Financing the coming infrastructure boom
As the global population moves toward cities, the pressure is on to upgrade infrastructure. It has to be done - but who is going to pay for it all? Are banks the best option to finance it?
With their sleek silhouettes and bright, roomy interiors, 115 new Class 700 Thameslink trains will begin service through Central London next year. Faster, lighter and more energy-efficient than the rolling stock they replace, these eight-car and 12-car electric trains will double capacity on one of Europe’s busiest stretches of railway. Their much-anticipated arrival is part of a £6 billion upgrade program for Thameslink.
Urbanizing at a steady pace, the world needs better transit, larger airports, new water sources and infrastructure upgrades in general. In a complementary way, the world of capital and investing needs stable, inflation-protected debt instruments by which to generate reliable returns. Governments can go it alone on major infrastructure projects, appropriating tax revenues or issuing bonds, and many of them do. But with that process, they forego notable benefits that can be provided by large commercial banks and investors with a long pedigree in infrastructure finance and specialists dedicated to this activity.
“With the right sort of institutions involved, you should get added discipline and ongoing access to new capital,” explains Michael Dinham, Head of Infrastructure Finance in Europe for ING. When the Cross London Trains consortium sought financing for its Thameslink trains, Dinham’s unit at ING came in as one of the lead financiers on the project. ING was meanwhile supporting a £1 billion refinancing of Budapest Airport, which in 2014 passed the 9 million-mark in passenger traffic; financing a major upgrade of the Netherlands’ A9 motorway, including one section of tunnel that will be covered by a new public park; and financing a gas distribution network in Germany and new port facilities in the Port of Antwerp.
The taxpaying public is generally wary of sprawling construction projects before they break ground, but usually pleased and perhaps even proud when they’re finished and opened. No two projects are alike, and in every case the decision to use commercial lending bears scrutiny. The ING philosophy, in Dinham’s words, favors “having an intelligent debate” as to whether privatization or other forms of public-private collaboration might yield optimal outcomes.
“What you hope to achieve with increased private sector involvement in major public projects is an allocation of risk between parties involved, which leads to tighter performance standards and timelines, thorough long term cash-flow analysis, greater scrutiny over costs and other safeguards against problems,” says Dinham. He brings up the example of Heathrow Airport, which was privatised 20 years ago and where ING has been a longstanding lender. This business, which is critical to the UK economy, has invested nearly $20 billion in new terminals and other works without relying on taxpayers - it is all privately financed by banks and bondholders, but within a tight and bespoke contractual framework that involves very close lender scrutiny. As bankers, we are supportive and we’re backing the effort, but there is still strict oversight.”
To excel in this financial sector requires long experience and well-established relationships. (You know you’re cut out for it when the engineering report for a new wastewater treatment plant proves to be riveting reading.) Recently honored with a pair of best-in-class awards from banking-industry publications, the ING Infrastructure Finance group has shown it can use its deep expertise and market familiarity to expedite agreements. “A client was recently bidding on a major new greenfield project and needed a commitment of funds in a tight timeframe,” says Dinham. “We were able to study the deal and approve it in a few weeks. We are part of a community of specialist financiers that live and breathe this type of financing, so there isn’t a steep learning curve.”
In Europe and elsewhere, the flow of new projects depends to some degree on which way political winds are blowing. Yet even when activity slows, considerations beyond what is lucrative affect where ING and its peer institutions do business. In ING’s case, the bank is a signatory to the Equator Principles - one of 80 financiers in several dozen countries to embrace the rigorous EP policies protecting against harm to human populations and the environment. “In the name of expediency, some governments in emerging economies won’t think enough about the environmental and social impact of new infrastructure projects,” Dinham says. As it happens, ING has “recently had to step away from some large-scale projects” in such scenarios.
Even when socially responsible practices are certain to be observed, a major public-works initiative has to make sense fiscally over the long term in order for ING Infrastructure lenders to step forward. “The motivation to involve commercial banks and institutions has to arise from long-horizon planning and a careful analysis of the benefits,” asserts Dinham. In cases where politicians are seeking to add new facilities with an eye to the next election cycle and nothing else, his team is very cautious. “If buy-now, pay-later is your only motivation for mobilizing private finance,” says Dinham, “it’s not enough.”
Record levels of ready capital throughout the global economy, along with the post-2008 tendency for governments to put off major public works projects, suggest a strong period for infrastructure-building ahead, as pent-up demand is fulfilled. The paucity of income-producing debt instruments in which savers can invest further encourages such activity. One of the genuine benefits to society is the ability of large public pension funds to rely on steady returns from bonded infrastructure projects. “Infrastructure offers relatively predictable inflation-linked returns,” Dinham notes. “As a result, we have seen a high flow of capital toward deals, with infrastructure becoming established as an asset class in its own right.”
Demographic studies tell us that two-thirds of the world’s citizens will live in cities by 2050, and this addition of 2.5 billion people to urban populations promises to place an even greater burden on infrastructure. Best practices - and best partnerships - in this vital area of human activity are counted on to create the built environment societies will need.