A long and winding road

http://www.economist.com/news/finance-and-economics/21599394-world-needs-more-infrastructure-how-will-it-pay-it-long-and-winding

                As financing for infrastructure becomes a worry, can other investors help plug this gap being that infrastructure investments are vital for economic growth? European lenders, which dominated infrastructure financing, are now busy repairing their bruised financial statements. “Basel 3” rules are steering banks away from long-term loans, ones exceeding 20 years, required by backers of infrastructure projects. Japanese banks, which have healthier balance-sheets and are keen to putting money to work, could help plug this gap. Such activities are very risky for banks and they are not lending as much for projects from the past. McKinsey consultants predict it will cost $57 trillion to build and run the world’s roads, power plants, and pipelines between now and 2030. This value exceeds today’s value of infrastructure, which is spending currently amounts to $2.7 trillion a year, yet $3.7 trillion is needed. Governments are unable to make up the entire shortfall being that public finances have straightened.

                This is creating a need and opportunity for new entrants. Financial instruments linked to infrastructure are typically hedged against inflation and offer stable returns, with low volatility and little correlation with other asset classes. Some speak of budding asset class. Long-term investors have snapped up loans which were originally made by banks, or they are figuring out ways to issue their own. Sovereign-wealth funds and others after the raciest returns are keen on owning infrastructure assets rather than just lending to them. Projects that are suited for banks often don’t appeal to new moneymen so transition from banks to other investors is not smooth. Insurers worry assets will not prove as profitable as advertised. They are focusing on putting together strategic deals, those in predictable places such as Europe. Investing in 30-year projects is too risky for most.

                The main concern from investors is a shortage of profitable projects. For governments seeking growth, smarter planning could result in a lot more of the infrastructure they crave.