Deau: How the LTIIA will reframe infrastructure

Meridiam's founder Thierry Deau explains why the Paris-based infrastructure investment firm teamed up with other leading private investors to launch the Long-Term Infrastructure Investors Association.

There is little doubt that the services provided by infrastructure – for instance, power, transportation, telecommunications, provision of water and sanitation – are fundamental to economic activity and growth. The sizeable amount of total infrastructure investment required in all countries ($53 trillion by 2030 according to McKinsey Global Institute) testifies to this fact. Many institutions have made resounding declarations on how important infrastructure is to humanity, that is, connecting the world, facilitating travel, and providing safe and sanitary public facilities. The US Department of Commerce, the World Bank Group, the European Investment Bank, as well as the European Bank for Reconstruction and Development (EBRD), in particular, have demonstrated quite convincingly that infrastructure is an essential ingredient to economic development.

Yet in a global context of scarce public resources, is there enough capital available to support infrastructure development? And equally important – where will it come from? Government officials and the private sector unanimously agree that investors specialising in infrastructure can help reduce the funding shortfall by serving as capital providers. The increased need for private capital has, in part, led to a radical transformation in the infrastructure industry over the past 20 years, allowing it to become an asset class in its own right after years of being just a sub-class to private equity.

The growing interest in infrastructure investment is not surprising because it provides stable, yet attractive long-term returns, as well as opportunities to fulfill social responsibility. It becomes a must-have for institutional investors, especially for pension funds, looking to balance their investment objectives. Institutional investors currently allocate 3 percent average assets under management to infrastructure, and just last year, a Preqin survey revealed that 58 percent of investors will increase funding allocations to infrastructure in the long term. A doubling of infrastructure investment is expected to generate an additional $2,500 billion in available capital. This projection matches a rule of thumb established by France and Germany’s infrastructure levels, which are two countries with the most developed infrastructure systems in the world.

So, a few things are clear: infrastructure development is a priority topic for people across the globe and there is a lot of private capital available for new projects. Given the practical significance and visibility of infrastructure, systems must be in place to ensure that private investors are held accountable, act responsibly, and remain transparent. Key players have been discussing the necessity of developing benchmarks that provide insight into the value and performance of their investments, as well as a need for a single voice to engage governments and regulators, and a forum to share best practices.

The need for a global governance structure to systematically balance these growing needs and organise new developments has truly emerged. My team and I at Meridiam recently partnered with several of the leading private infrastructure investors and jointly launched the Long-Term Infrastructure Investors Association (LTIIA). This Association will support the creation of benchmarks for the infrastructure asset class as it relates to asset allocation, regulatory and risk management, research of infrastructure investment, and the integration of Environment, Social and Governance aspects. In the spirit of the public-private partnership philosophy, I envision the LTIIA serving as the foreground for far-reaching collective projects that advance best practices by critically engaging with business leaders and political figures around the globe.

Contrasted with dominant market logic, which leads to investors maximising profits and rates of return, infrastructure investment firms and multilateral institutions have a multi-bottom line orientation that considers an array of social, sustainability, and stakeholder issues. As the LTIIA rolls out, emerging guidelines on investment responsibility and ownership will help to define and re-define the rules by which the private investment community, both new investors entering the asset class as well large institutional investors who are already active, must follow. The fruits of the LTIIA’s collective knowledge in infrastructure will become more relevant and accessible to a larger public domain than ever before, leading to a more informed context for external stakeholders and governments. Over the long-term, I believe that these new practices and guidelines will reframe what infrastructure investors must do to sustain their legitimacy and be accepted social actors.

Considering the existing structural threats facing infrastructure across the globe, the striking costs associated with repairs and development, and the limited public resources available to meet these needs, there is no better time for the creation of this Association. PPPs have become the new face of infrastructure development, and state and private actors will continue to work more collaboratively to further the shared goals of our market-driven, growth-oriented agenda. High quality infrastructure not only boosts economic growth, but robust economic development will also, in turn, make infrastructure projects more attractive and rewarding. By connecting private capital with localized needs, it creates a frictionless system of checks and balances and a win-win scenario for all parties involved.

To ensure greater infrastructure development, the LTIIA will re-examine the ways in which sub-structural developments, like the rise of PPPs, can influence super-structural developments like higher standards of living, facilitating commerce and trade, and last but not least, increasing overall financial stability by channeling savings into more stable assets. The power of PPPs to produce substantial economic benefits is easily underestimated, but the inter-connected practices of the public and private sector are perpetually reinforced. With our inaugural meeting coming up in October, this will be the first step to fine-tuning and bolstering best practices in the infrastructure investment industry, which should lead to quantitative transformations in the quality of infrastructure around the globe.

1 LTIIA Meridiam Presentation
2 http://www.out—law.com/articles/2014/january/standard-poors-backs-institutional-investors-to-fill-global-infrastructure-funding-gap

Thierry Déau is the founder, chairman and chief executive officer of Meridiam, a leading independent global investor and asset manager specializing in public and community infrastructure founded in 2005.