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Political pet projects are roadblocks to infra investing

A ‘traumatic’ gap is made larger because non-bankable projects without clearly defined revenue streams are inflating infrastructure programmes, financiers say.

Political, social and economic challenges remain for infrastructure development despite increased interest in the industry, according to a group of financiers.

Speaking at CG/LA's Global Infrastructure Leadership Forum in Montreal, a panel made up of commercial and development banks and private investors explained what they see as continuing roadblocks to more infrastructure spending.

One problem, according to John Laing Capital Management director Andrew Charlesworth, is a lack of support from lenders and governments for risky projects. The challenge, he said, is getting more debt financing to higher-risk projects that are still profitable.

“There is funding available,” Charlesworth said. “There is a large amount of equity funding, a large amount of debt funding. But there is a point at which the risk pricing makes it unsuitable.”

Government priorities and the politicisation of infrastructure projects has created a backlog, Thomas Maier, a managing director at the European Bank for Reconstruction and Development, said in the discussion. Politicians focus on high-profile new projects while “the solutions are in asset management and small projects” that keep communities efficient, he added.

“There is a traumatic infrastructure gap,” Maier said. “What sometimes inflates the numbers is that many projects are political pet projects that are not bankable, investable projects with clearly defined revenue streams.”

JLL economist Walter Kemmsies agreed, stating there are “funding cascades” for properly prioritised infrastructure projects.

Laurie Mahon, global head of infrastructure finance at the investment banking division of CIBC, said there are two big problems holding back project funding, especially in the US.

The first is that the public is not used to paying for the infrastructure it needs, she explained.

“We've tried to basically provide a social good through a transportation pricing scheme,” she said. “Instead of subsidising people that might not be able to afford a $3 subway ride, we subsidise the entire service.”

She said it is hard to reinvest in a transit system, for example, when wealthier people pay the same amount for a subway ride as someone who cannot afford the $3 fare.

Mahon also said the way projects are developed needs to be shifted. “By the time bankers and the financial advisors are in the game, the project is already 150 pages of drawings.”

Overall, the panelists were optimistic about the near future for infrastructure investing, citing US President Donald Trump's support for a large infrastructure programme and the proposed Canada Infrastructure Bank as reasons why the market is on a strong footing.