Getting in the Game

Global Race for Private Infrastructure Investment

If you think securing funding for infrastructure improvements is difficult, think of this ? the competition for investment doesn?t stop at municipal or state borders. Not only do individual projects vie for financial resources on a local level, but in an increasingly integrated world economy with more transparent capital flows. The competition for economic development resources is now truly global and the United States finds itself competing with other countries in the race to attract private financing to build winning infrastructure.

Without adequate transportation, water supply, sanitation, energy systems and social infrastructure such as schools and hospitals, countries risk lagging behind their peers in the growth of economic development drivers, including businesses and the jobs they create. They face the prospect of an erosion of their citizens? quality of life and economic prosperity.

The current debate in the United States demonstrates the tension between the need for infrastructure and its continued dependence on public funding. Around the world, this same dynamic has led more governments to proactively seek out private finance for infrastructure, as they work to ensure their countries are globally competitive while meeting their domestic social and economic objectives.

To inform decision-makers in this vital area, ARCADIS has issued its second Global Infrastructure Investment Index (GIII), which highlights the most dynamic and promising markets for infrastructure investment worldwide by ranking 41 countries in terms of their attractiveness to investment in infrastructure. The study looked at criteria such as the ease of doing business in each market, tax rates, GDP per capita, government policy, the quality of the existing infrastructure and the availability of debt finance. All of these factors combine to create a relative score to rank each market, with an appropriate consideration of risk, revealing each country?s attractiveness to potential investors. From the highest-ranking countries, we can glean best practices for nurturing private investment, while other countries demonstrate important lessons learned.
Consider these key strategies for the U.S. economic playbook.

ARCADIS Global Infrastructure Investment Index rankings for 2014,showing the top 20 of the 41 countries ranked.Arcadis Global Infrastructure Investment Index Key Findings

The most attractive markets for investment in infrastructure combine strong growth potential and high levels of investment with low-risk, business-friendly environments. The report shows how different countries leverage their asset base, including physical, natural, financial and human assets.


Singapore is the most attractive, but better investment opportunities may lie elsewhere. Singapore?s integrated strategic plan linking infrastructure planning with business and social requirements helped it retain top position. However, with a government that self-finances most major projects, investment opportunities for (external) private investors can be limited, so other countries with major investment plans such as the United Arab Emirates, alongside emerging Asian markets such as the Philippines, Indonesia and Thailand may provide more actionable opportunity, albeit at a somewhat greater risk premium.

Asia and the Middle East

Asia and the Middle East can leverage well-articulated strategies. A key differential we have seen in some Asian and Middle Eastern markets is that these countries have a clear, integrated strategy tying their infrastructure development plans to business and economic objectives. This can provide the long-term clarity investors require.

United States and United Kingdom

The United States and the United Kingdom entered the top 10 of the rankings for the first time, thanks to improvements in their economies, as well as the growing need for investment in infrastructure. However, the United States in particular must continue to work hard to attract private investment funds when competing against countries that provide more clarity over government infrastructure policy and are able to act on their promises to deliver major projects.

Continental Europe

Continental European countries are struggling to attract finance. Most European markets are becoming relatively less attractive because of their maturity, as implied by low macroeconomic growth profiles and limited investment potential. Low-risk markets like Sweden and Norway remain stable at fifth and sixth place. Both have highly efficient business environments with transparency in regulation and efficient legal systems. Continental European countries such as Holland, France and Italy are somewhat lacking the public finance needed to upgrade their infrastructure and have slipped down the rankings due to ongoing economic challenges.

Latin America

Latin American countries vary in attractiveness. Chile is the highest placed Latin American country at 13th position, but its potential is limited by its size. Mexico has seen its attractiveness increase thanks to efforts to stabilize the political structure and the creation of new investment opportunities, and Colombia has seen Foreign Direct Investment increase as its economy has expanded. Brazil is placed closer to the bottom, outside the top 20 in 32nd place, indicating that stalled infrastructure programs and their difficulties can prove risky for investors.

