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Global Construction Race Heats Up

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“We published research last week that said $1.3 billion worth of investment can create 30,000 jobs and, with the multiplier effect, even more in related industries. In addition, you will get about $2 billion in real economic growth,” he said. “So, shouldn’t investment in infrastructure be a sure bet?” Not always, he noted, citing the impending funding shortfalls in the U.S. Highway Trust Fund and what that could mean in terms of job loss in the U.S.

Worldwide, S&P estimates that $57 trillion is needed to fund infrastructure between now and 2030. Historically, funding has come from governments and commercial banks. However, globally, with a few exceptions, such as Canada, public resources to fund infrastructure construction are diminishing. D’Olier-Lees said, according to S&P’s analysis, the base case is that there could be a gap of as much as $500 billion per year.

Who is going to fill it? “Institutional investors, such as insurance companies, pension companies and other non-bank lenders, are well positioned to fill that gap and are becoming more interested,” D'Olier-Lees said. “The reasons are yield; the length of the assets—generally long-term—that allow them to match their liabilities; and diversity.”

S&P finds that institutional investors would like to increase their investments from 2% to 4% of their holdings and that could partially close the gap in needed funds, with about $200 billion per year. This is likely to vary regionally, D’Olier-Lees points out, with a lot of interest in the U.S and Europe but less in Asia and Latin America. He cited a recent study by Preqin Infrastructure Online that found 60% of institutional investors reporting they are planning to increase their investment in infrastructure. In the U.K., for example, six large insurers say they will invest $40 billion into the U.K. government’s national infrastructure plan.

D’Olier-Lees said one factor that, historically, has made these investors cautious is having a steady flow of opportunities to make it worthwhile for them to hire infrastructure specialists to assess the projects. Historically, the investors have been hesitant about construction risk, but as they get more comfortable, there’s a progression where they say, “This is not so bad,” he added.

It is within this context that S&P published a detailed, 30-page methodology that makes it much more transparent to investors what the risks are and how to assess them, he adds. The idea is that, as investors become more comfortable with construction risk, pricing will improve, and then it will become much more attractive.



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