The failure to invest in infrastructure when interest rates are negative in Europe is a terrible waste of opportunity, one of the world’s leading investors said yesterday. “I know the politics are tricky, but economically it makes no sense,” said Mohamed El-Erian, chief economic adviser at Allianz.
The topic has dominated discussions across the IMF and Institute of International Finance meetings this week, as everyone from bankers to investors to finance ministers looks for ways to boost growth — and offer higher returns to savers.
Larry Summers, the Harvard economist and former US treasury secretary, advocated more infrastructure spending — even when there was a risk funds would be spent inefficiently — as it was better than nothing. He pointed out that even wasteful spending, such as in wartime, still stimulated the economy.
He was responding to the claim that the congressional district of Hal Rogers, chair of the House Appropriations Committee, had some of the finest infrastructure in the world.
But while Summers might be relaxed about money going missing, spending money on infrastructure efficiently, particularly in emerging markets, is still a crucial concern. Emerging markets need infrastructure for basic power, water, transport and communications — not just because economies need stimulus.
Asian Development Bank (ADB) president Takehiko Nakao told GlobalMarkets it was revising upward the estimate it produced several years ago that Asia would need $8tr of infrastructure investment in the current decade. “We need more money for infrastructure development — power, roads, railways and communications.”
The organisations that do the hard grind of finding and funding individual projects, particularly public institutions like the multilateral development banks, want careful controls.
Just by their presence, though, some of the biggest infrastructure headaches go away.
NO WASTE
Joachim von Amsberg, vice president, policy and strategy, at the new Asian Infrastructure Investment Bank (AIIB), said: “Developing countries are almost defined by weak institutions or institutions not serving public good, which are a natural source of risk in these areas, but those same governments are our shareholders, so some participants see our participation in deals as mitigating the risks from government, even if we don’t do an explicit guarantee.”
Even developed market infrastructure investing has to confront government risk to projects. Cressida Hogg, head of infrastructure at the Canadian Pension Plan Investment Board, which has C$22bn ($16.6bn) deployed in infrastructure investments of a planned C$40bn, flagged public private partnership (PPP) rules.
“You don’t want to constantly reinvent the wheel,” she said. “When governments re-did Australian and UK PPP frameworks, everything went back up in the air and you had to re-understand everything you understood before.”
Bill Winters, chief executive of Standard Chartered, said the world was getting towards a better leverage model, based around different parties taking different parts of the risk in a public and private infrastructure collaboration — separating out, for example, political risk, and short and long term economic risk.
But he also warned that regulation is a challenge. “No financial institution is encouraged to take long term complex illiquid unrated types of risk,” said Winters. “That’s led to a real lack of standardisation. That means the brain damage to get your arms around some of these infrastructure investment can’t be justified in terms of volume.”