Several macroeconomic factors have contributed to the preponderance of infrastructure debt opportunities. Although bank deleveraging has opened the door for non-traditional lenders in the infrastructure space, that does not account for the public demand for new infrastructure – something spurred by a steady pipeline of public private partnerships (PPPs).
“It’s still quite vibrant. And what’s driving it is a lack of governments’ ability to fund it. Because PPPs are so dependent on debt availability, there was a bit of a wobble through the GFC [Global Financial Crisis] but we’ve broadly seen that stabilise now,” says Nick Cleary of Hastings. “The UK and Europe has a very strong pipeline of PPP projects and there’s growing amounts of long-term institutional capital to support them.”
“They need that long term lending that the banks are no longer willing to provide.”
The continued development of Europe’s robust public private partnership pipeline is also due (at least in part) to a political factor, says IFM investment director for debt David Cooper. Many consider European governments’ renewed emphasis on large infrastructure projects to be motivated by a desire to push private capital into their stagnant economies. Given its stability, the political support for public private partnerships in Europe (and also Canada) will benefit institutional investors that allocate capital to infrastructure project finance, sources say.
“A lot of European governments are looking to use infrastructure spending as a way of getting back into those economies,” Cooper says. “Historically, the way they would have using classic tax-and-spend, and most of them are now in a situation where they can’t do that. So they have to use private finance to do that for them.”
But while Europe’s public private partnership pipeline has grown, the strategy has yet to attain critical mass in the United States. Although the quality of the US’ infrastructure has declined steadily over the years – one source pointed out the 23 May collapse of a bridge in Washington as an example of widespread need for improvements – state and local governments have not embraced the strategy with the same fervor as their European counterparts.
“The US has been – for the last 10 years – the next force in PPP. And surely it just makes sense that it will happen, we’re going to see deals done, if you’re a serious player you need to be out here,” Cooper says. “It’s something that everyone seems to think is inevitable, but everyone has seemed to think it was inevitable for quite some time.”
Although Cooper concedes that public private partnerships in the US have increased over the years, “it probably hasn’t taken off to the extent that people expected”.
“It’s almost a state-by-state approach. Whereas if you go to most of Europe, you’ll have a central government that will decide, ‘We’re going to do PPP, and here is a project we’re going to bring forward’,” he says. “In the US, I kind of sense that if the federal government decided to do that, there’s no follow through in the individual states.”
That isn’t to say opportunities don’t exist. In April, Allentown, Pennsylvania’s city council voted to lease its water and sewer system to Lehigh County Authority – a transaction that will reportedly generate $220 million for the city, as well as an annual payment of $500,000 per year starting in 2016 and adjusted for inflation thereafter, according to a local news report. Although Lehigh County Authority is a government utility, the council had seriously considered bringing in for-profit businesses such as Aqua America or American Water Works.