Global demand for new and upgraded infrastructure is at an all-time high. The triumvirate of climate change, population growth and urbanisation, coupled with a legacy of under-investment, are the main drivers of increasing need for core infrastructure in the transport, energy and healthcare sectors.
Furthermore, in the new digital age – the fourth industrial revolution – companies are stepping up investment in automatisation and digitalisation in order to increase productivity and connect with global suppliers and customers. According to McKinsey research, approximately $57 trillion in capital is needed by 2030 in order to finance global demand for infrastructure.
At the same time, infrastructure can play an important role in stimulating gross domestic product (GDP) growth, creating jobs in the short term and delivering productivity gains over the long run. Consequently, governments, think tanks and public and private sector financial organisations are working hard to develop solutions to enable infrastructure investment and secure the associated economic benefits it delivers.
Certain steps can be taken to create the right conditions for increased infrastructure investment. Firstly, investment should be prioritised and project quality defined. Secondly, private sector funding should be optimised to ensure efficient deployment of capital and thirdly, the public sector should provide strong leadership in the procurement of infrastructure projects.
SETTING PRIORITIES AND ENSURING INFRASTRUCTURE QUALITY CONTROL
It is vital that investment decisions are made cautiously and infrastructure is delivered fit for purpose, meeting end-user customer needs. The example of bankrupt toll roads in the US and Spain demonstrates the stark reality of what can happen when this is not achieved.
There are a number of measures that could help improve effective deployment of capital resources. For example, governments can manage demand by optimising existing brownfield infrastructure, such as with the Thameslink programme in the UK.
Upgrading brownfield infrastructure can optimise the whole-of-life value of an asset, though this needs to be compared with the whole-of-life value of greenfield infrastructure.
Furthermore, infrastructure should be prioritised according to the system-wide benefits it can deliver, so that utility value is maximised. For example, the £1.6 billion (€2.2 billion; $2.5 billion) project financed Thameslink rolling stock upgrade, in which Siemens Financial Services acted as a lead partner, was shown by the UK government to deliver good value-for-money when these benefits were considered.
OPTIMISING PRIVATE SECTOR FINANCE IN INFRASTRUCTURE
With government resources under pressure, collaboration between the public and private sector is undoubtedly key. While investors are chasing yield in historically low interest rate environments, many are turning their attention to the attractive nature of infrastructure investments.
For example, Norway's $870 billion sovereign wealth fund, the largest in the world, has announced that it is looking at increasing its allocation to the infrastructure asset class. Increasing the investor base is certainly a positive development that can help boost infrastructure development globally. That said, with good liquidity in the market, banks are still active despite restrictions from Basel III regarding leveraging their balance sheets. With long-term infrastructure experience, banks play a leading role in the origination of projects, particularly in capital-intensive sectors such as energy and transport.
Captive financiers also play a growing role alongside banks during the structuring process and construction stages of projects. Increasingly, project developers are looking for strategic investors to partner with and develop intelligent infrastructure solutions that add value to projects. The combination of technology and financial risk expertise provided by captives, such as Siemens with its Financial Services division, can help play a key role in risk distribution discussions.
Through captive investment, investor and lender comfort levels towards construction and technology risks can be raised, increasing project bankability and accelerating financing negotiations. The approximately €3 billion Gemini project, the largest project financed offshore wind farm and Siemens' first order for its 6-megawatt (MW) turbine technology, highlights the value this combination of structuring know-how and financing expertise brings to projects.
However, despite the high liquidity in the market, banks are shortening tenors and looking to place infrastructure debt back into the market sooner. This is where institutional investors seeking high-yielding inflation-linked returns and liability-matching long-dated investments can play a growing role – provided they are comfortable with taking on a bit more risk.
By taking over long-term ownership of infrastructure assets and helping to recycle capital back into construction, institutional investors can help unblock potential bottlenecks in the supply of funds. This is an important role, since increasing efficiency is vital to maximising the impact of capital investment.
