In developed countries, much of the infrastructure euphemistically labeled “mature” is well past its usable prime. Emerging economies, meanwhile, urgently need new infrastructure such as sanitation, potable water and drivable roads.
Formerly, many governments – by far the largest source of financing for infrastructure projects – supported the infrastructure and project finance markets with cash and/or guarantees. But this support is no longer sustainable due to the significant deficits and sovereign debt levels in developed countries.
Furthermore, infrastructure stimulus packages will understandably reverse as governments look to bring their finances under control.
The World Bank, export credit agencies and other multilaterals, along with state-owned infrastructure banks, will continue to play an important role in financing infrastructure projects. Private investment will also continue to grow in importance.
Specialist funds may arise, while pension funds and sovereign wealth funds will increasingly look to take direct stakes in infrastructure projects and companies.
In the developed countries, more investment is apt to go to the operation and maintenance of existing infrastructure. For new infrastructure, public-private partnerships (PPPs) will gain traction provided the government partners can show private investors both stability and a professional transactional capacity.
The regulatory landscape for debt will continue to evolve as Basel 3 works its way through the markets. The regulations are likely to increase the price and reduce the supply of long-term debt.
The key to successfully raising enough investment for tomorrow’s essential infrastructure will rest in finding the optimum balance between public and private money.
In the present climate, the key challenge for the debt markets remains attracting institutional pension fund money. Whilst prior to the global financial crisis institutional money was invested directly into projects with monoline credit enhancement, or helped to relieve banks’ balance sheets through collateralised debt obligations, these structures are no longer a realistic option.
Large infrastructure debt portfolio sales by banks to institutions will continue; however, all market participants will continue to try to create multi-investor institutional debt funds or find structured products that mitigate the risk of senior debt. The capital debt markets need to be the prime source for infrastructure refinancing; the rollover of bank debt can’t be counted on to meet current and future needs.