Infrastructure funding: Juncker Plan hit by unnecessarily short timeframe
€315 billion investment over three years; 15 times multiplier of EU and EIB funding.
The European Commission’s Juncker Plan for infrastructure investment was formally adopted in early January with a target to fund a pipeline of 2,000 projects worth €1.3 trillion.
The plan, named after new commission president Jean-Claude Juncker, is just the latest scheme to stimulate private sector investment in Europe’s infrastructure and reflects the focus by governments across the world on directing investment towards this asset class.
As former US treasury secretary Larry Summers wryly observed in late January: “If we can borrow money for 1.75% for 10 years in a currency we print ourselves and at a moment when male unemployment is a near record high, then if this is not the moment to fix Kennedy Airport I don’t know when that moment will ever come.”
The focus of the Juncker Plan is the establishment of a European Fund for Strategic Investment (EFSI), which will take a first loss position in projects across Europe. The fund, which is due to be up and running by September, will initially be €21 billion, with €16 billion in the form of EU guarantees and €5 billion from the EIB. The latter will be equity-type investments and loan guarantee facilities via the European Investment Fund (EIF) targeted at SMEs and mid-market companies.
Multiply by 15
Applying a 15 times multiplier, the plan aims to convert that €21 billion of EU guarantees and equity investments from the EIB into €315 billion of real long-term investments over three years. By any measure that is ambitious. “We consider the plan’s greatest challenge will be to open up the capital markets sufficiently in a relatively short three-year timeframe given its aim to attract private sector investors at a multiplier of 15 times the EIB and EU’s initial investment,” says Michael Wilkins, managing director at Standard & Poor’s in London.
Global project bond issuance stood at roughly $37 billion in 2014, according to S&P, while data provider Preqin determines that infrastructure funds had raised about $27 billion globally by the end of the third quarter. Taking this as a proxy for institutional debt appetite, together with the €38 billion of institutional investor capital raised via funds in 2014, the rating agency calculates that total nontraditional sources of capital are still only a quarter of what the plan requires on an annual basis. However, industry specialists do not necessarily see the quantum of financing required as the problem, more the short timeframe.
There has to be a risk
that EFSI focuses on
the shortest-term projects to get the stimulative
effect rather than
those most needed
“The initial timeframe of three years seems unnecessarily short,” observes Mark Dooley, head of infrastructure, utilities and renewables at Macquarie Capital in London. “Those of us in the infrastructure development business are very patient people. The sponsors of EFSI are seeking a Keynesian stimulative impact quickly – which is laudable and valid – but unfortunately identifying, structuring and funding projects can take years. There has to be a risk that they focus on the shortest-term projects to get the stimulative effect rather than those most needed.”
Bill Hughes, head of real assets at Legal & General Investment Management in London, shares his concern.
“There needs to be a regime where the private sector can step in but the crux of the question is whether it is possible for private capital to be brought in in such a tight timeframe, “ he says. Legal & General IM merged its property and infrastructure capabilities into one team under Hughes in January to target long-term, low correlation, relatively illiquid and sticky assets.
“Any infrastructure assets that offer a safe, predictable income stream are generally heavily overbid by pension funds,” says Hughes. “The private sector needs to be willing to take more risk. There are ways of managing construction risk and we are willing to be more enlightened about how that happens. But equally the public sector needs to be more enlightened about providing some sort of support – we are not asking for a wholesale underwrite. Some interesting intellectual discussions should be stimulated off the back of the Junker Plan.”
Institutional lenders are certainly more receptive to taking greater risk in infrastructure projects. In December last year Allianz Global Investors privately placed £200 million of 20-year bonds to part-finance the £600 million construction of the 58km Aberdeen bypass in Scotland. But the presence of the EFSI should enable riskier projects to be financed privately.
“I hope that the impact of this will be to help push projects on the edge of ‘go’ or ‘no go’ over the line,” says Dooley. “EFSI also seems to have the potential and the intent to enable funding of projects that carry more risk than the debt markets will currently support. Without commenting on the specific metrics proposed by EC and EIB, their idea that injecting relatively small portions of capital at precise risk bearing points in a capital structure can transform the rest of the funding proposition is valid. EIB’s Project Bond 2020 product demonstrates this.”
As bank appetite for infrastructure lending returns in Europe, even riskier projects across the region should now have more ready access to funding.