Making up the shortfall between global infrastructure investment needs and actual spending, estimated at over $1 trillion annually, is high on the agenda for policy makers and investors alike. With public sector balance sheets and resources under strain across the globe, bridging this gap will require new and existing sources of private sector capital.


A variety of different delivery mechanisms and financing approaches has evolved to deliver infrastructure assets, although capital expenditure by infrastructure corporates far exceeds that from infrastructure project finance transactions. Technical assistance, credit enhancement and regulatory incentives to invest in infrastructure will play a growing role going forward.



Infrastructure investment is a high priority


Infrastructure investment is of critical importance to society, providing assets that underpin economic activity. However, the need for infrastructure investment across the globe is not being met. The World Economic Forum (WEF) estimates that the shortfall between global infrastructure investment needs and actual spending is about $1 trillion per year.


Making up this shortfall is a high priority for policymakers. They regard increased private sector investment as vital, given the fiscal pressure facing many governments.


Investment in infrastructure can boost economic growth. The International Monetary Fund estimates that in advanced economies, every dollar of infrastructure investment during periods of low growth can increase output over the medium term by $3. The WEF calculates that every dollar spent on road maintenance can save $5 of reconstruction costs.


Countries at different stages of development have different infrastructure priorities. Lower income countries often require the basic infrastructure needed to provide electricity and clean water. As economies develop, the focus switches to economic infrastructure, such as transport networks.



Investor interest growing


Many institutional investors see value in creditworthy infrastructure debt, as its long tenor makes it a suitable matching asset for long-dated liabilities, and because it offers attractive risk-adjusted yields. Institutional investors across the OECD held assets of over $90 trillion as at December 2013, underlining their importance as a potential source of capital for infrastructure investment.


Exhibit 1
As at December 2013, institutional investors across the OECD held assets worth $92.6 trillion in aggregate


Source: OECD



Ample debt capacity in creditworthy countries…


Banks and institutional investors are willing to provide long-term debt for infrastructure corporates and projects in stable creditworthy countries, encouraged by exceptionally low interest rates in advanced economies.


The global financial crisis inflicted significant losses on the commercial banking sector, forcing it to deleverage and raise risk capital. However, many banks that had curtailed infrastructure lending are now re-entering the sector, despite increased regulatory costs under Basel III that disincentivize long-term lending.


Competition between banks and investors, and a dearth of investment opportunities, is compressing credit spreads and loan margins, although these remain attractive in relative terms.


In advanced economies, infrastructure investors’ key concerns are (1) policy risk from potential adverse legal and regulatory changes, (2) revenue risk, reflecting uncertainty over user demand and tariff levels for assets such as toll roads, and (3) construction and technology risk.



but less in emerging markets


There is a particular need for private debt capacity to close the infrastructure gap in developing countries. Infrastructure financing in these countries is often dominated by commercial banks, national development banks, multilateral development banks (MDBs) and other international development finance institutions (DFIs).


This reliance on bank lending often reflects underdeveloped domestic capital markets and limited access to international investors. Moreover, debt tenors, typically ten years or less, are shorter than the economic life of the infrastructure assets they finance, giving rise to refinancing risk.


One deterrent for international institutional investors is their restrictive mandates, which can include geographical constraints and minimum credit quality criteria.


Infrastructure investors in developing economies are particularly sensitive to (1) political risk, (2) counterparty credit risk, which may apply to the host government, (3) untested legal and regulatory frameworks, (4) forex risk, and (5) transparency concerns. The investment risks that arise in advanced economies also apply.



Options for infrastructure delivery


Governments control the strategic context and policy framework for infrastructure investment. Their role is to decide what assets are required, and how and over what time period to deliver them. The financing approach will depend on whether revenues from the asset take the form of government transfers or user tariffs.


Governments can deliver infrastructure in the following ways:

» Direct procurement.

» Setting performance standards for regulated utilities that necessitate infrastructure investment.

» Tendering infrastructure assets via concessions or project agreements.

» Creating markets with incentives to achieve desired infrastructure outcomes.



