Roger Hirst [00:00:00] Welcome to The Big Conversation Explainer. People of a certain vintage think of infrastructure as the building of hydroelectric dam projects or the updating of road and rail links. China's Belt and Road Initiative has kept up this tradition with a vast network of trading and transport hubs sponsored by the Chinese state. Whilst infrastructure was originally in the realm of governments, it has increasingly become an investment class for private investors in its own right, and its success has reignited the interest of governments across the world.
Rod Morrison [00:00:42] 20 or 30 years ago we thought of infrastructure as basically major civil engineering projects; roads, bridges, maybe the odd nuclear power station, etc.. Now infrastructure is an asset class owned by private companies and regulated by the governments that used to buy the construction services. So it's now an owning type of asset as opposed to simply a construction sector asset. What we've seen recently, though, is that private equity players and private investors, pension funds, insurance companies, investing in these assets have made quite good profits. And now the government's realizing that these assets have a steady income stream that can be financially engineered and the returns can be enhanced, they're now starting to regulate back and starting to impose tougher conditions on these new asset owners. So across the world I think we're seeing owners of water companies, electricity grids and the like, having their returns now capped by the government regulators.
Sherry Madera [00:02:02] When we're talking about infrastructure and infrastructure investing, it's important to make sure that we think about the global context. And certainly this isn't lost on many countries around the world who are trying to attract investment into their infrastructure. Some of this is organized, some of this has been politicized. I think a lot of people are hearing about the Belt and Road Initiative. This is something that's highly linked to China, but also includes over 70 signatories across the world, which is trying to remake the original Silk Roads and building those trade links through infrastructure development, not only in terms of roads, rails, port, but also in terms of the modern infrastructure of energy and infrastructure in data, telecoms and digital. Of course, China isn't the only one who's driving initiatives. There's a more recent initiative coming out of a combination of the U.S., Australia and Japan called the Blue Dot Network. Again, looking at trying to create best quality, high standard infrastructure in places most needed around the world.
Rod Morrison [00:03:02] But we've seen in the construction sector itself, this move from pure contracting to ownership. So in the UK and actually taken up by countries across the world, we've had the private finance initiative where instead of the government simply asking the private sector to build schools and hospitals and the like, they actually give the private sector a 30 year concession to build the asset and then run it for 30 years and make an equity return on running that asset. And that model actually dates back to French water concessions in the 15th century. It's not a new model, but it was taken on board in the late 1990s by governments. And it did encourage a lot of building of new social infrastructure and infrastructure assets. But then the political tide turned against it. Investors were perceived to have done very well or too well out of it. And then governments started to rein back on concession type procurements.
Sherry Madera [00:04:16] So as we talk about infrastructure investment, it's important to think about who it is we're talking about. Who are these investors? Public funds are a key part of driving infrastructure investment, particularly from greenfield sites. Those are the beginnings of a project, breaking ground and starting something new. Often it's the government funds that are deployed, either directly or through a multilateral development bank structure, which pulls from multiple governments. There's been a big trend over the course of the last few years to think about how it is we can mobilize private capital alongside public funds. Many different reviews have showed that there's a major gap in terms of where public funds can bring us versus the needs for infrastructure investments globally. Private funds can fill that gap. However, the needs and requirements both for returns as well as the criteria in investments, differ between public funds and private funds. So this trend of trying to mobilize private capital, to crowd-in private capital alongside public funds is gaining interest. Luckily, we also have the trend that low interest rate environment globally is driving more interest from public funds to try and have long term returns through an infrastructure asset class. This bodes well, but there are still many roadblocks along the way. Mainly this can be solved through understanding data, being able to have more data about existing projects, previous projects and what projects in the future may yield. Green projects, infrastructure that is going to be sustainable, but also what are those yields? Where's the trade that's going to be linked through these infrastructure projects? Where are the needs for energy? All of this is of acute importance to both public and private sector investors. And in order to be able to bring in those private sector investors and make sure that we don't leave stranded assets around the world, it's going to be critical to make sure that data is available and it's complete.
Roger Hirst [00:06:06] Infrastructure projects are providing a wide range of opportunities, financed by a wide range of investor types. These projects have generally fallen into the category of alternative investments. Sourcing accurate data becomes an essential requirement when assessing the viability of these opportunities. Refinitiv have built the products to access accurate data.
