Recession Could Lead to an Upswing in PPPs to Rebuild Global Infrastructure
The Obama administration brings the promise of new approaches to old problems, according to Infrastructure Investor. The report argues that investors eager to see a new approach to infrastructure financing by the U.S. government are hoping to capitalize on this promise.
One day after President Obama took his oath of office, a group of investment banks, infrastructure funds and law firms published a report claiming that private sector capital could help the government create nearly two million infrastructure jobs in the U.S. by the end of 2010. According to Infrastructure Investor, “The figure is based on very bullish assumptions, but it sends the right message in a recessionary environment: infrastructure investment creates jobs.”
Infrastructure Funding Gap Huge…and Growing
While the U.S. government’s $700 billion bailout is a huge number, it’s basically chump change when you consider the scale of the infrastructure demands currently facing the world. According to KPMG, “Taking into account the ‘life-critical’ infrastructure projects (energy, water, transport etc.) which the world’s population needs delivered, current OECD estimates suggest that this equates to up to $40 trillion of investment between now and 2030.”
KPMG argues that some things remain unchanged by the ravages of the liquidity crisis, including the world’s pressing need for infrastructure improvements and investment. The problem facing the public sector is that they now have to address this issue with financing options that are even more limited than before.
KPMG concludes this could result in an upswing in the number of infrastructure projects being delivered by Public-Private Partnerships (PPPs or P3’s) as governments increasingly tap private sector funds and resources to deliver public infrastructure.
Infrastructure Funds Sitting on Piles of Cash
While not unaffected by the credit crisis, many large infrastructure funds are currently sitting on large piles of cash. And according to KPMG, the challenge facing national governments is to consider how they could unlock the investment potential of these funds.
$180 billion of private capital is available for infrastructure, according to Infrastructure Investor, citing a new report published by Kearsarge Global Advisors on behalf of industry players in the U.S., including Morgan Stanley, UBS, Babcock & Brown and Citi Infrastructure Investors. The report also predicts that nearly two million jobs (including 377,000 of the total three million jobs the Obama administration plans to create through its American Recovery and Reinvestment Plan) could be created as early as 2010 if U.S. infrastructure stimulus spending is combined with this private equity capital.
An additional 1.5 million private sector infrastructure jobs could be created by the end of 2010 if all the $180 billion of private capital globally were invested in the U.S. over the next 10 years at 60%leverage, adds Infrastructure Investor. In short, private investment of $450 billion in U.S. infrastructure could help decrease the U.S. unemployment rate by 17% by the end of 2010.
Firms Continue to Eye Infrastructure’s Stable Returns
Right now, as leveraged buyouts remain frozen, U.S. alternatives manager and buyout firm Blackstone Group announced it will raise between $2 -$3 billion for its first infrastructure fund, taking the total value of private equity infrastructure funds on the road to close to $100 billion, according to Dow Jones Financial News. The report states that Blackstone is just one of many firms still looking to benefit from the stable returns on offer from the sector.
New York-based Blackstone began hiring executives focused on projects such as toll roads and airports last year and is now marketing to investors, according to a separate Bloomberg report. Bloomberg quotes Blackstone Chairman Stephen Schwarzman as saying, “We have a number of new initiatives and we continue to sow the seeds for future growth.”
Meanwhile, KKR is forging ahead with plans for its foray into the asset class with its debut infrastructure fund, according to Infrastructure Investor. Credit Suisse is currently marketing the fund, which has a $4 billion target. The report notes KKR made public plans to launch a global infrastructure initiative back in May and has since begun building up its infrastructure team with the addition of several senior team members.
More broadly, infrastructure funds raised $24.7 billion in 2008, according to Infrastructure Investor, citing figures compiled by Probitas Partners. The vast majority of that year-end total, $21.7 billion, was raised during the first three quarters of the year. The fourth quarter slowdown, however, coincided with more funds entering the market.
In October 2008, Probitas counted 63 funds in the market or expected to come to market in the next 12 months, states Infrastructure Investor. The report states their total targeted fundraising topped $94.4 billion. And by year-end, Probitas counted 77 funds in the market seeking $92.3 billion of capital.
Top Execs Say More PPPs Needed
Right now, however, top executives say current infrastructure investment won’t support business growth. The vast majority of C-level executives, 77%, surveyed by KPMG International, believe that the current level of infrastructure investment is insufficient to help sustain the long-term growth of their organizations.
The KPMG survey, conducted by the Economist Intelligence Unit, also revealed that analysts estimate that $2 trillion will be spent on infrastructure globally on an annual basis until 2015. Executives in every region, however, expressed concern that infrastructure investment would not be adequate. The survey’s respondents also believe infrastructure will be rising in importance over the next five years. In addition, the availability and quality of infrastructure will directly affect where these executives locate and expand business operations.
“As governments around the globe grapple with the current economic crisis, they must recognize that infrastructure investments are still desperately needed to support critical business activities,” said Nick Chism, Head of KPMG’s Global Infrastructure practice, and partner in the U.K. firm. “Not only does improved infrastructure attract businesses and the employment and the tax revenue that is derived, but it’s recognized that infrastructure work can be an economic stimulus if managed correctly.”
The KPMG survey also reveals that business leaders believe governments should partner with the private sector to finance and administer major infrastructure projects. In fact, 80% of executives surveyed say governments need to work to a greater extent with the private sector to finance infrastructure improvements.
“Infrastructure is at a critical crossroads, and governments have an incredible opportunity to make decisions that will impact many future generations,” Chism noted. “Almost three-quarters of the executives surveyed in the U.S. and Western Europe expressed concern that poor economic conditions along with the challenges facing governments will prevent the needed investment in infrastructure. They are looking for government to partner with the private sector to develop effective financing solutions.”
Looking ahead…
As budgetary constraints across the globe encourage governments to seek private-sector financing, doors may be opening for professionals with experience in project and infrastructure finance. Executive search firm, A.E. Feldman, says infrastructure finance jobs are likely to open up for candidates with backgrounds in investment banking as well as experience in analyzing and executing structured financings. Experience in infrastructure transactions and civic engineering will also be highly desirable. Additionally, legal jobs may open up for attorneys with expertise in global project development and complex financial transactions.
Are you working in Project & Infrastructure Finance? If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman, today.
