Infrastructure: public funding is not enough

The need for infrastructure is such that even massive government plans will have to be supplemented by private funds. And that’s just as well as these investments are particularly attractive, especially in times of inflation.

Whether in the US, China or Europe, governments are multipliying announcements of massive plans to support infrastructure, particularly in the fields of renewable energy, telecommunications and social infrastructure. Under pressure from public opinion (and the cruel realisation of energy dependence on Russia), it seems that leaders are finally realising the climate emergency and putting their money where their mouth is.

A clear backlog in investments

It has to be said that the world’s major countries had fallen far behind in modernising their infrastructure. Unfortunately, this is not surprising, as these investments are usually the first to suffer when budgets are cut. As a result, spending on infrastructure declined after the 2008 financial crisis, a trend that was further accelerated in Europe during the sovereign debt crisis. In 24 out of 28 EU countries, public investment in infrastructure as a percentage of GDP declined between 2007 and 2017. In Europe, public spending on infrastructure in 2018 was just under 3% of GDP, a level comparable to that of the US, but well below that of Japan and South Korea, which spend almost twice as much. At the same time, private financing of these projects has also declined, with total investment falling from 22.4% of GDP in 2007 to 20.1% in 2017. The result is a huge gap between the needs and the actual investments that now needs to be filled with billions.

Europe and the US are doubling down

Fortunately, the situation is changing rapidly, with massive investments, accelerated in Europe by the war in Ukraine, which has put the vital issue of energy independence back in pole position. Indeed, after the European Green Deal, which provides for EUR 7 trillion in investments, and the post-COVID Next Generation EU recovery plan, which allocates a budget of EUR 750 billion by 2027, there is the “Fit for 55” programme, which aims to reduce emissions by 55% by 2030 with an investment of EUR 3.7trn, not forgetting the REPowerEU plan, which intends to drastically reduce our dependence on Russian gas thanks to EUR 210 billion invested over the next five years.

In the United States, the IRA bill passed this summer represents the largest federal investment ever made in the fight against climate change and provides USD 369 billion in spending on renewable energy and the fight against global warming. These measures provide major support for all areas of infrastructure, including renewable energy production and transportation electrification.

Private investment is essential

Despite the size of the amounts planned, it is important to be aware that public money will not be enough to successfully modernise infrastructure, particularly energy infrastructure. It must be complemented by private funding, either directly through companies or through public-private partnerships. Fortunately, this does not imply sacrifices on the part of investors, on the contrary, because infrastructure investments have significant advantages. Indeed, they often offer attractive and recurring returns over the very long term, thus providing good visibility. In addition, counterparties are usually robust structures, often government-backed, with proven risk transfer mechanisms. Demand for most infrastructure is highly inelastic and there are usually high barriers to entry for new competitors in a sector often dominated by local monopolies. With low correlation to financial markets and other asset classes and low sensitivity to economic cycles, these investments also provide welcome diversification.

Good protection against inflation

Another important argument in favour of infrastructure investments is that they offer a good protection against inflation. Indeed, most infrastructure projects benefit from pricing indexed to the consumer price index, which allows them to adjust their revenues and therefore shareholder returns in the event of inflation. As this phenomenon, which has been somewhat forgotten for the past thirty years, has become a major concern for the population and investors, infrastructure is thus a particularly attractive investment.

Switzerland is slowly waking up

In Switzerland, due to the good financial health of the Confederation and most of the cantons, infrastructure is most often financed by public authorities. But the measures to support the economy during the pandemic have put a strain on public finances, and it can be assumed that private investment or public-private partnerships will become more popular in the coming years. This is all the more vital as the current energy crisis has been a painful reminder that our country, too, needs to invest heavily to achieve energy independence. Whether it is in the development of wind and solar energy, or the creation of a network of charging stations for electric vehicles, the financing needs are enormous. Private investors, particularly institutional investors, will have to be called upon. A possible sign that things are moving in the right direction is the adoption by the Federal Parliament of a new type of collective investment vehicle, the L-QIF or Limited Qualified Investor Fund, which will avoid the need to obtain FINMA authorisation to quickly set up a structure reserved for institutional investors.