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Credit Risk and Infrastructure Issues: At the Crossroads of a Potential $15 Trillion Problem

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Credit Risk and Infrastructure Issues: At the Crossroads of a Potential $15 Trillion Problem

$15 trillion USD is the estimated world-wide infrastructure investment gap by 2040 based on the Global Infrastructure Outlook, a G20 initiative.[1] The investment gap (“gap”) refers to the difference between the infrastructure needs of a country or sector based on current and expected demand, and the resources available to meet these needs. The gap can vary widely. For example, as of July 20, it was estimated to be $148 billion for the U.K., with 92% being driven by the rail transportation sector, and $115 billion for the Kingdom of Saudi Arabia, with 71% being driven by the road transport sector.

As large as these figures are, the true world-wide investment gap may be even greater for at least two reasons. First, the Global Infrastructure Outlook is only based on 56 countries across seven sectors, leaving out a number of important areas. Second, the broad and acute impact of COVID-19 may not have been taken into account. This will miss funds earmarked for infrastructure that have been diverted to other endeavours (e.g., healthcare), plus previously approved projects that have been put on hold. In fact, as of June 11 of this year 470 infrastructure projects in the UK worth £6bn in total remain on hold.[2]

A survey conducted by the Association of Chartered Certified Accountants (ACCAs) and Certified Public Accountants (CPAs)[3] identified three top reasons for the persistence of this investment gap:  

  • Lack of political leadership
  • Lack of financing or funding
  • Planning and regulatory barriers

 

While this article focuses on the second issue, a lack of funding or financing, it is worth noting that all three factors are interconnected. For example, planning and regulatory barriers, which include the lack of a standard for project selection and planning opposition on environmental grounds, often arise due to a lack of political leadership.

Infrastructure Finance: Public versus Private Capital

Citizens may think governments are responsible for the provision of infrastructure, but does that mean all infrastructure projects should be directly taxpayer funded? According to the World Bank,[4] while the public sector continues to drive overall infrastructure investment and project implementation, private participation plays an important role in offsetting financing shortfalls and injecting much-needed management and technical expertise into public services. With trillions of dollars in deployable capital at institutional investors,[5] the case for an increase in private financing is difficult to ignore. Indeed, 85% of respondents to the ACCA/CPA survey believe infrastructure should be financed by a mix of public and private sources.

The survey also found that the top three challenges facing governments in securing private financing are:

  • Lack of attractiveness of infrastructure investment
  • Negative perception of private finance for public infrastructure
  • Insufficient skills in government to negotiate with the private sector

 

Yet infrastructure offers the opportunity for private investors to benefit from low-risk returns that are tied to a physical asset.[6] One impediment to becoming involved, however, is often a lack of clarity about how government’s participation will be funded. Will it be general taxation, user charges, or other sources?  Private investors with long-term capital will often look for solid cash flows from the very start of a project, and general taxation is typically a more stable source of revenue than user charges.

There are many benefits from private sector involvement. For example, certain risks may be successfully transferred to the private sector in building and operating infrastructure. Greater efficiencies may also be achieved when working with private sector organizations that are focused on innovation and profitability. Furthermore, private financing can, under certain conditions, lead to the related liabilities being held off a government’s balance sheet, thereby improving the liquidity position.

Narrowing the $15 Trillion Infrastructure Investment Gap

The demand for new infrastructure is large, but many potential market participants lack the ability to reliably evaluate the level of risk related to a project. Utilizing tools to understand possible risks in advance and, therefore, be prepared to take appropriate action to mitigate these risks may help pave the way for additional private sector funding to come forward. The S&P Global Project Finance Probability of Default Scorecard (PF PD Scorecard) is one such tool and is broadly aligned to the criteria used by S&P Global Ratings to assign project finance credit ratings.[7] Utilising a mix of quantitative and qualitative questions in a check-box style, this Excel-based capability has been in use by a broad range of institutions for over two decades to help identify and manage pertinent project finance risks across a wide range of industries. 

[1]“Forecasting infrastructure investment needs and gaps”, Global Infrastructure Outlook, accessed 20 July, 2020: https://outlook.gihub.org/.

[2] “Pandemic puts hold on £6bn infrastructure projects”, Financial Times, as of date: 10 June, 2020, www.ft.com/content/7b3a4c0f-ac9e-4968-9c52-b2ea0f03946b.

[3] “How accountants can help bridge the global infrastructure gap: Improving outcomes across the entire project life cycle”, ACCA, as of date: 18 April, 2019, www.accaglobal.com/content/dam/ACCA_Global/professional-insights/Infra-gap/pi-global-infrastructure-gap.pdf.

[4] “Who Sponsors Infrastructure Projects: Disentangling public and private contribution”, The World Bank, 2017, as of date: 15 January 2020, https://ppi.worldbank.org/content/dam/PPI/documents/SPIReport_2017_small_interactive.pdf.[5] “Global AuM to exceed $100 trillion by 2020”, PWC, as of date: 24 Feb, 2014, www.pwc.co.za/en/press-room/asset-manage.html.

[6] “Rated Global Infrastructure Displays Strong Credit Quality And Low Risk”, S&P Global, April 2018.

[7] S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.

 

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