Why infrastructure investment needs to become a real asset class
Tasks for governments, regulators and the financial industry
by Franco Bassanini and Edoardo Reviglio, Cassa depositi e prestiti
Tue 26 May 2015
Among the market inefficiencies are lack of suitable project pipelines, inadequate risk-adjusted returns, prudential and regulatory constraints and high development and transaction costs.
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To increase long-term investors’ asset allocations, infrastructure needs to be transformed from the realm of an ‘alternative’ investment category into a real asset class. This would then attract new streams of investment from around the world.
Pension funds, insurance companies, asset managers, foundations, endowment funds and sovereign funds are eager to invest more in infrastructure. Today they invest on average less than 1% of total assets in this sector. In Canada and Australia, by contrast, pension funds and insurance companies invest over 15% of their assets under management in infrastructure.
So governments and public administrations, international regulators and the financial industry need to do a lot of work. Development institutions from the G20 countries (the so-called D20) will play a growing role in facilitating the process at the national, regional and global level.
Schemes financed by public private partnerships and other private finance initiatives may be part of the solution. Today, globally, these account for only about 10% of total infrastructure financing – while 54% is financed by taxpayers’ money and 36% by corporates. One way to attract global long term investors into infrastructure financing is to improve the quality, innovation and standardisation of projects and financial products alike.
I hope that governments accelerate what is needed to be done. Those under fiscal pressure can build on various forms of taxes, user fees and divestures. They may capture property values of land and other real estate to raise funds for new investments or to reduce the price of the infrastructure by providing the land. Governments should intensify privatisation of brownfield assets and utilities to finance new infrastructure developments.
Governments need to increase private and institutional investors’ participation in PPP-like structures by establishing comprehensive policies in this sphere, with an appropriate legal and institutional framework. They should increase transparency and provide visibility in project pipelines, establish efficient bidding and procurement processes, and improve risk distribution by providing credit enhancement and/or co-investment mechanisms.
The global financial industry can increase availability of long-term financing through standardised financial documents, agreements and contracts. Also necessary are methods to facilitate refinancing or resale of mature investments on the books of institutional investors and development banks.
Establishing infrastructure as a fully-fledged asset class will open up this category to a broader range of investors and pave the way towards innovative financial instruments, capable of bundling and securitising equity and debt of investment vehicles with well-defined risk-adjusted returns and customer-focused investment periods.
The industry needs to develop local and regional capital markets and giving a boost to capital market instruments (such as project bonds and asset-backed securities for project financing loans). This requires a new complementary relationship between banks, capital markets and institutional investors. The Juncker plan for greater investment in Europe promoted by the European Commission and the European Investment Bank has an important role to play here.
Financing infrastructure especially in the social field is a vital issue for strong, sustainable and inclusive global growth. In North America, the Far East, Australia and New Zealand, such investments are seen as more than mere catalysts for new business opportunities. Social infrastructure brings other benefits essential for economic performance and human development. Harnessing the joint capacities of governments, regulators and the financial markets is an essential task for us all.
Franco Bassanini is president and Edoardo Reviglio is chief economist of Cassa depositi e prestiti (CDP). Bassanini is also chairman of the Long Term Investors’ Club (LTIC) and a member of the OMFIF Advisory Board. This article is an edited and abridged version of opening remarks at the D20 Conference on Infrastructure as a Long Term Investment Tool for Sustainable and Comprehensive Growth in Istanbul on 26 May.