Climate Change Reshapes Infrastructure Investing Frontier

By Henry Teitelbaum
Editor, P3 Planet

Unless you’ve been living under a rock, you may have noticed that  climate change investing is finally starting to get the widespread attention it deserves.

In this regard, December’s COP 21 Paris Climate Change Conference was the watershed moment we’d been waiting for. The signed document that came out of that particular event legally binds all countries to work towards limiting the rise in average global temperature to less than 2% from pre-industrial levels. In terms of adaptation effort, it also brings clarity to how the government and business need to proceed with their investments in the physical infrastructure.

“COP 21 was a clear signal to business that any investment in infrastructure has to be low carbon,” Laetitia De Marez, senior climate policy analyst at Climate Analytics Inc. in New York tells P3 Planet. She says the international agreement to limit CO2 in the atmosphere means that governments can no longer commit public funds or, for that matter facilitate private sector funding for carbon-intensive projects. Beyond funding issues, she believes there is a growing risk that these investments will create “stranded assets” as economies shift towards renewables.

Stranded assets are investments, such as those in fossil fuels, technologies or related businesses, that suffer premature write-downs or conversion to liabilities. This reduction in their value becomes more likely as regulatory, tax and other indirect costs penalize the burning of carbon.

Climate Change Tops Risk Survey

The speed with which climate change has moved to the top of the global agenda is evident in January’s World Economic Forum 2016 Global Risks Report http://www3.weforum.org/docs/Media/GRR16_ExecutiveSummary_ENG.pdf. The 11th edition of the report found that the possible failure of climate change mitigation efforts is for the first time the top concern among survey respondents. What’s more, concerns about cascading risks related to climate change, including water crises and large scale involuntary migration are now in the top five concerns in terms of potential impact.

There is also a growing recognition of the investment opportunities in delivering the physical infrastructure that addresses climate change risks. Business leaders understand that green infrastructure, whether for public transportation, renewable energy or climate adaptation projects such as flood barriers, sea-walls and coastline conservation, is a good investment in and of itself. Not only do these  investments help to safeguard human and natural habitat, they are capable of generating  stable  long-term returns.

Mobilizing the private sector is important for two reasons. One is that we live in an age of fiscal austerity and constrained public budgets. This means that achieving any of the targets set by the United Nations Framework Convention on Climate Change (UNFCCC) will require private sector funding, particularly in underdeveloped countries. The other is that many investments in public infrastructure generate economic growth in both the short and long-term that more than justifies the initial expense.(http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/)

PPP Model Draws New Interest

One UNFCCC-supported approach to tapping into the financial resources, efficiencies and technologies that the private sector brings to efforts to tame global warming is through the Public Private Partnership model.

PPPs are partnerships between public institutions or non-governmental organizations (NGOs) and private sector developers, who in addition to providing expertise bring their own financing to the table. In the context of climate change mitigation efforts, they have been already been successfully used to support forest and coastal wetlands conservation efforts, among others. Looking ahead to the growing challenge that global warming poses to existing economic and social infrastructure, their use is becoming even more important as the rising cost of adaptation places a greater burden on public finances in both developed and developing economies.

The growing interest in attracting private sector investment to climate change mitigation also comes at a time when there is strong structural investment demand for the assets that are created.

Rising Demand, Constrained Supply

Institutional investors in the developed world, particularly those with very long investment horizons such as public pension funds, are finding it challenging to meet their liabilities as more and more baby boomers reach retirement age. More than a decade of low interest rates has meant that many of these funds can no longer expect government bonds to provide the yield they are committed to paying out to pension recipients. As a result, trillions of long-term investment dollars are searching far and wide for high-quality cash-generating investments backed by physical assets with sufficient yield to cover their liabilities. And this increasingly points them towards investments in green infrastructure projects.

There is much work to do. Years of under-investment and neglect of physical infrastructure in developed and developing economies alike have left many countries with huge infrastructure deficits. McKinsey & Co. has estimated the global infrastructure deficit for the period from 2013 to 2030 at around $57 trillion. http://www.mckinsey.com/insights/financial_services/money_isnt_everything_but_we_need_$57_trillion_for_infrastructure

Governments, typically burdened with shorter-term political priorities, have consistently failed to make the necessary long-term investments that would put a dent on this deficit. Many have also been unwilling or unable to incentivize private sector investment by extending credit guarantees, and some do not even have the legal and regulatory structures in place. A further complication is that some of the private sector banks that used to play leading roles in arranging project financing have withdrawn from the sector since the financial crisis.

Institutions Becoming Early Stage Investors

One important development has been for pension funds, private equity firms and other long-term investors to take on leading roles in the financing of PPP projects themselves. In more and more cases, this means leaving their comfort zone and find new ways to manage the risks involved in early stage investment.

Public sector authorities around the world can do much to encourage this trend at minimal cost. Among the several ways they can help to incentivize private sector investment in climate resilient infrastructure would be to adopt PPP enabling legislation. Beyond this, governments should  provide credit guarantees to enhance the credit quality of debt funding for specific projects, remove structural impediments to infrastructure development, and promote best practice by establishing local centers of excellence.

A multilateral facility whose advancement would also support these efforts is the UNFCCC’s Green Climate Fund. This fund is designed to encourage programs and policies to support thematic investments in climate change mitigation, such as in climate resilient infrastructure for developing countries. It currently has more than $10 billion of funding in place and a goal of raising $100 billion by 2020. But the fund, which was established more than five years ago, is beset by disagreement over board transparency, country ownership and the role private enterprise should play in financing solutions. Developing countries want fund resources to focus on financing locally sourced solutions that support small- and medium-sized businesses. But developed countries are pushing for a Private Sector Facility that focuses on tapping into the huge capital resources available from institutional investors.

Explosive Growth Of Green Bonds

Other facilities for attracting private investment to climate change mitigation projects are faring better. Early progress from multilateral and national development banks in developing a global market for Green Bonds has led to explosive growth in the past three years. New issuance topped $41.8 billion in 2015, and is expected to rise to $100 billion in 2016, according to the Climate Bonds Initiative. https://www.climatebonds.net/

Governments and public sector authorities at every level can help to deepen the liquidity of this market further by issuing their own green bonds. But they should also consider offering credit enhancements such as guarantees to improve the risk profiles of important projects. Tax incentives are another tool that could be used to attract long-term investors. http://www.climatebonds.net/files/files/10%20point%20policy%20guide.pdf

What the world’s climate cannot afford is a drawn out debate over modalities. Global warming is a reality that cannot wait for consensus. We need to act now.

If you’d like to support P3 Planet’s mission to promote sustainable public infrastructure, please contact Henry at hthq@hotmail.com.

Europe’s Corporates Raise Dividends, But Fail to Invest

By Henry Teitelbaum, Editor, P3 Planet.com

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, P3Planet.com

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

SouthChinaSea

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 Planet.com

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 Planet.com

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

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