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2012: What can we expect? (Part 1)

We asked leading professionals in the infrastructure asset class for their thoughts on what next year has in store. Today’s opinions come from Alain Rauscher (pictured), Bindu Lohani, Stephen Vineburg and Joel Moser.

Alain Rauscher, chief executive, Antin Infrastructure Partners

Alain Rauscher

At Antin Infrastructure Partners, we think the most interesting theme in infrastructure for 2012 will be the pricing of risk in the face of a challenging macroeconomic environment that nonetheless offers an abundance of buying opportunities.

For those investors with capital to spend, the current wave of selling provides a wealth of opportunities as there are many very high quality assets up for disposal. Governments are continuing to accelerate the privatisation of infrastructure assets. 

Some corporate disposals are being forced by regulation (eg. Europe’s unbundling policy) whilst others are seeking to divest to restore balance sheets following pre-crisis over expansion. Many construction companies are now selling assets to refocus on their core business.  In addition, there is ongoing strategic recycling of capital to finance growth, particularly to fund capital expenditure in renewable energy assets. 

But ‘buyers beware’: a quality asset does not guarantee a quality transaction. Publicly auctioned assets continue to be sold for prices which, in some cases, do not provide an adequate return for the underlying risk, particularly in the case of regulated assets, we believe. We continue to believe that regulatory risk is real. This risk must therefore be thoroughly analysed and mitigated when reviewing opportunities.

Bindu Lohani, vice president for knowledge management and sustainable development, Asian Development Bank

Bindu Lohani

Governments are looking at private innovative financing structures such as public-private partnerships (PPPs). Across the region, there is progress toward creating an environment in which private infrastructure financing can be successful.  But to attract the private sector to risk private capital, governments will need to provide the right policy environments, including enabling legal and regulatory frameworks, transparent and competitive procurement policies and processes, and better tariff policies, among others.  

Second, learning from the Asian crisis, governments have developed their local currency bond markets. Total bonds outstanding in emerging East Asia’s* local currency market rose 5.5 percent to reach $5.5 trillion at the end of September 2011.  Municipal bonds may emerge as a new asset class in Asia’s local currency bond market in 2012. Some Asian countries have taken steps to permit the issuance of bonds by local governments.

In November 2011, Shanghai issued Y7.1 billion (€858 million; $1.1 billion) worth of local government bonds. Local currency financing can be tapped to finance infrastructure development. This bodes well with the current trends in decentralisation, which has transferred a lot of the fiscal responsibility for infrastructure investments to local governments.

 For the municipal bond market to develop in Asia, local governments need to consider reforms in the following areas: (i) enabling regulatory and legal environments to support municipal borrowing; (ii) the capacity of sub-nationals to manage and support debt; and (iii) the availability of credit enhancements.”

*Emerging East Asia comprises the People’s Republic of China; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Vietnam.

Joel Moser, partner, Bingham McCutchen

Joel Moser

My year-end opinion on US infrastructure is no different than my mid-year view: that the US will not host a robust equity-based infrastructure market until Congress can finally deal with the anachronistic municipal bond tax exemption, which can provide a subsidy to the rich and maintain a false internal market for public debt.  

The Simpson-Bowles deficit commission recommended eliminating this subsidy and the Super Committee was also considering its end before deadlocking. The cat is now out of the bag on this relic of the 1916 Internal Revenue Code which, like an extinct leveraged lease, is an inefficient passive tax shelter which does little to advance national and regional infrastructure priorities.  

As Lou Jiwei, chairman of China’s massive sovereign wealth fund, kicked the tyres on UK rail systems as possible recipients of investment capital, the US has remained the global hold-out by not transforming its civil works programmes to 21st century business models. Perhaps 2012 will mark a beginning, and Washington will refocus on the inefficiencies of federal tax policy to solve the deficit problem and, in undoing the trap of the public debt market, encourage the growth of an alternative.

Stephen Vineburg, chief executive, infrastructure, CVC Capital Partners

Stephen Vineburg

2012 will see institutional investors increasingly focus on the search for robust income streams, particularly given the volatility of the public markets and the low yields available from fixed interest. 

Undoubtedly, this search will bring them to infrastructure investment. However, one of the challenges they will face is the tension between the attractiveness of the sector and the costs of implementing investment programs. 

Investors will also grapple with the limitations of a portfolio of externally managed co-mingled pools compared with the difficulties of developing a programme of direct investment. 

As a result of these challenges, many investors will increasingly look to an experienced manager to provide a package of fund exposure and focused co-investment opportunities.