Infrastructure – the $50 trillion bill the private sector wants to share

Global Outlook

The Tokyo games this year are a massive sporting event that involves years of careful preparation, including the timely delivery of large-scale infrastructure projects.

Since the 1980s, the infrastructure – sports venues, the athletes’ village and transport links – required to stage events of this size has been financed through a combination of commercial sponsorships, private sector developers and government grants.

This public-private partnership model has provided a blueprint for successive organisers of the quadrennial competition. Despite the occasional scare about whether facilities would be ready in time, everything’s in place for the opening ceremony.

Can we use this funding model for large-scale social and economic infrastructure development in an age of austerity when governments can’t afford big cost overruns?

I would say we can and, what’s more, the public-private partnership model offers up some attractive opportunities for investors seeking attractive long-term yields.

Global infrastructure deficit

Countries are facing some of the biggest economic challenges in modern history. Addressing these challenges will require unparalleled investment in social and economic infrastructure – transport and energy networks, schools, hospitals.

New and upgraded infrastructure is needed to support population growth, urbanisation, industrialisation and economic competition. Governments are keen to improve living standards.

New and upgraded infrastructure is needed to support population growth, urbanisation, industrialisation and economic competition. Governments are keen to improve living standards.

Measures to limit the damage caused by climate change (e.g. achieving net-zero carbon goals) will also require big investment.

Estimates on how much all this will cost vary, but one number that often comes up in discussions is US$50 trillion. That’s only the bill for global infrastructure requirements up to 2050.

Unfortunately, most governments find themselves unable to foot the bill alone. Traditional sources of government revenue, such as taxation and regulated user charging, fall short of what’s needed.

Public-private partnerships

Given the requirements of time, cost efficiency and need for expert oversight, many public-sector bodies have enlisted private-sector help via so-called public-private partnership concessions.

These concessions enable private-sector companies to work closely with governments, or government agencies within the public sector, to complete and operate infrastructure projects. Private capital, managed by financial institutions, is a crucial component of this arrangement.

In return, the private-sector partner receives a share in the revenue stream generated by the project. Not only can concessions help propel a project by providing financial assistance, they can also help increase efficiencies. Projects are typically completed faster as well.

Private companies can also help bear the risks associated with these projects, such as completion risk and the risk that usage will not be as high as forecasts suggest.

The private sector can, and ought to, play a role in laying down a solid foundation from which countries can potentially transform their economies for a better future.

That said, there has to be a well-articulated economic, social and political vision in each country. There also needs to be a realistic blueprint, incorporating in-depth financial plans, that details how this will be delivered over the long term.

Investment rationale

Appropriately structured, infrastructure investments are able to provide attractive yields to investors over the long term.

When an infrastructure project involving both the public sector and private investors begins, contracts are typically put in place for terms of 25 years or longer. These arrangements dictate what investors can expect from cash flows once development is complete.

A well-managed, stable investment should continue to produce a reliable income stream following completion. These risk-adjusted returns are stable, long-term and partially index-linked.

We know this model works. A topical example from the sporting world, is the Optus Stadium in Perth, Western Australia. This award-winning venue hosts major cricket, rugby and Australian rules football (AFL) matches, as well as big music concerts. Before the pandemic, AFL matches were regularly played in front of capacity crowds of 60,000 people.

Following a tender process in 2013, a private sector firm was awarded the concession contract in mid-2014. Construction commenced later that year. Despite the technical challenges of building on the site of a reclaimed flood plain that had been used as a municipal rubbish dump, the stadium was completed on time at the end of 2017. It hosted its first event in January the following year.

Full disclosure, we manage an investment in this public-private partnership concession.

Risk management

Any project that costs hundreds of millions (if not billions) of dollars and with a lifespan measured in decades, will come with considerable risk.

Our focus is on skillfully managing those risks. There’s not enough room to be comprehensive, but here are five examples of good practice:

  • Look for clear upfront project specifications to optimise short-term versus longer-term costs;
  • Welcome the discipline that comes with whole-life costing and through-life risk analysis;
  • Private sector contractors and investors should put their own capital behind their forecasts;
  • For the right projects, the higher cost of capital required (versus public financing) is justified;
  • Ensure risk is located with the party best placed to manage it (and the party that has the best incentive to do so).

And finally…

Private sector infrastructure capital has never been more necessary. Economic historians will come to remember the current era as the one in which financial institutions forged deep relationships with private sector infrastructure sponsors, developers, investors and the public sector.

The games’ motto ‘Citius, Altius, Fortius’ (Latin for faster, higher, stronger) should be adopted by the public and private sectors embarking on the next generation of infrastructure investment. It provides an aspirational guide for what they must strive for:

  • ‘Faster’ in terms of reduction of procurement and delivery times;
  • ‘Higher’ in terms of ambition to innovate, particularly in the area of net-zero carbon emissions;
  • Stronger’ in terms of longer-term planning and robust objectives.

 

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