Category Archives: Blog

Europe’s Corporates Raise Dividends, But Fail to Invest

By Henry Teitelbaum, Editor, P3

Those oversized dividend payouts that shareholders are getting from Europe’s big, listed companies disguise the sombre reality that corporate Europe just isn’t investing.

The average dividend yield for Stoxx Euro 600 stocks was 2.9% for the year up to Nov. 28. Not only is that far higher than the equivalent 1.85% average payout for US companies included in the S&P 500 index, (as of Dec. 5), it’s the highest since the euro was introduced.

Naturally, this is great news if you’re a short-term investor trolling for good returns at a time when benchmark Euro government bonds are yielding less than half that amount. Continue reading Europe’s Corporates Raise Dividends, But Fail to Invest

GOP Should Put Infrastructure Back On US Agenda

By Henry Teitelbaum, Editor, P3 Planet

Over the past six years, Republicans have become very adept at blocking US President Barack Obama from achieving anything in Washington, often through tactics that could have done lasting damage to the nation’s credit standing in the world.

Now that the Republicans have control over both houses of Congress, it’s time for them to grow up. The 114th Congress  brings with it just about enough time before the  2016 Presidential election campaign for the Republicans to craft a meaningful federal agenda that will prove it is more than just the party that says “no”.

While there is already talk of working together on a tax reform or immigration agenda over the next six months, it’s hard to imagine a breakthrough on issues of such long-standing disagreement between the two parties.

Continue reading GOP Should Put Infrastructure Back On US Agenda

US Assails China’s Infrastructure Bank Plan Amid Muddled Policy At Home

by Henry Teitelbaum, Editor,

In war, the way is to avoid what is strong, and strike at what is weak. Sun Tzu, The Art of War


US opposition to China’s plan for a new pan-Asian infrastructure bank might some day be a case study for explaining why US efforts to contain China’s reach for regional power and influence failed.

The US and China have been locked in conflict on a range of issues for years. On the trade side, long-standing disputes simmer over access to markets, competition for resources, tariffs and the like. There is also conflict bordering on convert war over copyright theft and cyber-espionage, and in most instances the US is not winning. Continue reading US Assails China’s Infrastructure Bank Plan Amid Muddled Policy At Home

Mexico’s Infrastructure Plan Makes Compelling Case For Foreign Investment

by Henry Teitelbaum, Editor, P3 Planet

It probably comes as no surprise to investors that great diversity exists among the countries that make up the world’s emerging markets. Yet, when a financial crisis strikes them, it’s often because the foreign portfolio managers that run giant global investment funds indiscriminately dump their holdings of emerging market debt and equity at more or less the same time.

This behavior has often been triggered by country-specific credit issues or by changes in interest rate expectations in the US or elsewhere. But the impact on many of these countries is both immediate and far-reaching, often dramatically raising the cost of financing for governments and businesses in those countries that rely on foreign borrowings to service their debt. Typically, this leads to liquidity shortages as buyers disappear, steep losses for investors, bank runs, government and private sector defaults, and catastrophic job losses.

It doesn’t end there either. The contagion that follows reaches across borders to engulf whole economic regions. Of course, this domino effect is rarely justified by the underlying economic reality, and many western institutional investors have become adept at exploiting such short-term selloffs to pick up stocks for their portfolios on the cheap or to lock-in high yields on bonds that have been beaten down by panic selling.

Correlations In Emerging Markets Declining

Lately, this pattern has started to break down. Individual country performances seem to be reflecting a more diverse range of economic and business conditions across emerging markets better than they have in the last 20 years, and investors appear to be standing by their convictions. This is a good thing, and the surest evidence yet that emerging markets have grown up in a very short period of time. Emerging markets have not only grown dramatically just in the past five years, they now offer more ways to diversify risk across credit and equity markets.

Naturally, investors will look at broader macro-economic factors affecting individual economies such as external debt, current account, domestic deposits and foreign currency reserves. But they are also looking more closely at the policy priorities within individual countries that affect long-term stability, including progress in political and economic reform, and at the choices governments make when investing for the long-term prosperity of their people.

The selloff in January 2014 was a case in point. Emerging market countries where reforms have been implemented, where governments have limited their borrowing and where domestic savings are growing, proved resilient to the selloff. Many of these mostly Asian and Southeast Asian markets have more than recovered the steep losses that followed the change in dollar interest rate expectations.

