First State sees multiple drivers of infrastructure allocation

Institutional allocation to infrastructure investments is likely to grow given the drivers being seen across the region, argues First State Investments.

Philippe Taillardat, co-head of Infrastructure Investments Europe at First State said, however, that there was no one-size-fits-all approach to the asset class that would suit, particularly pension funds and insurers looking for liability matching over longer periods.

Certain infrastructure is absolutely necessary and heavily regulated, but there is a challenge around the financing of new projects or undertaking maintenance of existing infrastructure. Central government budgets in developed countries are under pressure, and corporate participation via banks has been hit by the after-effects of the credit crunch, leaving a funding gap.

This points to other sources of capital such as long-term savings – pension funds – and insurers, Taillardat said.

In a market such as the UK there is considerable government impetus behind the idea of using long term savers’ capital to drive infrastructure developments. However, this is driven by a realisation that big infrastructure projects can have a disproportionate effect on growth, which remains weak at a time when UK government spending and borrowing is subject to strict market conditions.

Elsewhere in Europe, governments may be less restricted in terms of budget committments to such projects, but face other political challenges – such as the German decision in the wake of last year’s nuclear disaster at Fukushima in Japan to speed up the de-nuclearisation of its power industry. Thus non-nuclear power infrastructure may be an area that becomes more interesting to pension schemes and insurers as a way to obtain access to steady, regulated returns that are often inflation hedged – for example, electricity delivery contracts often contain price-index linking.

Taillardat listed five key areas of infrastructure opportunities across Europe – see table – which he defined as driven by diversification reasons rather than the need to drive countries’ economic growth.

Opportunity Description Examples
Austerity-driven privatisations Governments looking to privatise state-owned assets to cut public debt AENA (Spain), REN, EDP (Portugal), various ports, airports, water, and gas utilities (Greece)
Utilities unbundling Vertically integrated energy utilities are divesting regulated transmission and distribution networks Vattenfall, RWE, ENBW (Germany), EDF, E.ON (UK) Galp Energia (Portugal)
Move to low carbon energy Clean energy targets accelerating investment in the sector Solar Millennium/ OHL (Arenales)
Recycling capital Contractors working to recycle capital from mature assets into hgiher return greenfield assets Hochtief Airports, Dragados ports, Acciona car parks
Oil & gas refocusing Integrated oil and gas companies exiting lower-margin regulated assets in order to focus on core businesses G6 Rete Gas, TENP, Transitgas, Trans Austria Gasleitung

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Jonathan Boyd
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