Infrastructure sub-sectors emerging


Infrastructure assets tend to be capital-intensive, and have a long economic life. Distinct infrastructure sub-sectors have emerged, as illustrated in Exhibit 2.


Exhibit 2
Examples of infrastructure sub-sectors differentiated by revenue risk

Source: Moody's



Corporate capex dwarfs project finance


Between 2012 and 2014 in Europe, we estimate that total capex by Moody's-rated infrastructure corporates was more than 4x the combined capital value of the infrastructure project finance transactions (both rated and unrated) that reached financial close (Exhibit 3). In North America, the multiple was more than 6x. (Exhibit 4).


Exhibit 3
Infrastructure Capital Expenditure in Europe: Infrastructure Corporates compared with Infrastructure Project Finance


Note: Infrastructure project finance excludes oil & gas, mining, petrochemical and industrial projects

Source: Moody's, Thomson Reuters Project Finance International



Exhibit 4
Infrastructure Capital Expenditure in North America: Infrastructure Corporates compared with Infrastructure Project Finance


Note: Infrastructure project finance excludes oil & gas, mining, petrochemical and industrial projects

Source: Moody's, Thomson Reuters Project Finance International



Annual capex by Moody's-rated infrastructure corporates in Europe and North America combined was $371 billion on average between 2012 and 2014. This substantially exceeds the $160 billion global average annual capital value of the infrastructure project finance deals that reached financial close during the same period.


Infrastructure corporates invest significant sums in infrastructure assets. In the developed world, their business models are well-understood by investors, and they are typically highly creditworthy.


However, their investor appeal is more limited in developing countries, where country-specific risks can undermine their creditworthiness. Project finance, which provides a framework for mitigating these risks, offers a potential way forward in those countries.


Bridging the global infrastructure gap will likely require a range of delivery mechanisms and financing approaches, spanning both the corporate and project finance models. Recent initiatives aim to increase the number of investable opportunities, while simultaneously attracting fresh capital.


In September 2015, world leaders attending the United Nations Sustainable Development Summit in New York adopted a range of goals designed to promote sustainable global development over the next 15 years.


MDBs have been given a central role in achieving those goals. To do so, MDBs and DFIs will need to optimize the use of their balance sheets, encourage long-term private investors to channel more capital into infrastructure, and develop innovative policy instruments for infrastructure investment.


Steps taken so far include:

» The principal MDBs have established project preparation facilities to improve the quality of infrastructure development, strengthen regulatory frameworks, and build capacity in developing countries.

» Many MDBs and DFIs are exploring forms of credit enhancement to mitigate risks of concern to investors.



Project pipelines under development


In October 2015, the G20 launched the Global Infrastructure Hub which is mandated to deliver a comprehensive global pipeline of infrastructure projects.


Separately, the European Investment Project Portal, which was launched by the European Commission (EC) on 1 June 2016, establishes a transparent pipeline of investable projects across the European Union. The portal is a key element of the EC's Investment Plan for Europe, which aims to mobilize EUR315 billion of private investment in infrastructure and other sectors over 2015-18 by deploying risk capital from the newly-formed European Fund for Strategic Investments.



Insurers incentivized to invest


Solvency II, the European capital adequacy regime for insurers that took effect on 1 January 2016, is designed to better align insurers’ capital reserves with the risks they face. Amendments to the rules adopted by the EC in September 2015 are designed to incentivize insurers to invest in infrastructure projects by reducing capital charges that apply to qualifying infrastructure project investments.


Further amendments that would incentivize insurers to invest in infrastructure corporates are under consideration. In October 2015, the EC issued a call for advice to the European Insurance and Occupational Pensions Authority (EIOPA, the European insurance regulator) on investment risk in infrastructure corporates. EIOPA is conducting its investigations, including a market consultation launched on 15 April 2016, with a view to delivering its advice to the EC by 30 June 2016.



The topics raised in this article are discussed in further detail in Moody's report: "Infrastructure Renewal and Investment Bridging $1 trillion infrastructure gap needs multi-pronged approach", February 2016. This article is subject to Moody's content disclaimer located here.




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