The yin and yang of a crisis

You have to love the irony of it. A few years ago, pre-crisis, investors were able to secure long-term financing for their infrastructure assets with nothing more in mind than holding onto them for a few short years before selling them for a quick buck. These days, investors will wax philosophical on how infrastructure is all about the long term, but clinching a long loan tenor is now akin to stumbling across an oasis in the desert.

Be that as it may, without the global financial crisis (GFC), infrastructure would have taken much longer to emerge as a distinctive asset class. Thierry Déau, chief executive of Paris-based infrastructure fund manager Meridiam, put it in a recent paper:

“The GFC, if disastrous for the economy, has had the merit of making credible the players of the market who have promoted a long-term approach to infrastructure”. Importantly, the crisis also cemented the idea “that an infrastructure asset is not a ‘financial line’, but an industrial challenge to be managed,” Déau argues.

But if this can be seen as the yang of the crisis as applied to the infrastructure asset class, then – like all things in the universe – there is also a yin, or a darker side. And in infrastructure’s case, the yin is that, while investors have awakened to the long-term nature of the asset class, bankrupt governments, which traditionally promote these infrastructure investments, are increasingly fixated on the here and now.

That’s because, amid the post-crisis sovereign debt mire, every single expense is now under the microscope; every investment is a potentially explosive scandal; and any sign of largesse is a sure way to miss out on re-election at the end of that four- or five-year term.

So for politicians, always well attuned to the demands of the electoral cycle, Déau & co’s realisation that “infrastructure investment is about asset preservation”, and that its benefits come from doing this over a long period of time, is not necessarily a welcome message.

You don’t have to be the smartest person in the room to see the flogging that the Private Finance Initiative (PFI) has taken in the UK for what it really is: a new, cash-strapped government desperately wanting to mitigate the unitary payments agreed by its predecessor and political nemesis.

The UK government’s reluctance to foot the bill for the availability costs of the country’s 500 or so PFI projects is a clear sign that cash-strapped governments are not setting their sights on the long-term maintenance of these assets. Rather, they are focusing on how to claw back money now.

This means that when new infrastructure investment programmes are announced, investors would do well to scrutinise carefully how they are expected to get their returns in the long term.