Infrastructure investment reaching new heights
Sovereigns, multilateral organisations and private investors all essential
by Pooma Kimis in Amsterdam
Thu 30 Mar 2017
The conditions are right for infrastructure investment to reach new heights as an asset class. Political support, international coordination, and nimble investors using technological innovation are coming together to meet the needs of a rising global population.
Politicians’ appetite for infrastructure spending is nothing new. But measures are being put in place to facilitate public asset creation without relying solely on tax receipts. Among sovereigns, Canada is known for leveraging capital effectively and is a popular destination for international capital flows into local projects. The government is planning to establish a new infrastructure investment bank with C$35bn ($26bn) to spur development over the next 11 years. But the role of and incentives for the private sector are yet to be defined.
Bill Morneau, the Canadian finance minister, outlined details of the infrastructure bank earlier this month. There will be an opportunity for further discussion on this and other subjects at an OMFIF City Lecture with Morneau in London on 7 April.
The promised Canadian public spending differs from the US approach. Trump’s $1tn commitment to infrastructure projects seeks to rely more on private investment. In his outline Budget, the president is proposing to cut the Department of Transportation’s funding by 13%, or around $2.4bn. Private investment may fill that gap. Trump’s reversal of former President Barack Obama’s decision to reject the Keystone XL US-Canada oil pipeline illustrates the new prioritisation of infrastructure projects.
Obama rejected the pipeline – just ahead of the United Nations climate change conference in Paris in December 2015 – in response to environmental considerations. The Trump team must still deal with these concerns in co-operation with TransCanada, the company that will develop and operate the pipeline. Special interest groups will need to be appeased.
Coordination between governments and multilateral organisations is the second source of support for infrastructure investment. The G20 compact on private investment in African infrastructure, announced in Baden-Baden on 18 March, aims to achieve sustainable growth in African countries that have improving investment conditions. The agreement allows private-sector participants to save on due diligence costs and move straight to deal-making with sovereigns to buy, build and retain interests in assets.
Sovereign funds like Khazanah Nasional in Malaysia, the Direct Investment Fund in Russia and Strategic Investment Fund in Ireland are examples of how governments can promote systems conducive to foreign investment. Sovereign funds play a role in harnessing local expertise, presenting leading businesses as possible partners, and creating jobs.
Astute investors also play an important role in boosting infrastructure development. The private sector has honed its ability to revive brownfield projects and create greenfield projects.
Advanced economies are not alone in looking to attract capital for the development and upkeep of infrastructure; emerging markets are similarly inclined. However, some investors will cite regulatory and political risks as barriers in emerging economies.
These concerns are not always merited, as shown by Turkey’s Elazig healthcare public-private partnership project. The greenfield climate-friendly project bond carries a guarantee against currency and arbitration risk from the World Bank’s multilateral investment guarantee agency. The International Finance Corporation and the European Bank of Reconstruction and Development played a key role in securing strong financial backing for the project. Moody’s awarded the bond a Baa2 rating, two grades higher than Turkey’s sovereign rating.
Infrastructure investment boosts growth prospects, enhances trade discussions and encourages globalisation. The latter is especially important amid the threat of growing protectionism in key economies. McKinsey Global Institute quotes an infrastructure funding gap of up to $50tn over the next 15 years, while Citi reports that a 1% increase in infrastructure investment is associated with a 1.2% increase in GDP growth. Globalisation has facilitated a state of equality for market participants, but leaves enough room to unlock potential in projects coordinated by public and private sector partners.
Pooma Kimis is Deputy Managing Director of OMFIF.
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