Infrastructure provides investment bedrock

Relative stability and high demand mean investment in infrastructure is set to continue growing. Here, World Finance looks at the factors contributing to the boom, in the Infrastructure Investment Awards 2013

 

After years of crisis and austerity, Europe and the US have been slowly returning, or trying to return, to growth. The US economy in particular is making slow but definite progress – unemployment is going down; consumer spending is up; as are house prices. In Europe, recovery is still a glint in the single currency’s eye, but as with the US, the word of the day is ‘investment’.

“We believe that the economy is continuing to recover and continuing to strengthen in the aftermath of the worst recession since the Great Depression. Indicators demonstrate that the recovery is continuing,” said Jay Carney, White House Press Secretary. However, he added “there are still too many people who are looking for work who have not found work. There are still too many huge, unfilled, unmet needs when it comes to rebuilding our infrastructure.” A report by PricewaterhouseCoopers (PwC) claims that appetite in the US for infrastructure investment is growing significantly, “signalling a possible upsurge in activity after several years of slow deal flow.”

Considering how volatile financial markets have been over the last few years, investors have slowly started to turn towards infrastructure assets as a viable option. “With relatively stable, long-term cash flow and favourable risk-adjusted returns, they can offer investors a way to diversify their portfolios at a time when equity and capital markets are unpredictable and interest rates on fixed-income securities remain depressed.”

Infrastructure is key
This is good news for governments hoping to redevelop their essential infrastructure, or to modernise it. In Europe austerity has stifled return to growth, according to the IMF and many other prominent analysts. The advice now is to invest. Infrastructure is key to lift the mess it finds itself in. The PwC report suggests that the appeal of infrastructure has increased because of its relative stability; “power, energy, and water continue to be the most promising areas of opportunity.”

“There’s a tremendous amount of capital right now that’s interested in investing,” says Mark Wiseman, CEO of the Canada Pension Plan Investment Board, an organisation that routinely invests in such projects. But according to new research by McKinsey, the trouble right now is to “align the interests of lenders and government borrowers on projects that pay back over what Wiseman describes as the next quarter century, as opposed to the next quarter.”

The recently released Nabarro Infrastructure Index suggests that the most attractive countries for infrastructure investment are the UK, Australia, France, the US and Germany, with all of the BRICS making it into the top 20. Ranking is based on a number of factors from the tax environment to the current level of activity in the infrastructure market. That is not necessarily good news for the UK, which tops the list, as the report also concludes that the current government’s “openly austere” position was a “significant barrier” to investors. “There is a huge pot of money to invest in upgrading assets, which exceeds assets available, but funding for new projects has been particularly challenging,” says Matthew Jones, Head of Infrastructure for Nabarro. “However, the UK needs to make sure it has a favourable enough tax and regulatory environment to maintain its place at the top of the list if it wants to be there next year.”

Middle Eastern investment
Jones highlighted that although Middle Eastern and North African countries did not make it into the top 10, and that many of them were considered high-risk by credit agencies, all of the countries featured on the list – Israel, the UAE, Qatar, Egypt and Jordan – had invested considerably more on infrastructure than the average European nation. “The UK, like most of the European countries listed, lags behind the rest of the world, spending only six percent of its GDP on infrastructure, compared to a huge 12 percent by top-spender Qatar. China and South Africa follow, investing 10 percent of their GDP, and India invests nine percent,” reads the report. “This is not a surprising statistic given that Western Europe and the US have established infrastructure, and the rest of the world is catching up.”

There is no question that the opportunities in infrastructure investment will continue to soar throughout the year. There is certainly demand for it. Many developing countries have already announced significance projects and are looking for foreign investors to enter into partnerships. According to another report by PwC “industrial and urban growth in the emerging markets has led to unprecedented investment plans in infrastructure. This is creating opportunities for infrastructure operators, engineering and construction companies, private materials, and financial firms.” Countries like Brazil have the additional incentives of the World Cup and Olympics to boost demand for immediate investment.

According to the McKinsey Infrastructure Productivity report, for infrastructure development to keep pace with global GDP growth over $57trn in investment will be required between now and 2030, 60 percent more than what has been invested over the past 18 years and more than the estimated value of all of today’s infrastructure. The report suggests, however, that given the current widespread financial constraints of many governments, “even assembling the minimum investment required to meet growth predictions is a challenge.”

View the winners of the Infrastructure Investment Awards 2013 here.