Institutional investors could help fill USD500bn infrastructure funding gap, says S&P study
The gap between global infrastructure investment needs and available public sector funds could reach USD500bn a year between now and 2030, according to analysis by Standard & Poor's Ratings Services.
But institutional investors are likely to increase their allocations to help fill the breach left by governments and banks.
According to Standard & Poor's study, "Global Infrastructure: How To Fill A USD500 Billion Hole", the funding needs for infrastructure around the world will be over USD3trn annually over the next 16 years. Yet capital investment by governments in the US and Europe has dropped from about three per cent to two per cent of GDP since 2009, leaving a gaping hole in funds that are required to pay for economically-vital transport, power and water projects.
This leaves an opportunity for investment institutions such as insurance companies and pension funds to fill the breach. The report estimates that investors' allocations to infrastructure worldwide could rise to an average of about four per cent of assets under management over the next five years, more than double the current level.
That could potentially provide about USD200bn per year in additional funding for the sector. Alongside a continuation in bank lending at today's levels of about USD300bn a year, these new inflows from the private sector could fill the void left by government budget reductions.
The report notes that some institutional investors, principally pension funds, have already raised their target allocations to the infrastructure sector to between three per cent and eight per cent of their assets under management. Standard & Poor's expects that other institutions will also increase their commitments, attracted by the match these assets can offer against their long-term liabilities and the higher yields available on infrastructure debt.
The creditworthiness of infrastructure debt, as measured by Standard & Poor's default and recovery rates, is also relatively strong, and we expect this to continue. The average annual default rate for all project finance debt rated by Standard & Poor's since 1998 is just 1.5 per cent - less than the 1.8 per cent default rate for corporate debt issuers in the same period. And project finance debt also delivers a better rate of recovery when defaults do happen.
Michael Wilkins, managing director in the project finance ratings team at Standard & Poor's and lead author of the study, says: "The need for infrastructure investment worldwide is massive, the attractions of the asset class are clear, and the appetite of investors for infrastructure assets is growing. All that is needed for more institutions to get involved are the right conditions and incentives."
Measures that will encourage fund managers to invest in infrastructure debt include a clearer pipeline of projects, more standardisation of deal structures, policy stability, and better information about the performance of projects at their various stages.
"Prudential regulation needs to be carefully calibrated too, in order to avoid raising unintended barriers to infrastructure investment," Wilkins notes. In Europe, for example, risk capital charges proposes for insurance companies under Solvency 2, scheduled to take effect in 2016, may discourage insurers from providing infrastructure financing, as it could penalise them for holding long-dated, low to mid-investment grade project debt.”
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