The fear and volatility gripping global equity and credit markets are in marked contrast to the performance of infrastructure assets this decade. The return for investors in infrastructure since 2000 exceeded 60 per cent, 23 per cent more than the MSCI World Index of equities during the same period, and with the rise in demand in emerging markets, this trend is projected to continue until 2030.
Fund managers, financiers, government officials and institutional investors from around the world gathered in Dubai for a Euromoney conference to discuss where infrastructure finance is heading, share experiences and probably book a couple of deals.
The venue was appropriate given the high levels of liquidity in the region coupled with the massive infrastructure projects planned in the GCC over the next 20 years, and the desire on the part of governments to enter into more public-private partnerships (PPP).
These arrangements open the door for the private sector to develop and operate infrastructure assets and services that traditionally have been provided by government, such as hospitals, schools, prisons, roads, bridges, tunnels, railways, water plants, etc.
In Dubai, the Roads and Transport Authority is investing around $22 billion (Dh80.7bn) to ease traffic congestion. The breakdown of this investment spans multiple sectors – $12bn for new roads, $2.5bn each for marine transport and tram systems, $6.3bn for the Dubai Metro and $600 million for new buses.
Credit Suisse and GE, who jointly launched Global Infrastructure Partners in 2006, plan to set up a second $1bn fund with Abu Dhabi’s Mubadala that will invest in the Middle East. The Swiss and American companies estimated the market opportunity for infrastructure investment at $500bn in developed markets and $1 trillion in emerging markets over the next five years. In the Middle East, more than $395bn is required for energy projects alone until 2011.
Another area that requires massive investment is in electricity and water. Metito, a Sharjah-based water treatment company, recently revealed that the world needs an incredible $35trn invested in the two sectors over the next decade. More than $120bn will be deployed before 2015 – $50bn in Saudi Arabia and $27bn in Kuwait. Dubai plans to borrow $19bn over five years to expand its water and electricity capacity.
With the rising need for infrastructure globally coupled with the volatility in other asset classes, investors are allocating vast swathes of cash in infrastructure, which is considered to be long-term, inflation proof, and run contrary to business cycles. But more money looking for a home has some fund managers concerned about overpaying and inflating a bubble in the sector.
“There are 100 groups running around Fleet Street at the moment – you have specialist infrastructure, private equity, and hedge funds and some pension funds invested directly in projects. Insurance companies, like AIG are also getting in,” Stephen Vineburg, a veteran infrastructure investment manager, and CEO, Infrastructure at CVC Capital Partners said. “It is pretty crowded on Fleet Street now.”
It is estimated that of the record amount of funds raised for investment in the sector over the past few years for infrastructure, nearly $200 billion has been unallocated. The Financial Times reported the leveraged amount could be in excess of $500bn. Private Equity Intelligence estimates that there are currently 48 infrastructure funds globally hoping to raise another $46bn in 2008.
This is clear evidence that attractive deals are becoming more difficult to source. Vineburg’s solution to this problem is to “bulk up and go for bigger transactions” or try to source more proprietary deals with less bidders driving up costs, and lowering margins.
Another route is to focus on the regions that remain underinvested, yet where infrastructure spending is clearly on the rise, such as the GCC and North Africa. Robert Swift, CEO of the $500 million Mena Infrastructure Fund, highlighted this gap.
“In Mena and Asia, we have a project finance market that is about 20 per cent of the global market yet the funds raised specifically for the region comes down to about five per cent,” Robert said.
This gap between the clear need for new infrastructure in the GCC and the lack of sufficient funds explains the rationale for the new GE, Credit Suisse, and Mubadala $1bn fund, but the experts at the conference said an appropriate exit is a pre-requisite for any successful public-private partnership.
“Going in, you have to plan for an exit,” said Rauf Diwan, CEO of Atlantic Capital Group. “You have to behave like a bank robber… otherwise you go in and get the money but you can’t escape.”
Paul-Henri Aumont, who has been involved in PPP in Europe for a decade, and is director of major projects with French road construction and infrastructure maintenance group Colas, outlined the necessary ingredients for successful public private partnerships.
The governments must have dedicated teams and well prepared projects. The authority charged with awarding the contract should act within a programme with a dedicated budget, and must have experienced advisers. “The public sector should have done their homework,” Aumont said. The technical analysis, which includes the appropriation of the site, environmental impact studies and archeological investigations are best executed by the public sector for costs and quality reasons.
Aumont stressed that the legal regimes must be in tune with international norms for investors to feel comfortable to partner in a project. The framework should include clear tax and accounting rules, transparent procedures and schedules.
The government should support the project throughout the bureaucracy. Without a government cheerleader investors can be reluctant to deploy long-term capital.
The final ingredients include experienced contractors and operators, and more importantly, secured and deliverable financing.
Over the past few months, every discussion on finance has included the impact of the new global powerhouses – sovereign wealth funds.
The long-term nature of these funds’ investments makes them a natural partner in infrastructure, and many have been quiet participants for years. The Government of Singapore Investment Corporation (GIC) has been involved in such transactions for at least five years, especially in India.
Many SWF managers have stated that the main goal of their investments is to hold long-term, secure, and stable assets that generate predictable income streams.
“I would imagine that every SWF looks at infrastructure as part of the mix, and probably go through some specialist managers in order to gain access to airports, water companies and other assets,” Stephen Vineburg, CEO, Infrastructure at CVC Capital Partners said.
But the political issues surrounding the opaque funds are curbing their ability to close deals, and increasing protectionist calls from foreign populations. “The issue for some of these funds is that there can be political issues, depending on how high-profile the asset is,” Vineburg said. To overcome some of these hurdles, Stuart Lea, managing director, leveraged and acquisition finance, HSBC, suggested that SWFs should “market themselves better”.
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