Arguably, major infrastructure projects are each unique and resist categorization and comparison. This can be increasingly evidenced in emerging markets where rules governing regulations, climate impacts, political powers, capital markets and currency valuation are less transparent. The world’s low (and in some cases negative) interest rate environment is expected to continue, pushing investors to seek returns in other asset classes – infrastructure included.
- Infrastructure is an illiquid long-term investment that requires understanding of the investment’s unique risks to returns. Luckily, we are experiencing a data explosion, with more data available than any time in history.
- As of November 2019, Refinitiv’s database tracking China Belt and Road (BRI) investments has 2,881 projects with a total project value at completion of about US$3.45 trillion.
- 2020 can certainly be the year where this increased transparency in infrastructure investment can advance.
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Long-Term Interest Rate Forecast
Infrastructure is an illiquid long-term investment that requires understanding of the investment’s unique risks to returns. Luckily, we are experiencing a data explosion, with more data available than any time in history. Perhaps now is the time for making real progress towards transparency in infrastructure investment?
From concept to reality
The concept of infrastructure as an asset class has been discussed for decades at the G20 level. The financing gap has been well reviewed in recent years; the ADB quotes $1.7trillion/year to 2030 is needed to bridge the infrastructure funding gap in Asia alone, the Global Infrastructure Hub estimates a $15 trillion global gap to 2040, and McKinsey estimates $3.7 trillion/year is needed through to 2035. The key to unlocking infrastructure as an asset class rests with the ability to mobilize private capital to meet these needs. Private investors will demand the levels of data transparency they enjoy in other asset classes. This is an opportunity to move the infrastructure asset class concept forward.
Current financial players will remain the bedrock of financing major infrastructure projects. The world’s multilateral development banks (MDBs), alongside country-specific public funds, have the economic drivers and risk mandate to finance greenfield projects. Longstanding players such as the World Bank, ADB and EBRD have been joined in recent years by new entrants including AIIB and the NDB. They still need the private sector to bring additional funds to work. A potential source of infrastructure financing is the approximately US$80 trillion in assets held by institutional investors, particularly pension funds. And yet, according to OECD data, just one percent of institutional investors’ assets are presently invested in infrastructure. Change may be coming: research by the Global Infrastructure Hub–EDHEC indicates some 90 percent plan to increase infrastructure investment.
Innovative structures for “crowding in” private funds are growing. A number of funds have created structures to provide an extension of the MDB’s strong credit ratings to provide a first-loss guarantee to private funds that invest alongside them. This gives strong incentive for private financiers to consider infrastructure as an asset class. The additional work to plan for building a pipeline of investable projects that includes private investors from the initial project feasibility studies also helps build private funding requirements into the projects from day one. This is a useful step to a potential tradable asset class.
It is estimated that China’s investment in Belt and Road countries will increase by 14 percent annually over the next two years, and that the total investment amount could double to $1.2-$1.3 trillion by 2027. Yet, even this will not be enough to drive the next wave of development. Based on findings from the Asian Development Bank, the total infrastructure investment requirement in Asian countries is expected to be $26 trillion over the next 15 years.
To close that gap, China will seek new investment and to create new partnerships and facilitate new financing methods — all of which are likely to open up greater opportunities for organizations across the world. Presently, just over half of Belt and Road projects involve non-Chinese companies — and just six percent attract private investment.
The next wave
One of the initiatives that have driven interest in global infrastructure was the launch of China’s Belt and Road Initiative (BRI) in 2013. As of November 2019, Refinitiv’s database tracking BRI investments has 2,881 projects with a total project value at completion of about US$3.45 trillion.
While the first BRI investment wave came from Chinese sources, the scale of development ahead makes it likely that non-Chinese financial services organizations will play a bigger role in the future. Other global initiatives are forming to address the needs for infrastructure. Notably, the Blue Dot Network including the USA, Australia and Japan, launched in November 2019. These increase visibility and opportunity for infrastructure financing globally.
Build it green and they will come
Sustainability is now embedded in the investment process as an issue of global importance and regulators are pushing for ever-greater ESG transparency. Infrastructure investments have a large scope for impacting climate through emissions, waste, impacts on biodiversity and water. Therefore, it is no surprise that investable infrastructure projects must have green and sustainable credentials. The world’s MDB’s are already at the forefront of requiring environmental impact assessments (EIA) before investing.
For example, Asian Infrastructure Investment Bank (AIIB), whose tagline is Lean, Clean and Green, has a mandate to develop infrastructure as an asset class and bond markets for infrastructure investment with the integration of ESG principles into fixed-income investments in emerging Asia. The BRI has launched similar objectives through the Green Investment Principles for the BRI (GIPs), which include embedding sustainability into corporate governance; understanding Environmental, Social and Governance (ESG) Risks; disclosing environmental information; enhancing communication with stakeholders; utilizing green financial instruments; adopting green supply chain management and building capacity through collective action. Refinitiv is proud to be a signatory to the GIPs.
2020: The year for infrastructure as an asset class?
It will take some time to create an environment where infrastructure investments are adequately comparable. But 2020 can certainly be the year where this increased transparency can advance. Some areas to consider:
- We will never have complete comparability in infrastructure projects. However, neither do we in equities or bonds. Issuing companies are just as unique as an infrastructure project.
- The term “infrastructure” is broad. Perhaps we should choose a pilot subsector, such as transportation or energy, to create the first infrastructure asset class?
- Country risk can not be discounted when building an infrastructure asset class. Governments and state players are often heavily involved in projects and therefore comparability of risk needs addressing similarly to the global fixed income markets.
- Greenfield is different from brownfield in infrastructure development AND in infrastructure financing. We need to find ways for later stage investors to continue to match risk appetite with return requirements and get involved earlier.
There is much to do, but there has never been a better time for us to finance a sustainable infrastructure asset class. Innovation can – and should – continue in 2020.
Access news, data and insights about the infrastructure project of the century at refinitiv.com/beltandroad.