Published on March 6, 2014
Global Infrastructure: How To Fill A $500 Billion Hole Robin Burnett Director Infrastructure Finance Ratings February 17, 2014 7th ANNUAL MEETING OF SENIOR PPP OFFICIALS OECD Conference Centre, Paris Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.
Rising Infrastructure Funding Needs… We estimate annual global infrastructure needs of $3.4 trillion. The bulk will be split about evenly between the U.S., the EU, and China. More Than $57 Trillion Needed For Infrastructure Through 2030 9.5 Global investment, 2013-30 $ trillion, constant 2010 dollars. 57.3 11.7 12.2 4.5 0.7 2 16.6 Roads Rail Ports Airports Power © Standard & Poor’s 2014. Source: McKinsey & Co. 2 Water Telecom Total
... And Retrenchment Of Public Spending … The drop in the public investment ratio was steepest where the crisis struck hardest and where the need for fiscal consolidation was most intense. According to EC data, by 2014 compared to 2009, the public investment ratio would fall by 72% in Spain; 70% in Ireland; 62% in Cyprus, 58% in Greece and 54% in Portugal.
… That Is Expected To Persist Over the past few decades, public spending on infrastructure as a share of GDP has in most advanced economies been stagnant or falling. The deep cuts in public investment spending in countries at the center of the eurozone crisis offer an example of how public sector infrastructure spending may fare in times of financial stress. This leads us to believe that further retrenchment in government infrastructure spending may lie ahead.
So How Big Will The Gap Be? Government investments increase to 3.5% of GDP Projected Annual Funding Gap Bil. $ 1500 Apple Apple Government investments of 3% of GDP Microsoft 1000 Google Government investments drop to 2% of GDP Berkshire Hathaway 500 General Electric Wal-Mart 0 Downside Base Case Base Case Base Case Upside Source: Company market values at 31 December 2013 from FT Global 500 December 2013. 5
Where Could The Funds Come From? A rise in institutional investors' allocations to 4% could provide about $200 billion per year in additional funding. If banks continue to lend to projects at current levels of about $300 billion per year, these inflows could fill the gap left by the governments. Breakdown of Institutional Investor Active in Infrastructure By AUM Insurance Companies Asset Managers Private Sector Pension Funds Foundations 16% 8% 0% Endowment Plans Family Offices Public Pension Funds Sovereign Wealth Funds 1% 11% 1% 19% 1% AUM – Assets under management. Source: Preqin Infrastructure Online. © Standard & Poor’s 2014. 42%
Infrastructure Has Become Attractive Pension plans have increased allocations to alternative classes with infrastructure up from 8% to 24%. Percentage Of Canadian Plans With Allocation To Alternative Assets Has Risen Project bonds represented 16% of the project market in 2013, doubling to $55 billion. (%) Nearly 60% of investors say they will increase allocation to infrastructure in 2014. 2010 results 40 35 30 25 20 15 10 5 0 *Domestic and nondomestic. Source: Mercer 2013 Asset Allocation Survey © Standard & Poor’s 2014. 2013 results
Public-Private Partnerships Are Still Very Important • As markets and governments develop new approaches to completing highly essential infrastructure projects, we believe that initiatives such as the Canadian government's C$1.25 billion five-year contribution to the Canadian P3 Fund and the U.K.'s Private Finance 2 will continue to draw financing using public-private partnerships. • Advantages to this model are that it includes some level of private investment and that there is, typically, a transfer of construction and operating risk to the private party: o In the U.S., interest is growing as several states build robust PPP programs. California, Florida, Indiana, Texas, and Virginia are among those that have initiated PPPs o In Europe, we expect the trend of increased issuance in the social and economic infrastructure sectors to continue.
Catching Institutional Investors’ Eye Benefits • Low default rates and high recovery rates; Global Cumulative Default Rates By Rating (1992-2012*) % • Higher yields; 35 • Diversification; and 30 • Ability to match long-term assets and liabilities. 25 AAA AA A BBB BB B CCC/C 20 15 10 5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Source: “Project Finance Default And Recovery: Shale Gas Fuels Rise In U.S. Defaults,” published on the Global Credit Portal 09-Aug-2013. *Calculated by multiplying non-default marginal rates and then subtracting from 1 to get the cumulative default rate. 9
Unlocking Long-Term Infrastructure Investments 4. Ongoing Strong Project Credit Characteristics 2. Increased Transparency Of Project Data 7. Minimal Political And Regulatory Risk 8. Pricing And Yields That Are Attractive For Lenders And Borrowers 1. A Visible Project Pipeline And Standard Transaction Structures 6. Support Packages That Reduce Construction Risk 3. A Regulatory Regime That Encourages Insurers To Invest 10 10. Liquidity And Asset Diversification 9. Ongoing Strong Collateral And Security, With High Rates Of Recovery 5. Supportive Credit Enhancement Structures For Project Bonds
Related Articles Global Infrastructure: How to Fill A $500 Billion Hole, Jan. 16 2014 Cracks Appear In Advanced Economies' Government Infrastructure Spending As Public Finances Weaken, Jan. 14 2014 Top 10 Global Investor Questions For 2014: Public-Private Partnerships, Jan. 9, 2014 S&P Investors' Appetite For Infrastructure Assets Boosts EMEA Project Finance, Nov. 13, 2013 Italy Looks To Institutional Investors To Support Its Infrastructure Finance, Nov. 11, 2013 How To Unlock Long-Term Investment In EMEA Infrastructure, Oct. 4, 2013
Thank You Robin Burnett Director T: +44 20 7176 7019 | F: +44 20 7176 3691 firstname.lastname@example.org Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.
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