Liam Kennedy: Infrastructure pains
The US pioneered the development of modern fast roads with its interstate highway network in the 1950s and 60s. Yet the August 2007 collapse of the Mississippi Bridge in Minnesota highlighted the decrepit state of some of this infrastructure. And it is not just roads that need to be developed.
"By all accounts, the need to raise capital to finance infrastructure is quite huge. For those of you…. who have taken flights from Doha, Singapore, Beijing to LAX, SFO, JFK, you sometimes wonder which of these locations is the emerging market country based on the quality of the airport infrastructure," Adebayo Ogunlesi, chairman and managing partner of Global Infrastructure Partners, told the Milken Institute Global Conference in Los Angeles in May 2011.
While actual investment opportunities in the US are fewer due to a reluctance to privatise, the clear need is for authorities in developed and developing countries to raise capital for infrastructure projects. According to the OECD, the total global infrastructure financing need in power, transportation, telecoms and water is likely to amount to 3.5% of annual GDP to 2030 - a sum of some $2trn per year.
Given the state of public finances in the developed world, much investment will need to come from the private sector. Indeed, there is a strong case for pension fund investment, based on the long-term ‘predictability' of the assets due to their physical nature, as well as its duration and liability matching characteristics and the ‘real asset' inflation-linked cash flows that the infrastructure assets should provide.
But there are plenty of reasons why many pension funds don't invest, not least being the complex nature of typical investment structures and types - unlisted vehicles versus listed, domestic versus international investments, single sector versus - and the profile of cashflows that can be expected.
As far back as the 1980s, pension funds started to capitalise on the advantages of their long-term characteristics by acquiring and developing capabilities in areas like private equity. This buying power is now being replicated in the area of infrastructure; as IPE has reported, the Ontario Teachers' fund has joined forces with OMERS, the Ontario Municipal Employees in purchasing the UK's high-speed rail link to France.
In some cases, consultants are facilitating pension fund co-investments in infrastructure and there are plenty of positive signs as investors familiarise themselves with the asset class and turn their long-term investor status to their advantage. But more needs to be done to bridge the gap between supply and demand, particularly in terms of unlisted fund structures to better match them with pension funds' requirements.