Cash-strapped governments haven’t been investing in infrastructure and are unlikely to find the resources they need to do so in the future. That’s bad. Which is why we need innovative mechanisms for financing, developing and governing infrastructure assets. As readers of the blog will know, I’ve done some work in this area (see here
Why so interesting? Because Australia and Canada are two of the most vibrant infra markets in the world – both on the supply side in terms of the viable opportunities that exist to invest in and on the demand side in terms of investors looking to deploy capital into infrastructure. So I was quite interested in this paper's comparison of these geographies and how it draws lessons for the broader community of infra investors. As I see it, if you can begin to understand what’s preventing the investors in these markets from connecting with the assets in these markets, you can uncover some of the fundamental problems all private markets for infrastructure will face on the path to full maturity.
Anyway, here’s a blurb from their paper to whet your appetite:
“Many governments have decided to encourage private investment in infrastructure to bridge the infrastructure gap. Private sector participation can bring additional capital but also end-user benefits from a more competitive environment in the form of lower costs, as well as the use of the private sector’s technological and managerial competences in the public interest. Yet at the same time, a number of failed public-private partnerships in infrastructure sectors demonstrate the challenges facing policy makers. Infrastructure investment involves contracts and regulatory frameworks which are more complex and of longer duration than in most other parts of the economy, operated under the double imperative of ensuring financial sustainability and meeting user needs and social objectives... The challenges are even more acute when governments bring in institutional investors, such as pension funds, whose first responsibility is to provide adequate retirement income for their members. Infrastructure investments will only be made if investors are able to earn adequate risk-adjusted returns and if appropriate market structures are in place to access this capital. The purpose of this paper is to compare and contrast the experience of pension funds in investing in infrastructure projects in two countries: Canada and Australia.”
The authors do a good job of detailing many of the specifics of these markets, and I encourage you to read the whole paper. But what I was personally focused on were the factors that prevent the infra market from operating efficiently. For example, the authors found that:
- PPP frameworks tend to encourage transactional behavior instead of long-termism.
- Ticket sizes are too small given the bidding costs.
- The asset class is too complex for resource constrained institutional investors to manage in-house.
- The external asset managers in the sector tend to have unaligned structures.
- Investors prefer brownfield projects and are averse to construction risk and other greenfield risks.
- There’s a shortage of brownfield investment opportunities.
- This has increased global competition for those assets that tick the boxes for investors.
- Infrastructure transactions are lengthy and assets are large and complicated to acquire and to operate.
What I also found interesting in all this was to learn that all of the challenges listed above leads to some rather bizarre behavior. For example, Canada has a very well-functioning PPP model and a community of long-term investors that love infrastructure as an asset class... but the latter haven’t really taken an interest in the former... Odd.
Anyway, none of these will come as a shock to those of us who stare unblinkingly at this space... but it’s very useful to see these stylized facts rooted in two “successful” case studies. Kudos to Georg and Raffaelle for their paper...