Europe risks missing out on USD1trn of funds that global institutions have available to invest in European infrastructure over the next decade, as a weak pipeline of assets and regulatory uncertainty put the region’s nascent economic recovery at risk, according to research commissioned by Linklaters.
The law firm found that the UK could grab as much as a fifth – equal to USD200bn – of this wall of money, which, if fully invested, is forecast to drive a 1.9 per cent improvement in the level of annual UK GDP growth between 2014 and 2023.
The slower growing European Union could see a 1.4 per cent improvement in GDP per annum over the same period from the significant boost to economic growth that investment in infrastructure assets can deliver.
Linklaters found that this mountain of cash is being fuelled by global investors from Canada, China and Hong Kong, the Gulf Co-operation Council countries, Japan and South Korea, which increased their investment in European infrastructure assets by 465 per cent between 2010 and 2013, compared with the previous four years.
Ian Andrews, infrastructure sector co-leader at Linklaters, says the USD1trn of private sector finance available was a call to action.
“Governments have an excellent opportunity to secure private finance for national infrastructure projects by boosting the pipeline of projects available and to encourage investment by creating a hospitable regulatory environment. This will be crucial to assist Europe’s infrastructure revival,” he says.
He adds that with a limited number of assets available and inflated prices in the more economically stable countries of northern Europe, investors are being pushed to stretch their risk appetite and consider assets in the markets of southern, central and eastern Europe.
A private investment injection of USD1trn, phased in at USD100bn a year over a ten year period, could have a substantial impact on EU GDP. Infrastructure investment has significant multiplier effects on national economies, expanding their productive potential, benefiting supplier industries such as construction and raw materials and boosting job creation, which in turn boosts consumer spending and tax revenues.
Economic analysis conducted by Oxford Analytica on behalf of Linklaters found that the potential cumulative GDP impact of the additional spending in European economies could reach USD3.1trn by 2023 – more than a three-fold increase on the total outlay on infrastructure assets of USD1trn.
The UK’s emergence from recession, perceived stable regulatory environment and its appetite for private investment into large scale projects could enable the UK to grab as much as a fifth of the USD1trn available for European infrastructure investment. If this capital is fully invested, the UK economy is predicted to see a 1.9 per cent improvement in the level of annual GDP over the next decade, according to the Linklaters research.
To put these GDP figures into perspective, the UK economy actually grew by 1.9 per cent in 2013 and is forecast to expand by 2.4 per cent this year. If additional investment is successful, this could boost growth into the 3.0 to 3.5 per cent range for both 2014 and 2015.
Andrews believes the UK infrastructure market can still provide attractive opportunities for private investors looking for big projects yielding long-term, steady returns. He warns, however, that decisions about future pricing regulation could have a significant impact on the UK’s ability to secure private investment. Investors are wary of regulatory environments that are perceived to be hostile or unstable.
Iain Wagstaff, infrastructure sector co-leader at Linklaters, says the firm has seen a marked increase in investment in infrastructure from sovereign wealth and pension funds.
“As the Eurozone becomes more stable, these investment flows are expected to grow. But this is dependent on the availability of sufficient high quality assets and projects, as well as continued regulatory and economic stability,” he says.
