The II 50 View: Infra’s greatest near-term challenge

What is the main problem facing the infrastructure markets today?

• Not enough investment expertise for the amount of capital inflows.
• Inappropriate risks being taken for a given set of returns.
• Incentivisation of managers and potential misalignment of interests are a challenge that the infrastructure market continues to face. By their very nature, infrastructure assets are very long-term investments. However, managers typically invest in these assets for a fraction of their useful life, often between five and 15 years. In many cases managers have been incentivised to prioritise shorter-term financial performance over stewardship of these assets for the longer-term benefit of all stakeholders.
• Political risk is increasing and makes long-term infra investments more difficult.
• The use of leverage and the impact leverage has on the volatility of cashflow streams to exogenous factors. For example, many investors have cast judgement on toll road investments, particularly in the current climate; however, a closer look often reveals good performance at the operating level, but with financial resilience undermined through excessive leverage.
• Long lead times and the political commitment across electoral cycles that is required to deliver consistent infrastructure investment programmes have always been a challenge. But, as politics polarises, it is becoming increasingly difficult for industry participants to plan ahead and commit resources for the long term.
• Overall shift towards riskier infra deals at higher valuations.
• Private investors must make the case for their role in infrastructure by demonstrating the importance of the specialist skills, expertise and capital they can bring to the sector. Investors must also back up their rhetoric on ESG and sustainability with concrete actions in order to prove their value-add for communities.
• Global governance and the rise of right-wing nationalism, which hurts social progress worldwide.