Supply, demand and the Juncker plan
A plan to meet the EU’s infrastructure needs was announced as 2014 drew to a close, with new European Commission president Jean-Claude Juncker launching an investment fund that will be leveraged up to €300bn with institutional capital and guarantees aimed at reducing risk.
The so-called ‘Juncker plan’ would divert finance away from EU guarantees and the European Investment Bank to seed the fund aimed at kick-starting long-term infrastructure investment and growth.
The president argued that this would unlock capital and create a “credible” pipeline of EU projects to attract investors, at the same time sparking a debate as to why such an intervention is needed in a market capable of standing on its own.
The simple economics of supply and demand should be enough to explain why the infrastructure pipeline remains lacklustre, and institutional interest sluggish. But there are many other factors at play, including the dynamics of bank financing, demand for low-risk assets and investor caution.
So where is the real market flaw? Speaking in Paris at the November OECD Roundtable on Long-Term Investing, Dominique de Crayencour, secretary general for the Club of Long-term Investors, says the bridge between institutional capital and the need for investment has collapsed somewhat.
“The money of institutional investors is there, and the money from capital markets is there, but the projects are not coming to them,” he says.
De Crayencour says the lack of a meeting place for investors and project owners, previously provided by banks and governments, is another recent problem, adding that he remains hopeful a new European hub for technical assistance and advisory services will help investors – particularly smaller ones.
However, investors place the blame at the feet of providers – not necessarily for the lack of projects available but for the continuous mispricing of risk in the current low-rate environments.
Ang Eng Seng, head of European investments for GIC, the Singaporean sovereign wealth fund, says the distortion in the European infrastructure market is down to ultra-low interest rates across the euro-zone and UK. The fund is wary of long-term investment projects not because of a lack of options or appetite but because of a mispricing of risk.
“We are seeing an under-pricing of risk across the board,” he says. “That is creating the problem. Everyone is doing the logical thing and working to find investments that give a decent yield, and if you get something above zero you chase it.”
He says something needs to be “fixed” regarding risk-adjusted returns across the market. However, according to the European Commission, the debate is not that simple. Defending the stream of projects across Europe, Oliver Guersent, deputy director general in DG FISMA at the Commission, says the supply and demand debate is, to a large extent, irrelevant. He says investors are being overly cautious, based on where we are in the economic recovery.
“Some say there are piles of money available, which is true, and that there are no projects, which is true and not true,” he says.
“But there are a number of needs, and needs are nothing but potential demand and potential projects.
“[Investors] are probably over-cautious. Supply is there, but there is not willingness to take risk. This is a good example of market failure and calls for public intervention.”
The Juncker plan could address these market failures, but as low rates continue to drag down yields and some investors unwittingly accept more risk, only time will tell whether European institutions really do fund the Continent’s future.