From pension funds to power stations
In principle, investing in a power station or toll road ought to be an attractive prospect for institutional investors. The long life of these assets is a perfect match for the long-term liabilities of a pension fund. Infrastructure projects offer reliable cashflow, a hedge against inflation, low volatility and returns that are generally not correlated with other assets. In practice, though, many money managers have shied away, scared by the scale, complexity and political risk involved. Individual pension funds lack the expertise to assess complicated projects, too many of which are dreamt up by politicians who care more about winning votes than commercial viability. Corruption is rife and political pitfalls, from angry environmentalists to voters furious about rising power prices, are legion. In emerging economies these dangers are magnified by the possibility of currency crises.
The first is the professionalisation of project management. Every country needs a competent group of bureaucrats who have the authority and skills to design a pipeline of viable infrastructure deals and the political clout to standardise procurement procedures and other practicalities of getting a road built or a tunnel dug. Some countries already do this well. Chile has a National Public Investment System that has dramatically improved the efficiency of its capital spending. Canada and Australia stand out too. But in too many countries technocrats tend to be under the thumb of politicians and not up to the job. In poorer countries aid money could usefully be used to pay for top-notch infrastructure teams.
The second priority is to streamline the system for slicing risk unrelated to a project’s commercial viability. Governments and international financial institutions like the World Bank already, for a fee, protect private investors against political risks, such as the expropriation of their assets. Rich-world development agencies also offer guarantees for projects their countries’ firms invest in. But the system is small, fragmented and geared to banks. To encourage the growth of a market in infrastructure bonds, the big development organisations, led by the World Bank, ought to provide a bigger and more standardised menu of credit enhancements and guarantees.Continue reading….