Michael Rautmann [00:06:25] So we acquired a company named Zawya about 10 years ago. Zawya had a lot of really great data. They had a great database of private company and they had a lot of data on original construction projects that were happening in the Middle East and North Africa region. And we looked at that and we really realized that there's an asset there. What we really wanted to do was to stitch the data together in a much more connected way so that anyone looking at our applications could see not only these projects that were happening around the world, but also the companies that are involved in these projects. So what we decided to do was to expand our private company and projects database to be beyond just the Middle East and North Africa region and look to see if we could track a global initiative such as the Belt and Road Initiative. And that's what we did. We took all the projects related to the Belt and Road, we plotted them on an interactive map, and then we connected them to all the different organizations that are involved in those projects that are happening on a global basis. This allowed you then to click on any project and see the companies involved and also, surprisingly, see the global nature of the companies involved in the Belt and Road Initiative.
Michael Rautmann [00:07:30] We cover about 4000 projects related to the Belt and Road Initiative and another five or six thousand companies that are related to those projects. And then one interesting thing that you'll notice is if you click on any of these projects, you'll see two things. One is the projects aren't just all Chinese owned and run. There's lots of other organizations involved and lots of private and public sector partnerships. But also what you'll notice is the global nature of the companies involved in these projects. Yes, there's companies from Asia, but also companies from the U.S., from Europe and all around the world are involved in these projects. Our Belt and Road application then became very popular with customers because it made data available in a very unique way. It also made the data very accessible. Our customers then started asking us questions around the funding of these projects and really wanted to dig deeper into what is behind the deals and loans that support these projects. And it gave us an interesting idea. To really not just look at following the lifecycle of the project, but we also started to look at could we follow the lifecycle of the deal and the and the funding related to these projects. So what we decided to do was to take a step back and really see if we could look at these projects on a global basis and not just following a specific initiative like the Belt and Road or projects happening in the Middle East, and cover projects happening on a global scale and follow the funding related to those projects so that you could see the evolution of the project, but also then see the evolution of the funding that is linked to that project. Understanding the nature and the status of the funding of any project is always very important, especially in these times where Covid has put a lot of these projects that these deals are funding under strain. And it's really resulted in there being a lot of distressed assets out there, which for some are a challenge, but also for a lot of others creates opportunities. So we've launched an application called Refinitiv Infrastructure 360, which follows 36,000 global project finance deals and loans, as well as the associated companies and projects linked to those deals and loans.
Roger Hirst [00:09:22] Infrastructure is expected to play a key role in the post-Covid world as governments look to boost their fiscal expenditures in order to stimulate their economies.
Sherry Madera [00:09:31] Infrastructure investment is slowly but surely becoming a topic of the green movement as well. Sustainable infrastructure and thinking about how to deploy capital in a way that's going to be able to be a positive effect on the environment is a top priority. Typically, multilateral development banks and governments, public funds, are looking at ways of making sure that capital is deployed in a way that's sustainable and is reinforcing the green agenda. Many countries around the world are looking at net zero targets and being able to support that through infrastructure that is not burning fossil fuels in the areas of energy and also making sure that it has a low impact on biodiversity adverse effects, is going to be more and more critical going forward. And this whole area of sustainable finance is something that is going to be tracked both through environmental reports, data and thinking about how it is the capital's deployed going forward.
Rod Morrison [00:10:26] But again, following the Covid-19 crisis, you can see calls again for infrastructure to play a major part in boosting the economy of developed and developing countries. But I think that it takes time to put together these projects, particularly in our new environment where regulations and planning regulations are quite strict. But I still see a role for infrastructure to play, particularly in the United States, where the infrastructure deficit if you like, or the lack of money spent on infrastructure over the last 20 or 30 years, most people agree has been not beneficial to the economy. So I still think there's a major infrastructure deficit in the United States that, if the politicians can agree on a way forward, needs to be addressed. I guess the infrastructure spend though, will shift to new areas such as broadband, telecoms. There's an awful lot of money now being spent on fiber to home.
Roger Hirst [00:11:37] Governments will be looking to partner with the private sector in order to boost infrastructure spending. This should help long term economic development as well as provide a much needed jobs boost. Private investors will also play a crucial role in providing finance. The long term returns will help the beleaguered pension fund industry hit some of their investment targets in an environment where conventional returns have been whittled away over the last decade. Infrastructure is an asset class that is going to have an increasingly important role to play in investment portfolios.
