‘Inadequate infra’ as private investment falls short

The world is facing a “future of inadequate infrastructure” if a trend of falling private sector investment continues, according to a new report from the Global Infrastructure Hub.

The infrastructure affiliate of the G20 initiative has published the Infrastructure Monitor 2020 report, which reveals that private investment in “primary infrastructure” – defined as greenfield projects or privatisations – has fallen to $100 billion per year, a steady decline from $155 billion a decade ago.

Although privatisation processes have gradually slowed, GI Hub’s chief economist Neil Saravanamuttoo highlighted other causes for this decline.

“There’s limited dealflow for private investors. There’s a lot of dry powder sitting on the sidelines which would have an interest,” he told Infrastructure Investor. “We have PPP models where sometimes the private investors are being asked to take on more risk than perhaps is prudent for everybody. The risk-adjusted returns are just not as attractive for private investors as they need to be.

“Also, there are regulatory impediments such as capital charges. An investor needs to put [aside] a certain amount of capital to protect against losses. We’re finding [higher levels of] capital charges in infrastructure than what historical experience would suggest is required.”

Saravanamuttoo also pointed to the lower borrowing costs faced by governments in the last decade, which have given them the option to change tack on how to build infrastructure, as well as increased opposition to private sector involvement in some jurisdictions. He is unsure whether these trends will be reversed by covid-19.

“On the one hand, we have very limited fiscal capacity in governments through covid, but also low cost of borrowing,” he explained. “The jury is still out on which of those courses will prevail. Some societies are quite open to private investment in infrastructure. I don’t think we should necessarily be assigning a negative or a positive assessment. It’s societal choices.”

He said there would need to be “pragmatic adjustments” to various PPP models to address some of these imbalances: “Certainly, in fixed-price contracts, there has tended to be excessive risk on the shoulders of the private sector and taking it off the public sector balance sheet. We need to be more pragmatic about the PPP model and where the risks should be held between public and private.”

‘Better-than-expected’ returns

The GI Hub’s report also found that returns from infrastructure investments were “better than is generally expected” and exhibit less volatility than those from other asset classes, particularly once greenfield projects become operational.

Unlisted infrastructure has generated an annualised return of 14.6 percent over the last 10 years, according to EDHECinfra, while global equities in the MSCI index recorded a 9.7 percent return over the same period. Listed infrastructure equities in the MSCI index generated a 6.7 percent return, but exhibited lower risk and volatility.

“Returns are better than [they are] commonly understood to be,” maintained Saravanamuttoo. “Infrastructure does not perform like other asset classes.”

This year is the first in which the GI Hub has released this report. Saravanamuttoo said its findings could provide a long-term perspective when compared with more short-term political ambitions.

“The priorities shift with the different priorities of the G20 presidency, so we wanted to create a report that provided some continuity around themes that occur and that have staying power,” he said.