Investors are also drawing distinctions among emerging market countries based on major programs and policy initiatives. One good example of how this is playing out can be found in Mexico. The country, which has historically been a target for foreign investment due to its oil and gas resources and proximity to the US, has lately been garnering attention for its open, progressive and highly credible approach to developing public infrastructure.

Making Mexico Investment-Friendly

And it should be. Mexico’s 2014-2018 national infrastructure plan outlined earlier this year by President Enrique Peña Nieto is an excellent example of how to structure a large-scale investment program to make it attractive to private investors. Not only  has the government incentivized domestic institutions such as pension funds to invest in early stage Public-Private Partnership projects, it has created the structures that will ensure that financing is available to get them off the ground.

The plan is nothing if not ambitious, envisioning some 7.75 trillion pesos ($590 billion) in public and private investment in infrastructure. There are 743 projects outlined for investment, and these focus heavily on energy, communications and transport. But the plan also includes new projects in housing and urban development, health and tourism.

To support investment, Mexico’s government-run infrastructure bank and fund trustee, Banobras (Banco Nacional de Obras y Servicios Publicos) has been given the capacity and the legal and structural mechanisms to make public private partnerships (PPP) “bankable” for a broad range of long-term investors, including foreign institutions.

What that means is that Banobras and Fonadin, the infrastructure trust fund that it runs, may help to catalyze private investment in infrastructure investment by taking the financial risks that private investors are unwilling to take. This is especially important in the early stages of construction, when risks are at their highest. They are also willing to provide long-term financing for projects, including PPPs that have low yields but high social impact.

Mexico, which has the world’s 14th largest economy, could really benefit from the investment, as its infrastructure places it only 64th of 148 countries in the World Economic Forum’s global competitiveness index. This was recognized as a key driver in the government’s decision to dramatically boost infrastructure investment. It also provides any and all potential investors with clarity on the value that the government places on the success of these projects.

A Helping Hand For The Poor 

Mexico’s government has gone further than most in trying to ensure that the investment capital is channeled to infrastructure development in parts of the country where it can make a big difference. Finance Minister Luis Videgaray indicated early this year that the plan places special emphasis on Mexico’s poorest states in the south and southeastern regions of the country.

By targeting these regions for infrastructure investment, there’s a good chance the investment will do “double duty”, and have an outsized impact on the economy of these regions. That’s because in addition to creating public assets that boost local productivity and competitiveness over the long-term, the investment will bring a near-term boost to regional economies through the jobs it creates.  Taken as a whole,  the program amounts to a powerful instrument for  addressing income inequality and increasing social stability throughout the country.

Foreign investors seem to have taken notice. The country’s equity market has been a strong performer in 2014, and currently stands out for both its emerging market-leading forward price/earnings ratio, and for its performance in relation to historical averages.

Could Mexico’s model for infrastructure development also be giving the country a leg up on the other emerging market countries with which it competes for  stable, long-term foreign investment?

I wouldn’t want to generalize about individual investment decisions. But for any investor comparing long-term prospects in emerging markets around the world, Mexico’s PPP-driven infrastructure push sure seems to tick a lot of boxes.

full disclosure: the author holds listed shares in the iShares MSCI Mexico Capped ETF

This article has also been published in The Conde Report on U.S.-Mexico Relations


European infrastructure investment still stuck in neutral

By Henry Teitelbaum, Editor, P3

One would have thought that improving capital market conditions in Europe along with new  project finance models and multilateral facilities would quickly unlock  private investment in capital projects.

But that hope, like so much else in Europe, seems forlorn. Five years after the crisis began, even modest public spending to spur job creation and recovery in the region is being trumped by pressure to cut budget deficits and implement structural reform. This leaves virtually no scope to invest without decimating the benefits of the unemployed and inviting explosive social unrest.

It is a fatal policy error that is unnecessarily prolonging the economic slump and the time it will take to put government finances on a sustainable path. Continue reading European infrastructure investment still stuck in neutral

Obama should strive to make infrastructure his second term legacy

By Henry Teitelbaum, Editor, P3

With the election and fiscal cliff behind him, and Republicans showing  flexibility over raising the debt ceiling, President Obama may want to consider what else he can reasonably expect to accomplish in his second term.

