Infrastructure allocations to double over the next five years

Institutional investors could provide an extra $200bn in annual funding to the sector, helping plug the $500 billion yearly gap left by public cuts in the period to 2030.

The gap between global infrastructure investment needs and available public funds could reach $500 billion a year between now and 2030, according to fresh research.

Standard & Poor’s, the rating agency, found that funding needs for infrastructure around the world could be worth more than $3 trillion annually over the next 16 years. Yet it notes that capital investment in Western economies has fallen from about 3 percent to 2 percent of GDP since 2009, leaving a number of transport, power and water projects with a crucial dearth of funding.

This will entice institutional investors to make further strides into the asset class, the agency said, with the likes of insurance companies and pension funds likely to increase their allocations to infrastructure vehicles to about 4 percent of assets under management over the next five years – more than twice their current level.

Infrastructure debt was seen as a strong magnet for capital, with investors likely to be attracted by its relatively strong creditworthiness. The annual default rate for all project finance debt rated by Standard & Poor’s since 1998 stands at just 1.5 percent, compared to 1.8 percent for corporate issuers over the same period. Project finance debt was also deemed to deliver a better rate of recovery when defaults do materialise.

The agency thought that efforts to shape clearer a pipeline of projects, standardise deal structures, develop stable policy frameworks and better inform investors about the performance of projects would be key to further boosting confidence in infrastructure debt.

“Prudential regulation needs to be carefully calibrated too, in order to avoid raising unintended barriers to infrastructure investment,” said Michael Wilkins, a managing director in Standard & Poor’s project finance team, in a statement.

Risk capital charges proposed under the new Solvency 2 regime, for example, were thought of as a potential hurdle to the greater involvement of insurers in infrastructure financing.

Increased allocations by institutional investors could potentially provide about $200 billion per year in additional funding, the report said, alongside the $300 billion already coming from traditional bank loans – thereby providing enough liquidity to plug the sector’s incoming funding gap.

“All that is needed for more institutions to get involved are the right conditions and incentives,” Wilkins said.