United States: Stable Economy, High Demand and Financial Movement

Climbing three places from its 11th position in 2012, the United States has made it into the top 10 for the first time. Underlying this improved performance is a huge and growing unmet need to rebuild or maintain aging infrastructure like public transportation, roads and water systems. The American Society of Civil Engineers (ASCE) estimates the cost to rehabilitate assets at $3.6 trillion by 2020. This is a 64 percent increase on the previous estimate of $2.2 trillion made in the same report by the ASCE in 2009. The U.S. infrastructure investment forecast of $2 trillion during the same period points to a significant shortfall against the need, not to mention the fact that this figure also represent a currently unbridgeable gap in funding, whether public or private. In addition, planners are rethinking how to make cities and communities more resilient to flooding, drought and other challenges, increasing demand over and above the usual replacement and O&M needs.
To meet this demand, the return of financial stability to the markets and low interest rates have led to a steadily increasing call on traditional funding sources, such as tax-exempt municipal debt. Cities have been able to raise bond finance, which is particularly attractive for new build infrastructure, rather than asset maintenance. Further progress has come from a more stable economic environment in the United States for the last couple of years, making the market more attractive than it was just 18 months ago. However, debt-service coverage ratio limits for public entities, as well as the general indebtedness of the United States, indicate that cheap credit is not a bottomless well ? the model is likely to be unsustainable in the long-run and therefore warrants re-examination.

The U.S. government has recently increased its commitment to investment in America?s infrastructure. The Water Resources Reform and Development Act (WRRDA) enacted in June 2014 will provide $12.3 billion for harbour maintenance, levee construction, inland waterway improvement and ecosystem restoration projects. This landmark legislation also includes provisions to increase the use of public-private-partnerships and other innovative financing mechanisms to fund critical water infrastructure projects.?

The transportation market is leading the way in funding and the creation of public-private partnerships (PPPs). Congress approved $10.8 billion in additional funding for America?s highway and transit programs, a measure to keep the nation?s highway and transit programs solvent while Congress works to develop a long-term funding strategy. The U.S. Department of Transportation has also demonstrated strong support for increased infrastructure investment, starting with the Secretary of Transportation?s announcement of $600 million in grants for 72 high-priority transportation infrastructure projects in 46 states. The Department of Transportation has provided over $4.1 billion in Transportation Investment Generating Economic Recovery (TIGER) Grants since 2009 and is working closely with Congress to develop new funding and financing tools for America?s transportation infrastructure. Now, water utilities have joined the chorus calling for more public investment to save critical infrastructure ? notably supporting passage of the year-one $40 million pilot ($20 million each for EPA and U.S. Army Corps of Engineers) for the Water Infrastructure Finance and Innovation Act (WIFIA).

While it is positive that the United States has become more attractive to infrastructure investors over the last two years, policy and regulatory conditions remain barriers to private investment. To meet the demand yet compensate for continued underfunding from municipal, state and federal sources, the United States needs to find new ways to work with both the public sector and investors, building the needed business cases. The country risks experiencing a stasis in infrastructure investment and economic growth if it cannot demonstrate reasons for investor confidence.

Concluding Thoughts

For funds with global mandates, emerging markets seem to be winning the race to attract a higher distribution of funds to projects. A key differential we have seen in markets outside the United States is that countries that trend near the top of the ARCADIS ranking offer clear, integrated strategies and tie their infrastructure development plans to business and economic objectives. This gives long-term clarity to investors and is something the United States would do well to emulate. Like it or not, given the global nature of capital flows, the United States is competing internationally for this investment and needs to act accordingly to succeed.

Even though 33 states in the United States have varying degrees of enabling legislation for private participation in infrastructure development, the competitive reality calls for more fundamental changes, starting with clear strategies that address the needs of private investors. Investors, such as infrastructure and pension funds, have been extremely successful at raising considerable equity, which they are keen to deploy towards the development of well-structured public-private partnership projects. However, to tap into this demand and to make even a modest dent in the huge need for infrastructure improvements, the public sector needs to package projects more attractively and at a rapid pace. If the United States is unable to effectively tap into this opportunity, it risks reducing its appeal to investment and possibly losing its global competitiveness.

Manju Chandrasekhar is a vice president and Financial Institutions Sector leader for the Americas at ARCADIS in New York.

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