At the same time, new mechanisms for long-term investment have emerged, such as project bonds, as well as direct and listed institutional investment and multi-source project financing. In fact, infrastructure finance is becoming more of a “tailor-made” bespoke solutions business.
Having a wide range of financing tools available for investors to choose from according to their individual project risk profiles is important. In this way investors and projects can be well-matched and secure funding achieved, helping to build more resilient projects and secure stakeholder partnerships.
PUBLIC SECTOR LEADERSHIP IN INFRASTRUCTURE
The public sector should also ensure that the right legal, procurement and financial frameworks are in place to make investable opportunities available to private sector investors. Project Gemini is a good benchmark of how such public sector leadership benefits infrastructure investment and helps fulfill societies' needs.
The Dutch government and local municipalities prioritised and supported the project with stable legal frameworks and subsidies. As a result, HVC – a utility consortium representing 48 Dutch municipalities and six water regulating authorities – also invested in the project, taking a minority equity stake alongside lead sponsor Northland Power and co-investees Siemens Financial Services and Van Oord. The stable environment the Dutch government implemented meant investors could reliably assess cash flows, essential for estimating returns.
Identifying strengths and weaknesses in procurement frameworks and implementing best practice can also help improve infrastructure investment. Public-Private-Partnerships (PPPs) are one strong example being replicated globally to positive effect. PPPs are a tried-and-tested solution enabling costs to be controlled and services to be delivered efficiently by aligning project-stakeholder interests through delivery-based performance payments.
Importantly, PPPs provide a flexible risk-sharing model that can be applied to a wide range of public infrastructure, such as healthcare, education and transport. As such, PPPs provide a customisable solution to meet individual country or municipal project requirements. Governments, project partners and financiers now have a large toolkit of best-practice models at their disposal to use as benchmarks for new projects, fine-tuning risk-sharing models to tailor individual solutions to specific projects.
Countries such as Canada and Australia are using the PPP performance risk-transfer model, developed in the UK, as the platform for accelerated investment in national infrastructure. Projects such as Bendigo Hospital and Sunshine Coast Hospital in Australia highlight the benefits that private sector expertise can deliver in public infrastructure through PPPs. Other countries – including the US, Turkey, the Philippines and Brazil – are now following suit, having seen how PPPs can build robust partnerships, aligning stakeholder interests to deliver projects on time and within budget.
In Turkey, for instance, two major hospital projects – the Adana Integrated Healthcare Campus and the Bilkent Integrated Healthcare Campus in Ankara – have recently been procured using the PPP model as part of the government's progressive $12 billion Health Transformation Program.
Ensuring that supportive policies are in place is an essential role the public sector can play in boosting investment across all areas of infrastructure. Furthermore, with strong liquidity in the market, investors are shopping around for the most attractive opportunities.
Not everything can or should be built, so setting priorities and targeting investment to where it adds most value is critical. This is where initiatives such as the G20's recently announced Global Infrastructure Hub (GIH) and the World Bank's Global Infrastructure Facility (GIF) can add significant value – providing leadership and sharing knowledge, as well as improving procurement processes to deliver strong project pipelines.
MEETING THE CHALLENGE
To conclude, there are a number of key building blocks that are necessary for infrastructure financing to be met. This starts at the top with the public sector, through building effective procurement frameworks, legal and governance structures and robust pipelines of prioritised projects. For its part, the private sector should continue optimising the efficiency of financing by ensuring construction costs and risks are effectively shared and managed and financing instruments are made available to attract new investors.
The growing interest shown by institutional investors is clearly a positive development in infrastructure. By integrating innovative financing instruments, opportunities in infrastructure can be matched with investor risk appetite. With stakeholder interests aligned in this way, stronger partnerships can then be built. As levels of institutional investor experience and confidence grow, infrastructure will secure its position as an established asset class in its own right and attract increased levels of investment.
Established infrastructure investors, such as Siemens Financial Services, can support this transition. By sharing project risk expertise and providing “tailor-made” equity and debt finance packages, intelligent infrastructure solutions can be developed to build robust projects, attract new investors and help meet global demand.