By Richard Barley
If you build it, they will come. But first you must borrow the money. That is the challenge for infrastructure funds, which are discovering they mightn't be immune to the credit crunch after all. The orthodox thinking is that infrastructure is in a sweet spot, buoyed by government efforts to combat the crisis and investor appetite for stable long-term cash flows hedged against inflation. But despite a massive global infrastructure deficit, an anticipated tide of deals has yet to materialize.
Through 2030, annual requirements for spending on electricity, roads, rail, telecommunications and water will average 3.5% of global GDP, according to the Organization for Economic Cooperation and Development. On top of that comes funding for social infrastructure: schools and hospitals. In the developed world, governments weighed down by debt are likely to need to monetize infrastructure assets, either by privatization or by tolling. In emerging markets, spending could be huge: Goldman Sachs estimates India alone needs $1.7 trillion over the next decade for infrastructure.
That has left infrastructure funds scouring the markets for cash. As of June, a record 94 funds were on the road seeking capital, according to researcher Preqin. Construction groups also are positioning themselves ahead of an expected infrastructure boom: U.K. group Balfour Beatty /zigman2/quotes/202863772/delayed UK:BBY +0.69% last week agreed to buy New York's Parsons Brinckerhoff Inc. for $626 million -- seeking a greater role in projects backed by the U.S. government, whose $787 billion stimulus package earmarks $111 billion for infrastructure and science.
The snag is the lack of debt funding, rather than the cost of borrowing. The fall in underlying interest rates has helped compensate for risk premiums that in some cases have doubled or even quadrupled. But there isn't enough capacity. Precrash, infrastructure funding was driven by bank lending and bonds wrapped by monoline insurers. With bank capital scarce and monolines in a world of pain, new mechanisms are needed, perhaps through governments offering additional guarantees, or an increased use of secured bonds. Such guarantees need to be deployed carefully, however, if governments are to keep infrastructure projects off their balance sheets. Even then, debt investors may prefer to stick to funding existing assets rather than riskier greenfield projects.
Some big deals are getting done. In Australia, a A$3.5 billion (US$3 billion) desalination project should generate 1,700 new jobs thanks to a syndication guarantee from the state government. Some corporate infrastructure operators have good funding access: Italian toll-road operator Atlantia /zigman2/quotes/208093352/delayed IT:ATL +2.13% has issued bonds and received investor requests for private debt placements. Meanwhile, developing nations may yet find strong domestic growth will support their plans. Take India. Goldman forecasts a rising savings rate and positive demographics mean the country can finance its heavy needs internally, without relying on fickle international debt markets.
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