Blown Out(3)

It was all so exciting in the run up to the G20 London summit in April. Britain’s prime minister, Gordon Brown, was pushing countries to blow their budgets and spend their way out of trouble, backed up by the Americans. It all promised a hefty dose of infrastructure investment around the world, much of it privately financed.

But then the French and Germans said a very firm ‘no’, refusing to let outsiders dictate their fiscal policy. And for all the headlines about $5 trillion of new spending emerging from the summit, infrastructure ended up receiving diddly squat. “Infrastructure’s not the focus of this deal,” says one economist at a leading think tank.

WHY WORRY?

Don’t worry, said the politicians, so much is being spent at a national level that there was no need for a G20 spending spree. But it’s increasingly clear that the various economic stimulus packages launched around the world can do no more than accelerate existing schemes. This recession might drive home the need for private infrastructure investment, and the lack of government money, but it won’t create much new work in the short term.

The better news is that governments increasingly accept the need for private infrastructure investment, with countries from India to Colombia and Russia launching schemes for privately-funded roads and ports. There’s no sign that recession will derail this new found enthusiasm.

That’s quite an achievement, given the political backlash there could have been when public projects stalled because (already unpopular) banks refused to lend to them. And it would be wrong to call the G20 a non event, even for the infra world. As well as tightening financial regulation, an essential first step to restoring market confidence across the board, there was some strong action to strengthen the multilaterals that support infrastructure investment in emerging markets.

Under the plans drawn up in London, the IMF will receive an extra $850 billion, and development banks $100 billion. Many projects, from Slovakia’s €3.3 billion motorway scheme to India’s ambitious infrastructure renewal plan, simply couldn’t be done without multilateral support. Development banks are still too small to support the market by themselves, but they do encourage private investors to take a punt on wobbly countries. That makes the G20
cash injection pretty essential for market development.

But while the summit produced several measures that should help infrastructure, albeit indirectly, little has come of the G20 countries’ promises to spend their way out of recession. In many ways, the same is true for the various economic stimulus plans being launched by national governments around the world, too.

On paper, these look grandiose, and often involve pledges to throw billions of dollars at infrastructure. But in practice, these projects often take too long to get underway for anything new and meaningful to emerge. That was perhaps most obvious in the UK. Talk of throwing billions of pounds at building new schools and roads was rapidly replaced with a far smaller amount of social house building and the like. Most of the projects the government wanted to accelerate were private finance initiatives, which take years to launch. That makes them useless for providing a quick fix to the economy.

A GENTLE PUSH

Most countries around the world seem to accept this, and the result is only a mild acceleration of the existing project pipeline – or in some cases, the government stepping in to rescue deals long scuppered for lack of credit (America is debating setting up an infrastructure bank, for example, while the UK government will fund PFI deals that can’t borrow money commercially).

In fact, at a national level much of the money is being spent on bailing out financial institutions and giving people and companies tax breaks to encourage spending. Japan, for example, intends to spend over $200 billion, or 4 percent of GDP, but much of this will go on supporting poorer regions and its army of casual workers. Beyond a politically-friendly pledge to support renewable energy, infrastructure is largely ignored.

Look at the US, and the actual amount that will be spent on new infra deals is equally modest. The talk is of spending $787 billion in total, but again much of this goes on tax cuts and helping the poor. And, while some impressive sounding figures are banded around for infrastructure spending(with $46 billion to be spent on transport and $21 billion on school modernisation, for example), the reality is less impressive. The intention is to create jobs quickly, and hence the insistence on projects being‘shovel-ready’ before approval. “It’s generally just maintenance work,” says one disillusioned constructor.

It’s a similar story in Europe. France talks about launching 1,000 projects, for example, but very few of these are new – in fact, the most obvious effect of the crisis is that is has stopped several big PPP programmes dead in their tracks as banks refuse to sign off on the deals. Even in Asia’s emerging markets, the questions are generally about whether governments can do enough to rescue existing infrastructure plans – notably India’s $500 billion programme – rather
than of finding grandiose new projects to keep afloat.

So the one big lesson of this crisis is that you can’t launch billion-dollar deals quickly enough to create jobs in the short term. But what these various stimulus packages do offer is some hope that the crunch won’t destroy a young market. “We still see infrastructure as the growth market,” says Jerome Fremaux, head of Credit Agricole Asset Management Capital Investors. He’s extended his fundraising period to 18 months because the market is so tricky at the moment, but sounds far from disillusioned with infra’s longer term prospects.

NOT A GIVEN

Politically, the survival of a private infrastructure market should not have been taken for granted. The social infrastructure side has simply stalled for a lack of money, with just three PFI deals signed in the UK this year (down some 80 percent on normal times) and PPPs dead across Europe. A similar collapse in infra fundraising around the world suggests that the wider market is taking a prolonged nap at the moment.

So the fact that governments are working so hard to maintain spending plans is significant. And there’s some reason to believe that money can be found if investors have enough confidence the government will step in to guarantee a deal. London’s M25 motorway widening had been stalled for months because it couldn’t raise credit, for example. But when the government offered to foot the bill itself, enough commercial banks stepped forward to make this unnecessary.“It’s not impossible to find credit,” says Jon Simpson, a lawyer at Paul Hastings.

Hence, perhaps, governments getting involved in launching infra funds in emerging markets. India’s government is effectively stepping in to offer state support for its infra plans. And China is among those backing a new investment fund to develop infrastructure in the Association of South East Asian Nations (ASEAN) – including countries like Vietnam and Cambodia that will struggle to attract private investment.

The need to invest in infrastructure has not disappeared, and such countries are a reminder that everything from economic growth to health and education will suffer if the requisite capital isn’t found. Governments know that, and they know they need to tap private money because state budgets can’t stretch that far.

“It won’t happen quickly,” says Michael Barben, head of private infrastructure at Partners Group. He’s talking about private investors switching money to infrastructure, which is certainly starting to happen among pension funds in particular. “The majority of institutional investors have recently launched infrastructure initiatives or are just beginning to evaluate the sector,” says Kelly DePonte, head of research at Probitas.

This is not a market that can be created overnight. Projects take time to launch at government level, and private investors will need years to commit the hundreds of billions of dollars that will be needed. That is something both the G20 and national governments have been forced to accept. But the longer term market has not been derailed by this crisis, even if the political rhetoric has failed to translate into new deals.