Private capital key to closing infrastructure gap

19 May 2017

Population growth, urbanisation and increasing fiscal pressure will force many countries to look at alternative funding frameworks to meet the growing demand for infrastructure.

The global infrastructure gap, which describes the difference between current investments in infrastructure and what is required to keep pace with community needs, is $US1 trillion a year.1

Countries that are taking steps to better align their development requirements with the needs of investors will be best placed to deliver the societal benefits that come from having reliable transport, energy and communications networks, says Macquarie Infrastructure and Real Assets Senior Managing Director Steve Gross.

“What we know is that governments have to make infrastructure a priority and develop it as part of a broader strategic goal for the whole economy,” Gross says.

The World Economic Forum estimates 3.8 per cent of global GDP, or $US3.3 trillion a year, needs to be invested in infrastructure up to 2030.

What we know is that governments have to make infrastructure a priority and develop it as part of a broader strategic goal for the whole economy."

Emerging economies account for 60 per cent of that need. South Asia needs to invest $US2.5 trillion2 to bridge its infrastructure gap by the middle of the next decade following rapid economic growth in the region. 

Fiscal constraints mean governments are not in a position to fill this void on their own.

Part of the challenge in attracting private investment is that new or development infrastructure comes with a higher risk profile than already operating infrastructure, which has low volatility and is generally cash generative.

Investors in infrastructure are also looking for markets where regulatory and legal frameworks are stable and strong.

Gross says there is already a significant pool of capital ready to invest and scope to attract more long-term institutional capital for infrastructure.

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Macquarie estimates that in Asia alone there is currently $US300 billion to $US400 billion mostly from China and Japan, in untapped private capital available for infrastructure from sovereign wealth and pension funds that are looking for attractive yields.

Gross says tight public private partnership models that offer guaranteed revenues or a minimum revenue guarantee for private investors can boost the amount of private capital made available for infrastructure. Such approaches have already been used with some success by countries such as Korea and are becoming more prominent within the US.

Privatisation of existing infrastructure assets, more attractive to private investors for their reliable returns, is another way governments are freeing up finance for development projects.

In Australia, the Federal Government incentivised asset recycling by offering an additional 15 per cent funding to state governments that privatised operational infrastructure and applied the proceeds to addressing the infrastructure backlog.

Gross believes privatisation will become more popular globally because much of the untapped capital market throughout Asia in particular will be focused on core, developed markets and willing to pay a premium for assets that are operating.

“Governments can then recycle that capital to build new infrastructure. The key is selling the benefits of the privatisation to the electorate by earmarking socially acceptable uses of the privatisation proceeds,” he says.

Finally, he says multilateral development banks and sovereign wealth funds offer another platform for investment and are showing increasing willingness to take on riskier developments in emerging countries where infrastructure is part of the strategic development for a region.

Gross says the countries that experience investment success are those that intertwine their infrastructure goals with those of the broader economy. Korea is a good example of this, having in the past upgraded its infrastructure to boost the productivity of industries such as technology and agriculture.

And there is reason to be optimistic about investment opportunities around the globe:

“Certainly, the number of investment opportunities globally has now gone up quite dramatically,” says Gross.

“When vendors see a mature pool of capital ready to buy infrastructure, this leads to increased investment activity. The number of sector transactions, the number of privatisations and the number of new transactions have all increased and this is creating a lot of opportunities in the sector,” he says.

“It’s a cyclical process – capital drives opportunity and vice versa. Right now the pool of capital has never been larger, so our opportunity to fill this infrastructure gap has never been greater.  The key to unlocking this capital is finding creative ways of matching the needs of this capital with the investment opportunities.”