25/03/2020 by Georg Inderst
Social infrastructure – investment opportunity of the future?

The current coronavirus crisis has exposed many weaknesses, one of them being the chronic underinvestment in social infrastructure in most countries – developed and emerging. In fact, after a long period of neglect and decay, investment needs and investment gaps were already huge before this crisis.

The financial crisis 2007/09, austerity policies and other unfavourable regional developments, led to a more or less pronounced dearth of social investment by the public sector, notably in Europe but not only. Private sector finance of social infrastructure, too, has widely fallen back over the last decade – in contrast to economic infrastructure. Important questions arise about why, and what can be done. A first, systematic study on “Social infrastructure and Institutional Investors. A Global Perspective”, by Georg Inderst, seeks answers. It provides several key conclusions and recommendations for both policy makers and investors.1

Good education, health, housing, security, culture and recreational facilities are – evidently – essential for all political systems. Economists measure the substantial contribution of social infrastructure to economic growth and employment. Social scientists stress the links to human and social capital formation, inequality and poverty, social cohesion and community welfare. Demographic factors will put even more pressure on care and health spending. Even from a pure infrastructure investor perspective, the operation of transport, energy, water and communication networks etc. benefit from a healthy, progressive social infrastructure.

Social infrastructure investments are not new to most institutional investors as they are often part of generalist infrastructure funds or direct strategies. However, overall investment volumes have remained very small even at times of booming (economic) infrastructure allocations. Investor experiences have often been a rollercoaster. There were some significant clusters of investor engagement since the 1990s in schools, hospitals and other public buildings, e.g. public-private partnerships (PPP) in the UK (PFI), Canada, France and other EU countries, even in some emerging markets. Over the last decade, however, the supply of such assets has dwindled in most places.

The world is changing fast and it is uncertain how the (political and financial) world post coronavisus crisis will look like. Even under more normal circumstances, the public sector will remain the dominant funding and financing source for social infrastructure. Nonetheless, much more private capital could flow with favourable macro and sectoral condition. An integration of infrastructure policies with a proper long-term social policy vision is needed, using not only financial but also social services experts.

Investors require greater clarity on social assets and projects, especially credible longer-term funding propositions as well as consistent rules. Clarity in funding facilitates financing and investing. The investment characteristics of social infrastructure assets are potentially attractive, such as non- cyclical demand, steady income and low correlation to other asset classes.  However, they can also be small and fiddly, rather heterogeneous across sectors, with outputs difficult to measure, and subject to political and renegotiation risks. They are typically very “local” and subject to different laws and customs across countries, regions and municipalities. This requires capabilities in both public and private sector, transparency, good management and good governance.

The global experience so far shows that matching private capital investors’ expectations with the available assets and projects in social sectors is a bigger challenge than previously thought even in advanced markets. Many policy initiatives to mobilize more private capital may sound good but have not been very effective on the ground. It is worth investigating what approaches have worked successfully in the past for different infrastructure assets, at least in some places and for some time.

In social infrastructure, there are various investment strategies and instruments that can realistically be improved, scaled-up and expanded. For example, many investors these days seek real estate-like social infrastructure with steady expected income from users or hybrid fees, like student accommodation, care homes, affordable housing, urban regeneration. Another example is private equity firms/funds that have increased their investment in the health sector (arguably with a controversial record of innovation and efficiency gains versus poor service quality and profiteering).

Smaller investors in particular would need more well-diversified (and cheap) products or investment platforms in this field. Sub-government revenue bonds (e.g. municipal) are well-established while there is an expanding social bond market. More and more investors are trying new investment routes into social housing and other social projects, urban regeneration etc. Sustainable, impact and SDG investing are gaining traction, opening a new door for asset owners.

One  of  the  outcomes  of  the  last  global  (financial)  crisis  was  a  –  slow  –  revival  of  economic infrastructure policies, and a growing activity by asset owners. Will this decade see a renaissance of – public and private – social infrastructure investment?

———————-

1 Citation: Inderst, G. (2020), Social Infrastructure Finance and Institutional Investors. A Global Perspective. Inderst Advisory – Discussion Paper, March 2020.

This study expands and updates the expert paper by Georg Inderst for the “High-level Taskforce on Investing in Social Infrastructure in Europe” by the European Commission (EC) and the European Long-Term Investors Association (ELTI) in 2017. The main focus 2020 is on private finance and institutional investment in a global view.

The paper gives an overview on private finance and investment in the field, including the activity of institutional investors and their challenges. It discusses the specifics of social infrastructure assets and projects, the range of traditional investment instruments, the emergence of new financing vehicles and the new opportunities provided by ESG, impact and SDG investing.