Infrastructure spending set to bolster global growth
20 October, 2015
Sounds like infrastructure spending may be the global solution to bolster growth. What do you make of this?
There's certainly been a fair bit in the news on infrastructure recently. In the last week we've seen politicians in Australia and the UK announce new plan's to increase spending. In Canada, infrastructure spend has been a huge focus of their current federal election and the Canadian Liberal Party, for example, was promising to spend $125billion on infrastructure over the next 10 years!
The International Monetary Fund, or IMF, has also made statements recently supporting fiscal measures to boost growth. Just last week the head of the IMF praised governments' plans to increase infrastructure spend, describing it as a "win-win" solution as targeted investment would create jobs in the short-term and lift growth prospects in the longer-term.
And we share this view, particularly as we navigate through a period of Chinese turbulence and waning monetary levers. Infrastructure investment provides a neat solution to both stimulate individual economies as well as feed future growth through improved productivity.
But aren't governments already too indebted to fund this infrastructure spending spree?
Governments don't necessarily need to fund the infrastructure bill.
Infrastructure has become an increasingly attractive investment destination and there's a queue of investors hungry to fund more infrastructure; whether it's institutional investors, giant sovereign wealth funds, or companies already operating in the infrastructure space. In fact, McKinsey estimate that across all investor groups there's more than US$5 trillion a year ready and waiting to build new airports, roads, ports, etc. This equates roughly 10% each year of the current value of the world infrastructure stock of approximately $48trillion.
So finding the capital is not the problem.
So, if it's not capital, what is the issue?
The challenge for investors is actually around clarifying the risk and the policy uncertainties associated with potential deals. And unfortunately, we don't have to think too hard or look too far back in history to rattle off instances where government or regulatory policy has really dealt a blow to investor confidence.
Just look at how the share prices of the NZ gentailers responded to Labour's proposed NZ Power policy in the lead up to last year's election, or the Chorus' share price back in 2013 when the Commerce Commission came out and slashed its copper pricing.
In Australia, earlier this year we saw the Victorian Government cancel a toll-road project that had already been contracted out and more recently we've seen huge uncertainty around the Australian Renewable Energy Targets. These have finally been renegotiated downwards, but in the meantime we've seen investors pull the handbrake up on new wind farm developments in Australia.
I could keep going but the point is; if investors can't sufficiently clarify risk, they will be forced to look for greater compensation to offset the potential for regulatory or political risk which will ultimately end up costing governments and taxpayers more for the same outcome. Or there will be a stalemate and no investment will get off the ground, so it's extremely important that policy is stable.
We are hopeful that this infrastructure spend will eventuate and not only for the potential to support economic growth, but as investors in listed infrastructure companies, some of the companies we invest in may get a share of these infrastructure projects which will be good for growth and returns. Or alternatively, if developed by private investors maybe over time we might see new infrastructure companies become listed and provide new investment opportunities for ourselves as well as mum and dad investors.