Australia and the US look to better infrastructure

But one area in which governments are actively looking to boost investment, both internally and with private sector investment, is infrastructure, either repairing or maintaining existing projects or implementing new ones as a means of boosting economic growth and employment.

The UK is one of a number of countries to outline a National Infrastructure plan with clearly identified ‘priority projects’ to be completed first, although many of these require the help from private finance initiatives (PFI), or equivalent programmes.

Ian Rees, head of research at Premier Multi-Asset funds, says: “All sorts of social infrastructure projects have come to investors via PFI. That is where the opportunity [is].”

The latest pipeline update for national infrastructure projects estimates £310bn worth of projects to 2015 and beyond. In June, Danny Alexander, chief secretary to the Treasury, announced the government’s plans for ‘Investing in Britain’s Future’ that include a £100bn pipeline of infrastructure projects to 2020. This includes £70bn of investment in transport.

But Mr Rees adds: “With PFI it can be quite politicised, recently the government budget is constrained but infrastructure is a source of growth for the economy. It is a good way to try and stimulate growth in the economy as a whole.

“[There is a] strong pipeline of opportunities. For a developer/constructor from being awarded a contract to build, and the planning, to becoming operational can take three to five years, so the projects coming through now are those projects that were planned in 2007/09 so there are projects still to come through that infrastructure vehicles can target.”

But it is not just the UK that’s looking to boost its infrastructure programme, with US president Barack Obama focusing on the area in his Budget message in April including setting aside $50bn (£32.3bn) for up-front infrastructure costs.

The US is also looking to the private sector to share some of the burden, with its Rebuilding America Partnership initiative. Meanwhile, Canada has recently outlined its new 10-year Building Canada plan from 2014 and Australia is also looking to invest more in its infrastructure assets.

The focus on combining private sector investment with government projects has been highlighted by insurance giant Axa’s decision to increase its exposure to the infrastructure debt market by investing €10bn (£8.5bn) in the next five years through the debt platform of Axa Real Estate. It states Axa Real Estate aims to underwrite loans of up to €500m backed by assets located in established global economies. Laurent Clamagirand, Axa Group chief investment officer, explains: “Our decision to increase our exposure to the infrastructure debt asset class is in line with our global investment strategy.

“It meets our need to find long-term investments and diversify our credit portfolio in order to match the guarantees we offer our clients, and also demonstrates the role insurance companies can play in financing the real economy.”

Meanwhile other investment opportunities lie in the upgrading and structural growth of economically important sectors such as telecommunications and energy.

Peter Meany, head of global-listed infrastructure securities at First State Investments, notes: “Electricity transmission investment is a growth area for a number of regulated utilities in North America. Following years of transmission infrastructure under-investment in the US, the Federal Energy Regulatory Commission is promoting the development of a strong national electricity transmission network, by legislating generous return on equity levels on investment in this area.

“Toll roads are benefiting from a number of structural growth drivers, namely urban population and household growth, increased levels of motor vehicle ownership, and underinvestment in public alternatives. Their business models incorporate high free cash flow generation, high barriers to entry, and inflation-insulated pricing power. Although European toll roads face challenges in the short term, companies such as Vinci (France), Abertis (Spain) and Atlantia (Italy) are trading at valuations well below historical levels, and offer significant value for long-term investors.”

He adds that with capital markets ‘open for business’ corporates and governments are restructuring, resulting in an expanding investable universe for global listed infrastructure.

“For example, the satellite sector is expanding with the recent IPO of US-satellite operator Intelsat, the prospective sale of Singapore Telecom’s Australian satellite, and the sale of the Spanish government’s stake in its satellite company, Hispasat. Similar transactions are currently taking place in pipelines, wind farms and ports,” he says.

The importance of improving infrastructure was highlighted by Australian deputy prime minister and treasurer, Wayne Swan, in his budget speech in May, when he announced a further AUD$24bn (£14.3bn) in nation building infrastructure.

He noted: “Traffic congestion costs commuters time with their families and is estimated to cost our economy up to $20bn a year by 2020 if not addressed. That’s why we have committed more to urban public transport infrastructure than all our predecessors since Federation combined.”

Opportunities for infrastructure investment, particularly in direct social infrastructure projects, look set to continue to grow as governments are caught between the need to stimulate growth and improve conditions and the need for austerity to tackle large debts.

Nyree Stewart is deputy features editor at Investment Adviser