There is an amusing online argument over who first uttered the phrase: "If you build it they will come" – Theodore Roosevelt or Kevin Costner (in the movie Field of Dreams ). Never mind. Infrastructure investment is moving up the agenda in the developed world. China spent $25-trillion in the 10 years to 2011 on fixed asset investment, prompting angst in Europe and the U.S. Spending more on infrastructure is the natural antidote to austerity and sluggish economic growth, its proponents say. The question is how to pay for it.
Governments want greater private sector involvement in infrastructure projects. In fact, private investors already own a swath of the stuff: most U.K. utilities are in the private sector, for example. So nobody needs to reinvent the wheel. Infrastructure investment offers stable cash flows, indexed returns and backing from often highly-rated sovereign credits. It is also not cyclical. It should be a natural private sector activity.
The challenge comes in paying for new projects. The financial crisis has interrupted traditional means of bank financing, so projects are now more dependent on the capital markets. The sums involved are enormous. Up to €2-trillion ($2.5-trillion) of investment will be needed in the next decade in Europe's infrastructure, Brussels estimates. The cost of renewing the U.K.'s energy infrastructure is put at £200-billion. Yet private investors are not biting. And with good reason: regulatory uncertainty and a fear of being corralled into paying for expensive white elephants.
Two recent initiatives offer a way forward. U.K. pension funds have set up a £2-billion ($3.2-billion) infrastructure platform to invest in projects on terms that reflect the funds' long-term interests. The European Investment Bank and the European Commission have also launched a credit enhancement scheme to lift credit ratings and lower the cost of capital. Governments must follow up by re-establishing the regulatory certainty that went out of the window in the financial crisis. Without such clarity, pension funds are right to keep a tight hold on their pensioners' cash.