Fitch: Funding Streams Are Key to Infrastructure Debt Finance

15/8/2017/Fitch Ratings

The ability to identify and secure revenue streams is a bigger challenge to infrastructure investment than a lack of financing, Fitch Ratings says. This is particularly the case for developed-market economies which need to replace ageing infrastructure.

The need to build new infrastructure and to upgrade or redesign existing assets will demand large-scale investment. A report last month by Global Infrastructure Hub, an organisation set up by the G20 to promote infrastructure investment, and Oxford Economics, estimated that USD94 trillion of investment is required globally to meet infrastructure needs up to 2040.

Infrastructure investment is in theory attractive to private capital, offering predictable, less cyclical, and often inflation-linked returns. This suggests strong potential for increased private financing of infrastructure assets, although most infrastructure investment will continue to be financed through government budgets as governments ease fiscal policy and seek to boost growth.

However, we think the key constraint on private investment is the availability of revenue to service and repay project debt, rather than the availability of debt itself. Several countries with deep and sophisticated capital markets have infrastructure investment gaps, including the US, where various official and private sector estimates point to the need to increase investment to modernise ageing infrastructure. Global Infrastructure Hub’s report estimates US infrastructure needs at USD12.4 trillion, around 45% higher than likely investment under current trends.

Ultimately, the source of these revenue streams will be either infrastructure users or taxpayers. However, increasing either user fees or taxes can be politically difficult, especially in developed economies where the economic priority is often the restoration or adaptation of existing core infrastructure, rather than building new assets.

An example is the debate around using tolls to fund road maintenance and renewal in the US. We view interstate tolling as a potential tool to help close the funding gap affecting highways and local roads and bridges. The US Department of Transportation in January estimated the total backlog of unmet capital needs for highways and bridges at USD836 billion. But interstate tolling would be hard to introduce due to the widespread public perception that it constitutes double taxation.

Why Tolling is Often a Political Minefield

Political challenges in securing revenue streams, and policy-makers’ preference for traditional, publicly-funded procurement, could result in too much investment capital chasing too few appropriate infrastructure projects. If structurally or economically weak projects attract private debt financing which they struggle to service, this would damage the development of private funding in the longer term..