructure projects need virtually all their funding upfront, long before any pay-off, which can take decades. “It’s a critical difference with other businesses and services, and not like health or education. All the money has to arrive before anything exists,” said Mr Wilson.


“It’s less about whether the funding is out there but whether the quality of projects is out there,” said Dimitris Tsitsiragos, vice-president of the IFC. “Getting the project right from the outset is critical because that is the condition that will make this project sustainable.”

The multilateral development banks play a key role in this area. Rather than help with structuring financial products, they can advise on creating a “pipeline” of priority projects, and make sure they are robust enough to win backing.

“There are [often] very complex contracts, and more standardisation is needed,” says BlackRock’s Mr Barry. “There is none of that in the US. There is some progress being made, but it needs some element of federal intervention to create the elements of standardisation, and a legal framework.”

Scaling up

Standardisation is even more important in emerging markets. This has sparked a drive to create large funds with enough projects to reduce risk via diversification. Both the IFC and Meridiam are building funds that could eventually hold as many as 20 projects. They will help design the projects before looking for other investment partners.


A more radical solution is being fostered by Canadian pension funds. which are seeking to cut out the middle man altogether. Caisse de dépôt et placement du Québec, which administers more than $250bn in pension fund assets, this year launched a subsidiary to manage all project preparation itself.

“The government defines the public policy initiative, such as for some type of public transport infrastructure,” says Michael Sabia, CDPQ’s chief executive. “Then we take over and plan the project and do the execution. We finance the project with partners, we own it and we operate it going forward.”

The goal, shared by many, is for infrastructure to evolve into a recognised asset class. “If it’s recognised as a stable risk-adjusted investment then money will flow over time,” said the World Bank’s Mr Badré. “A lack of infrastructure is even more costly. Just ask a household without running water, or without electricity to light their home.”

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