Second terms are rarely successful in the US, either because of over-ambitious agendas, scandals and other political distractions, or as in the current case, a sharply divided Congress.

The president will need to choose his battles carefully, being sure not to squander political capital pursuing reforms that would face certain failure. Given the current state of politics and the sorry state of the federal government’s finances, this all but excludes partisan issues such as tax reform, climate change, or immigration reform.

But there is reason to be optimistic that a second term agenda prioritising the rebuilding of America’s physical infrastructure through well-designed public-private partnerships could attract the bi-partisan support needed to mobilise the nation. Continue reading Obama should strive to make infrastructure his second term legacy

Lack of infrastructure investment planning dims UK growth outlook

By Henry Teitelbaum

It would be unfair to place all of the blame for the collapsed state of investment in the UK’s economic infrastructure with the Tory-Lib-Dem coalition.

But then, we are now five years into the worst financial crisis in 80 years, three years into George Osborne’s public sector austerity program, and the UK is now mired in an entirely predictable second recession. So one could be forgiven for posing a few awkward questions of a Chancellor who appears far too hesitant to put a growth and investment plan in place and is instead pursuing an agenda that will surely make matters worse.

Here are a few of mine: Why has it taken so long to establish the government guarantees that were going to trigger private sector investment to the tune of £170 billion by 2015?  How soon will it be before these guarantees actually unlock the additional investment of £20 billion from pension funds that is sought to support the National Infrastructure Plan? And where are the promised funding models that will reduce the country’s reliance on banks for long-term infrastructure investment while delivering better value for money?

The crisis on the ground demands a response after the government reported a 20%-plus year-on-year decline in infrastructure spending in the first half. This came alongside a revised 0.5% contraction in second quarter GDP. We’ve  now seen nine consecutive months of economic contraction.

Admittedly, the future for infrastructure investment was bleak even before the government decided to make deficit cutting its priority. The pipeline of large new projects had been running dry well before the current coalition came into power. Now the Olympics are over, and the banks most associated with funding PFI and other infrastructure projects are themselves on taxpayer funded life-support. Meanwhile, the mono-line insurance industry that previously provided the credit enhancement needed to make large infrastructure projects investable is also out of the game.

But it has also been clear for some time that the current City-driven idea of relying on private sector enterprise to substitute for public investment without the government playing an major enabling role was not going to work.

Continue reading Lack of infrastructure investment planning dims UK growth outlook

Tsunami Disaster Should Put PFI At Top of Japan’s Rebuilding Agenda

By Henry Teitelbaum, Editor,

As the focus of relief efforts turns from rescue to reconstruction in northeastern Honshu, attention is also starting to turn towards how Japan plans to pay for rebuilding the region’s shattered public infrastructure.

Unfortunately, the backdrop isn’t promising. Japan’s government, which will have overwhelming responsibility for covering insured losses from the disaster, is in no financial position to shoulder these costs.

Japan’s government debt, at over 225% of GDP at the end of 2010, was already the world’s highest before the earthquake, tsunami and nuclear disaster hit one month ago. While that debt is 90% owned domestically and financed by Japan’s high savings rate, it will constrain what the government is able to spend on reconstruction.

It seems inevitable, given the circumstances, that an unprecedented level of sustained long-term private sector financial support will also be needed. Continue reading Tsunami Disaster Should Put PFI At Top of Japan’s Rebuilding Agenda

US Infrastructure Redevelopment Won’t Be Derailed By Midterm Vote

By Henry Teitelbaum, editor of

As the dust settles from the US mid-term elections, it is clear that the Democrats’ jobs and growth agenda will struggle against a newly empowered Republican House majority.

 But even if further stimulus spending is off the table for the time being as the focus turns to deficit reduction, Democrats and Republicans may yet find common ground in supporting infrastructure public-private partnerships (PPP), particularly where a minimum of public capital can be used to leverage huge amounts of long-term private investment.

Indeed, if there is any basis for building a spirit of bipartisanship in Congress and in state legislatures, it should be around precisely these efforts to catalyze private investment in public assets. The reasons are compelling. Firstly, there are powerful grassroots constituencies in both parties and in business that support private investment in public infrastructure. Secondly, investors are cash-rich and need to invest in long-term assets, meaning they can either invest to redevelop America’s infrastructure, creating jobs and economic growth domestically, or they can go elsewhere. Finally, if it needed mentioning, there is financing for projects that can be secured at rates that have never been this low at a time when the need has never  been so great.

