In 2018, the G20 Argentinian Presidency identified the lack of adequate data on the financial performance of infrastructure investments (the majority of which is unlisted) as an important hurdle for the development of a full-fledged infrastructure asset class. In response, the G20 Roadmap to Infrastructure as an Asset Class was developed to address common barriers to the emergence of infrastructure as an asset class, including the heterogeneous nature of infrastructure assets, the lack of a critical mass of bankable projects, and insufficient data to track asset performance.
The inadequate understanding and benchmarking of infrastructure investments was identified as a major impediment to channeling long-term savings into investments that could support future economic growth, the transition to a low-carbon economy, as well as the billions-to-trillions agenda of development finance institutions. Recent advances in the area of benchmarking infrastructure investments aim to close this gap, and will have profound implications for public policy both from the point of view of the prudential regulation of investments and of the economic regulation and procurement of infrastructure.
A new era of transparency and clarity for the infrastructure asset class
Since 2018, advances in data science and technology have generated online platforms that create robust and relevant data estimates for infrastructure as an asset class. Having data that captures more robust estimates of asset prices means a better understanding of risks and how the infrastructure asset class relates to other investments like stocks and bonds. At the same time, different infrastructure definitions are being used to build this data. For instance, the Infrastructure Company Classification Standard was created by EDHECinfra to provide investors with a frame of reference to approach the infrastructure asset class.
Implications for prudential regulators: creating breathing room for infrastructure allocations
The inclusion of illiquid assets like infrastructure equity or debt into prudential frameworks like the European insurers regulation and banking regulation has long been hampered by the lack of data. Without robust data, regulators have been cautious and assumed that infrastructure investments are risky, keeping capital charges for insurers or banks relatively high. Some prudential authorities have also expressed concern about the impact of COVID-19 on investments in transport infrastructure and launched inquiries to determine the extent of potential losses by pension plans.
Better data implies that risks can be better measured. The Global Infrastructure Hub’s (GI Hub) Infrastructure Monitor finds that infrastructure debt exhibits elevated risk during the construction period, but after yields tend to be predictable and stable, while corporate exposures typically have similar risk levels regardless of time duration. Furthermore, Monitor found that infrastructure debt recovery rates are significantly higher than that of corporate debt. Loss given default rates range from about 15% to 22% for infrastructure debt, in contrast with 40% to 50% for corporate debt. These findings were also confirmed through recent GI Hub interviews with key private investors to address barriers on the path to infrastructure as an asset class.
Recent findings suggest that a more favorable treatment for unlisted infrastructure can be envisaged by regulators since broad indices show consistently low levels of risk compared to other asset classes.
Likewise, the risk-based regulation of banks and creditors of infrastructure companies can benefit from a more precise measurement of the credit risk. A broad market index of private infrastructure debt representing USD250bn of market value also exhibits low risk.
Using the same data in a new study of strategic asset allocation, we find that investors could benefit from including as much as 10% of unlisted infrastructure equity or debt in their portfolio. But for this to happen, the prudential treatment of infrastructure needs to evolve to incorporate the latest data.
Implications for economic regulators and public procurement
Another important implication of better data is the improved ability of economic regulators and procurement authority to understand and update their view of the cost of capital of investors in privately-owned infrastructure. A recent study commissioned by the GI Hub finds that capital charges could be reduced by 60% to 70% for banks and insurers if historical infrastructure credit performance was applied to calibration approaches commonly used by regulators. This is true both for high-income country and middle-low-income country infrastructure loans.
In numerous countries, the regulation of network utilities including airports, roads, and other types of infrastructure requires estimating their cost of capital to set tariffs or tolls. These estimates determine both the profitability and the social impact of private infrastructure companies, as they trade-off setting a fair return on capital and the welfare of end-users, especially households.
In numerous cases, the cost of capital of infrastructure firms is set by negotiation or using listed proxies which, over the years, have proven increasingly inadequate as fewer and fewer comparable listed infrastructure companies can be found. Instead, robust and up-to-date measures of the cost of capital of private infrastructure companies provides a basis for transparent and fair discussions on the level of reward to be expected in such investments, while maximising social impact, which can also be an environmental, social, and governance objective for investors.
Likewise, the procurement of new projects, even using a competitive tender, would benefit from a clear understanding of the expected returns of the market for a given type of infrastructure investment at a particular point in time and space. This estimate is now available to policy makers who can use granular data to predict the future cost of new infrastructure given the market price of risk.
More applications of improved access to data will emerge as the infrastructure asset class becomes better documented and regulators and governments begin to integrate this information into their decision-making process.