Can G20’s Global Infrastructure Initiative Be a Circuit Breaker?

With the end of the northern summer it is global conference season. Last week the G20 Finance Ministers met in Brisbane, this week the UN Climate Summit was held in NYC and the PRI Annual Conference in Montreal. In the name of global dialogue many frequent flyer points have been earned. But as one delegate to a recent APEC conference stated ‘we have great conversations, and then I get back to my desk and am overwhelmed with the day to day work flow.’

In a modern world international dialogue is critical. How to make it effective is the question.

Out of all the discussions that have occurred in the last week, it is great to see a practical, Australian idea.

Coming out of the G20 Finance Ministers meeting in Cairns is a commitment to establish a Global Infrastructure Initiative.

According to the G20’s communiqué:

Investment is critical to boosting demand and lifting growth. Today we have agreed to a Global Infrastructure Initiative to increase quality investment, particularly in infrastructure. The Initiative will seek to implement the multi-year infrastructure agenda, including through developing a knowledge sharing platform, addressing data gaps and developing a consolidated database of infrastructure projects, connected to national databases, to help match potential investors with projects. The Initiative will also include key measures in our growth strategies to improve investment climates, which are central to our efforts to attract private sector participation. In implementing our growth strategies, we will seek to support quality public and private investment, including by optimising the use of the public balance sheet while maintaining appropriate risk controls.”

The G20 advises that the ‘implementation mechanism’ will be announced at the Leaders meeting in November. The words ‘implementation mechanism’ are unfortunately couched in diplomatic language. An Australian translation would go something like this: ‘we will tell you later how we are actually going to do all this stuff.’

The easiest thing is to come up with a communiqué. The hardest part is to implement it.

What we are likely to see is some form of infrastructure hub. How this will work will depend on the negotiation that occurs between now and November, but it can be expected that given Australia’s hosting of the G20 that the hub will have some anchoring in Australia.

There is a strong need for an infrastructure hub. It has the capacity to become a circuit breaker to link investors to projects.

The problem that we have at the moment is not a shortage of projects, or a shortage of capital. But the projects that are coming to market are mature assets – and there are only so many of these that will come onto the market in coming years. In the Australian context we will see privatisation of energy and port assets. There is significant global interest in these investments and we can expect on the basis of past details that they will attract a premium.

The so called ‘recycling of capital model’ which has been advocated by the Australian Government, after leadership from NSW Government provides an effective mechanism to communicate to the community that the selling of an asset provides the ability to invest in new infrastructure.

Whilst the Recycling of Capital Model is needed there is a limit to its application simply because there is a limit on how much can be sold. Australian Governments are well ahead of their European peers in privatising assets. With the next round of privatisations there will be no much left to sell.

We know that a lot of infrastructure investment managers are sitting on dry powder looking for infrastructure deals. We also know that more money is being allocated to infrastructure all the time. We are seeking European insurers and pension funds looking for yield looking to infrastructure as an alternative to sovereign and corporate debt.

The problem that we have is that investors are interested in the same kinds of assets. Mature, cash flow generating assets in stable economies are sought after. Despite the availability of capital there are many projects that struggle to attract investment. Greenfield construction, particularly where there are uncertain patronage forecasts, is one area where investors are cautious. Another is any infrastructure in developing economies.

The G20’s Global Infrastructure Initiative has the capacity to play a critical role in bringing together all the different partners that have an interest in building a long term pipeline of infrastructure investment. In particular it has the capacity to provide a mechanism to address areas where capital is not flowing. In a week of global discussions it is great to see a practical idea coming out of the G20. An infrastructure hub is a great idea, but to make it work will require that investors are a central part of its operations.

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