There is an estimated $2.2 trillion infrastructure deficit in the U.S., and that’s just to restore the nation’s highways, bridges and railroads to an acceptable standard. Roads and bridges are visibly in need of repair in virtually every city and town and on most of the transportation infrastructure that stretches between them. This is the low-hanging fruit for the many newly elected  local leaders to go for because it is relatively simple to execute quickly, creating jobs and tax revenue along the way so that it quickly pays for itself.

There are also large scale new-build projects, such as high-speed rail, energy efficiency and clean energy that the country will need  to compete in a globalized economy.

President Obama has laid out a  program for catalyzing the private investment that is needed to address America’s infrastructure gap through a national infrastructure bank. The bank would be capitalized initially at $60 billion, but would be able to leverage a further $500 billion from the private sector for infrastructure projects over 10 years. 

The idea has been endorsed by financial and industrial leaders alike. Some states are even assembling similar structures to attract private investment for a range of social and economic projects, with California having already established its own infrastructure bank and New York set to follow. The Rebuild NY Bank is a key program for newly elected governor Andrew Cuomo, who aims for it to help coordinate projects and incentivize private investment in public works. It will do this by levering equity investment from the state or Federal government to create a pool of funds to encourage private capital and risk-sharing in the construction of certain large projects.

Infrastructure banks rely on the expectation that a lot of private capital is out there, and they’re right. U.S. corporations are flush with cash after a strong year of earnings and stock performances. Large engineering firms like to invest in PPP for a number of good reasons, with one of the main ones being the long-term stable cash flows from the  operation and maintenance contracts that run for years after a project is built. These cash flows help to smooth the notorious boom and bust cycle of their other businesses.

But there are even more significant pools of capital available from institutional investors. Much of this money, some $190 billion of which is said to be immediately available, needs to be invested in very long-term projects, and until recently has found it hard to do so directly.

Pension funds, life insurers, university endowments, charity trusts and other institutions with long-term liabilities are anxious to support infrastructure because of the structural shortage of investments that reliably generate the annuity-like payouts that they require. The demand for assets such as those produced through PPP projects is particularly acute now because the Federal Reserve is holding interest rates at or near zero, flooding the banking system with cash, and engaging in “quantitative easing”.  Yields  on 10-year government bonds are now barely over 2.5% and 30-year Treasurys are yielding less than 4%, making it very difficult for pension funds and life insurers to support payouts on guaranteed premiums without adding risk to their portfolios.

PPP-related debt is part of the solution because it allows investors to match long-term liabilities – namely the guaranteed payments that pensioners live on – to steady yielding investments that are attractive, safe and very long term. Besides the cash generated from use of the assets once they are built, the large sizes of the undertakings are well suited to the scale that these investors typically need to make.

To some extent, this explains why pension funds that offer defined benefit plans are taking matters into their own hands and not waiting for the banks. Consider the example of the California Public Employees’ Retirement System, (CalPERS), which has adopted a policy that allows for direct investment in the equity and debt of privately funded infrastructure assets. By helping to finance projects from the inception, CalPERS, with its $204.9 billion of investments, and other public and private pension funds can bypass bank management fees and the associated cost of carried interest that would otherwise be payable to fund managers.

Direct pension fund and institutional investment in infrastructure and PPP projects is in fact a global phenomenon, with superannuation funds in Australia long-standing investors in domestic infrastructure projects through funds that they collectively own. In Canada, the Ontario Municipal Employees Retirement System, which manages some C$44 billion of member funds, aims to increase its infrastructure holdings from 31% to 35% of its total and is targeting North American rail systems for investment. And in the U.S., the Dallas Police and Fire Pension System recently partnered with Cintra on the 13-mile North Tarrant Express toll road.

Government leaders in America will need to think long and hard about how to ensure that deficit cutting measures do not also undercut public and private investment planning. There’s competition for this investment not only with other countries, but between states and cities, and capital tends to flow where it is most welcome. Voters will judge their newly elected politicians in terms of the tangible improvements they deliver, whether it’s the jobs they create, the fiscal revenue they generate or the productivity and environmental improvements that businesses and constituents enjoy. That’s food for thought for anyone looking ahead to 2012.