Financing Infrastructure

Today’s Irish Times reports that the IMF had warned that NAMA would not significantly increase lending (separate thread). Increased lending is something businesses are looking for, but with public budgets being squeezed one area of investment that will also need to attract significant non-public funds is infrastructure.

A story by Louise McBride in the Sunday Independent argues that “Greece and Spain’s financial woes are making it tougher than ever for Governments to raise cash for vital state projects”. She argues that the €70 bn held by Irish pension funds is being targeted by Brian Lenihan.

While the key issue here is the level of government debt rather than the ability to raise cash, the article makes an important point that is being discussed in many countries – how do we fund our infrastructure in the current fiscally constrained environment?

Given that infrastructure is typically a fairly safe investment that can yield a certain inflation indexed return, pension funds should find it useful to invest in infrastructure. A range of possible projects is presented in an accompanying article, including Metro-North, Western Rail Corridor, Landsdowne Road and National Parks.

What the article does not properly consider is that of the €70bn only a fraction should be invested in infrastructure given the need to hold a balanced portfolio. The other point is that it is not obvious why Irish pension funds should necessarily invest in Irish infrastructure or indeed why we should not expect foreign pension funds to invest here.

The key issue in attracting private funding into projects is a revenue stream. Without a relatively certain income private funding will not materialise. That would seem to rule out national parks unless anyone is proposing to charge an entrance fee and the construction of very long fences. A certain and sufficiently large income or rather the likely absence of one would rule out private finance for the Western Rail Corridor. In other words the projects need to stack up as a business proposition, and those that are driven more by political or redistributive goals will have to be ditched (in the absence of other funding). Thus, private funding should have a significant positive impact in that there will be less ‘gold-plating’ and only likely winners will be get funded.

The issue of private finance for public infrastructure and services should also ignite a debate about what services should be provided publicly in the first place. Should public transport and water be provided publicly or could they be privatised? As was highlighted recently our water supply infrastructure (primarily the pipes) is in serious need of investment, which may not be forthcoming from public funds, yet to get private sector involvement the sector will need to consolidate significantly.