The new reality

It is a truly staggering building programme. Even before governments around the world decided to spend their way out of trouble, the need to throw money at infrastructure was so vast that it could only be plugged with private capital. That is creating a whole new class of investment assets, and one that looks increasingly attractive as everything from equities to property looks too troubled to touch. Governments don’t have the fiscal means to upgrade infrastructure by themselves. Investors need safe, stable returns in a volatile market. The match is clear.

Vast amounts are needed for planned infrastructure projects around the world, regardless of the recession. Canada’s CIBC predicts that Europe alone will throw €200 billion each year at its crumbling infrastructure; in the US, many roads and bridges have already crumbled, and the country needs to spend a remarkable $2.2 trillion over the next five years.

In emerging markets, the need is even more extreme. India in particular reckons that third world infrastructure is a key block on growth, and that it needs heavy investment to improve the population’s general health and education. Even before the financial crisis, it aimed to make nearly $500 billion available for infrastructure by 2012, doubling capital formation to 9 percent of GDP in 2008-12.

This is the key context for the present wave of infrastructure efforts around the world: even before the current crisis, governments had (perhaps reluctantly) accepted that they couldn’t afford to pay for infrastructure by themselves. Therefore they needed to tap private funds. The UK started the trend, first privatising utilities and then, over the past decade in particular, using the private finance initiative aggressively to funnel private money into everything from roads to hospitals.

Continental Europe followed more cautiously, although countries such as France and Germany have launched partnerships programmes almost equal to the UK’s in recent years. More recently still, countries from the (surprisingly reluctant) US to Asia and Africa have decided to use private finance for infrastructure development. The likes of the World Bank have been nagging none too subtly for pension funds to start financing the schemes.

This is the important shift for the private investor, whether buying privatised power plants or lending to privately funded state schools. Look at many of the flagship projects out there, from the pending (and controversial) divestment of Germany’s Deutsche Bahn to London’s Crossrail, and they are far from new. Rather they have been either stalled for lack of state cash, or would crumble away without outside investment. That’s where the new market lies, and it is not a market that will disappear.

What this recession does mean, however, is that some of the building work will be brought forward, providing some juicy opportunities for investors. Infrastructure plays a key role in many of the stimulus packages being  launched across the world, even if job creation is the more immediate priority.

President Barack Obama’s $787 billion package includes £46 billion for transport projects, for example, and $21 billion for school modernisation, among many other measures. China’s £583 billion programme prioritises infrastructure spending, too, in a country that has already launched several multi-billion dollar schemes such as a $24 billion high speed rail line between Beijing and Guangzhou. Japan has pledged €13 billion for infrastructure projects in neighbouring countries.

So the demand is vast, and the recession means that infrastructure investment, traditionally a slow growing market because of the time taken to launch large projects, will explode into view far faster than expected. That’s something the institutional investor market must react to quickly, meaning a slew of new fund launches at a time when other markets have collapsed.