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March 19, 2014 /PRNewswire/ -- McGraw Hill Financial (NYSE: MHFI) President and Chief Executive Officer
Douglas L. Peterson today will call on policymakers and market participants around the globe to create the conditions necessary for institutional investors to fill the
$500 billion annual gulf between existing public investments and the growing need to build, repair and replace roads, bridges and other critical infrastructure.
In an address to 300 business and government leaders at the U.S. Chamber of Commerce's 8th Annual Capital Markets Summit in
Washington, D.C., Mr. Peterson will draw attention to the gap between the approximately
$57 trillion needed globally through 2030 for infrastructure projects and the limits of traditional mainstay funders, including governments, which are constrained from increased spending, and banks, which are repairing their balance sheets.
$500 billion annual shortfall cited by Mr. Peterson is based on research released in January by Standard & Poor's Ratings Services, a part of McGraw Hill Financial. Mr. Peterson's estimate is predicated on continued government infrastructure investment at the current pace of approximately 3% of GDP; a reduction in that level of spending could cause the annual funding gap to balloon to
In his speech, Mr. Peterson explains that institutional investors – insurance companies, pension funds, and other nonbank lenders – are best positioned to fill this financing gap, as they are ideally situated to take advantage of the higher yields, asset-liability matching, diversification, and the low default and high recovery rates offered by infrastructure investments. He predicts that institutional investors can bridge the shortfall if they increase their allocations to infrastructure from 2% to 4%.
"Fortified by additional understanding, transparency, predictability, and certainty, we believe nonbank institutional investors can bridge the coming
$500 billion annual infrastructure funding gap," Mr. Peterson says in remarks prepared for delivery. "In doing so, they will ensure that our growing world has the means to build the bridges, tunnels, ports, schools, hospitals, energy sources, and other physical assets it needs, assets that will continue to amaze and inspire, and that will pave the road to achieving our economic potential at a time of such extraordinary promise."
Highlighting the need for alternative sources of financing in
the United States, the U.S. Census Bureau has reported that government spending on infrastructure as a percentage of GDP is currently at a 20-year low, with calls for increased project funding going unanswered.
In order for the institutional investor approach to succeed, policymakers and investors must work together in three key areas, according to Mr. Peterson, who recently was named a co-chair of the World Economic Forum's Strategic Infrastructure Initiative. Those areas of focus are:
Standardizing Project Finance Structures And Enhancing The Transparency Of Project Debt
Given the magnitude and long-term illiquidity of infrastructure investments, transparency is especially important to the development of long-term project bond markets. Greater standardization of transaction structures enhances market visibility and predictability.
Streamlining Regulatory Regimes And Minimizing Political & Regulatory Risk
Inconsistent or inappropriate regulatory regimes can impede further development of institutional infrastructure financing. For example,
Europe's Solvency II framework doesn't account for the favorable default and recovery characteristics of infrastructure project finance. This could discourage and even penalize insurers for holding long-dated, low- to-mid-investment-grade project debt. Further, enshrining independent, stable, and transparent regulatory frameworks in law reduces the risk of subsequent adverse policy changes impacting transactions.
Enhancing Credit Structures And Reducing Construction Risk
With weakened credit quality of some public sector counterparties, the infrastructure finance market has struggled to find support structures that meet both equity investors' rate of return requirements and investor demand for higher-rated bonds. This problem highlights the growing importance of robust public-private partnerships – or "P3s," which include some level of private investment and a transfer of risk to the private party.