Where Do The Opportunities In Infrastructure Lie?

Probably the most significant issue in project and infrastructure and finance today is surely the disparity between the surplus liquidity that is available to invest and the lack of infrastructure projects to invest in. Standard & Poor’s Ratings Services has identified this investment gap as being $20 trillion through to 2030 in the G20 alone.

G20 Infrastructure Investment Gap Through 2030

Source: Standard & Poor’s Ratings Services – EU Infrastructure: Tackling the Funding Deficit to Unlock the Financing Surplus, October 14, 2015. Citing McKinsey & Co.

The good news, of course, is that the project and infrastructure finance market is very healthy. Global project finance volumes are at their highest levels since the financial crisis and, in the first nine months of 2015, they reached US$194.4 billion from 482 deals. This was up 7.1% from the same period in 2014.

And there are good reasons why the market is so healthy. Investors are attracted to project debt because it offers a better yield than alternative investments such as sovereign bonds while having the benefit of lower default rates and higher recovery rates than corporate bonds.

Yet while the project and infrastructure market is undoubtedly buoyant, it still offers insufficient opportunities to investors who have a strong appetite for this kind of debt. Although project numbers have grown over the past two years, for example, they are still well below pre-crisis figures.

So, what’s holding up further growth in the market?

Austerity measures

In the EU, government austerity programmes have reduced the amount of public funding that is available for investment in infrastructure projects. This has had a significant impact on the market since public and private funding tend to go together and two-thirds of infrastructure investment typically comes from the public sector. 

Obstacles To Public Funding Of Infrastructure Projects in the EU

Source: Standard & Poor’s Ratings Services – EU Infrastructure: Tackling the Funding Deficit to Unlock the Financing Surplus, October 14, 2015. Based on interviews in July and August 2015. 

While governments have been tightening their purse strings until now, we may be reaching a turning point, however. In 2014, the European Commission unveiled its so-called Juncker Plan – an attempt to stimulate growth in the economy and jobs through investment in infrastructure. It has slated €315bn for investment over the next three years, with the money especially intended to support strategic investments such as broadband and energy networks. As a result, the Juncker Plan should bring opportunities for private investors.

Furthermore, international concerns over climate change could lead to a target of a two-degree limit to global warming by the turn of the century being put in place. While this won’t be good news for the struggling oil and gas industry, which has been one of the biggest facilitators of infrastructure projects until now, it does present some interesting new opportunities. Offshore wind farms are already a major area of growth in European project and infrastructure finance and the trend for alternative power sources as well as energy efficiency projects are set to continue.

Outlook for infrastructure

Ultimately, good opportunities for market participants looking to invest in project and infrastructure already exist and we should see more of them in future. In order for this to happen investors need to feel comfortable that they understand the construction, liquidity, political and regulatory risks associated with the assets that they are looking to invest in. Therefore, risk analysis will be critical to creating a scalable, liquid market in infrastructure assets and bridging the gap between project supply and investor demand.

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