Europe’s €500bn infra maintenance opportunity

Yearly infrastructure maintenance costs of €500bn are likely to pressure governments to create more investment opportunities for infrastructure investors, says First State Investments. Fiscal pressure on European corporates and EU directives calling on utilities to unbundle assets will also generate increased deal flow.

There is a significant investment opportunity for the private sector to help shoulder the costs of maintaining Europe’s infrastructure, argues Marcus Ayre, head of infrastructure transactions for Europe at First State Investments, part of the Commonwealth Bank of Australia.

Marcus Ayre

Ayre estimates the annual cost of maintaining Europe’s infrastructure, which is valued at close to €5 trillion, stands at around the €500 billion mark. With governments coming under increasing budgetary pressure, Ayre believes they will have to look ever more closely at solutions that allow the private sector to help shoulder the cost of maintenance.

Europe is already First State’s preferred investment target, comprising about 50 percent of global infrastructure deal flow. From January 2006 to March 2010, the continent was host to 122 transactions in the core infrastructure space – which for First State includes regulated assets and public-private partnerships that are availability-based – worth some €206 billion, First State said in a presentation this morning.

But fiscal pressure on governments is just one of the many sources of deal flow across the continent. Similar pressures on European corporates have been and will continue to generate deals, Ayre points out.

“Take Spain,” Ayre says. “You have construction companies that used to get cheap debt from regional savings banks now struggling to find new sources of cash and that has led them to divest many of their more mature transport assets. At the same time, there is something similar going on in the utilities space, with fiscal pressures forcing utilities to divest their non-core assets.”

Another important source of deal flow in Europe comes from regulatory constraints, notably the European Commission’s directive for governments to unbundle utilities to stimulate competition in the sector. This has already led to some high-profile deals, including the sale of the German electricity grid owned by Sweden’s Vattenfall earlier this year to Industry Funds Management, and is likely to generate more deal flow in the future, Ayre argues.