If you want good infrastructure, you need a long horizon.
The trouble is, it is increasingly obvious that the attention span and thus behaviour of investors around the world is getting nearer to a quick fix than a long-term solution.
And, as we all know, infrastructure is about as long-term as investment gets.
The annual Infrastructure Index produced by multi-national law firm CMS is the best known of its kind and has the UK fourth in the list of attractive places for inward foreign investment behind the Netherlands, Canada and Germany.
There are many reasons why this ranking has been attained and why the UK is not in top slot: fierce competition for infrastructure capital from the Middle East which is furiously diversifying away from an oil and gas-based economy; China of course; and Canada.
The latter is reaping the rewards of a deliberate policy to nullify the effects of infrastructure investment’s most arch enemy – political short termism and uncertainty.
Second to this is investor short-termism.
Powerful foes
And they are powerful foes indeed. Infrastructure is political, we all know that – says planning consultant Tom Carpen writing in Infrastructure Investor in 2018.
Measured in 2009 in research by cross-party think tank Demos the rate of ministerial churn in the UK is 1.3 years and the average tenure of a minister is getting shorter by the year as Prime Ministers are under increasing pressure to reshuffle frequently.
High churn, it says, leads to an unhelpfully short-termist approach to policy, never mind implementation of said policy, and grants expert civil servants too much power relative to their elected representatives.
It recommended a new convention whereby ministers are appointed for three-year terms.
By way of comparison, it says: “In 1988, 1.3 years into his new job as manager of Manchester United, Alex Ferguson was grappling with a team of unfit alcoholics and the club had won nothing. In 1977, 1.3 years after he founded Microsoft, Bill Gates was still struggling to make his software company financially viable.”
“1.3 years is generally not long enough for even the most talented of individuals to achieve their potential; yet this is now the average tenure of a minister in the British government in any given post.”
This is an area where an exchange such as EIX Global brings stability, liquidity and long-term delivery. Politicians can come and go all they please, but the market remains open long after the minister-before-last closed his red box.
Extra lane
According to the Highways Agency, the average cost of building a mile of new motorway has risen to £29.9m. Adding an extra lane to a motorway costs £10m a mile, and a mile of dual carriageway costs £16.2m. A study by Roadblock shows that, on average, motorways and trunk-road schemes end up costing 68% more than originally budgeted – a cost overrun being investigated by the National Audit Office.
It takes, according to most estimates, 2.5 years to build a road and three to four for a bridge over water. How much longer it takes to conceive, plan and design is a timespan only measured by Athenean gods.
Investors too have developed an historical trend towards ‘gimme now’. The Bank of England’s top economic egghead Andy Haldane delivered a Sir Thomas Gresham Lecture in 2011 entitled ‘Get Shorty’.
In it, he demonstrated the average holding of a share by the average investor in the UK and the US since the Second World War. In 1940 on both sides of the Atlantic it was eight to ten years, in 2011 it was six months.
Of course there could be many other reasons for this – accessibility being a major one – but it does demonstrate a trend.
Investor impatience, said Haldane, is causing havoc, with CEOs of big companies not able to plan on shareholder resilience and the same goes for the longer-term investor.
He said, “Imagine a world with two sets of investor. Firstly, a long-term investor, who trades on the basis of fundamentals – when prices are above fundamentals, they sell, and when prices are below fundamentals, they buy.
“Secondly, a short-term investor, who trades on momentum – if the price went up yesterday, they would buy today, and vice versa. What you find, in a world with those two cohorts of investor, is that, if the set of short-term investors is sufficiently large, the long-term investor may be driven out.”
Big stuff
Infrastructure is, after all, about as big as stuff gets and takes a while, sometimes even a generation, to put together. This simple fact is both friend and enemy for investors.
The Netherlands tops the index because of its vigorous and focussed economy, a transparent and efficient procurement process, together with a multi-billion-Euro pipeline of road and water PPPs, have created an attractive, highly competitive environment for investors, it says.
The UK, meanwhile, is hampered by uncertainty surrounding Brexit and a government with the slimmest of working majorities.
In a fascinating paper, The New Era of Infrastructure Investing, published by Springer in the US in 2012, four authors (Gordon L Clark, Ashby HB Monk, Ryan Orr and William Scott) argue the same traits are affecting infrastructure investment.
“Behavioural theorists see short-termism as a human predisposition that confounds best intentions. This is particularly true for those individuals responsible for institutional investment, where short-term strategies, on average, underperform long-term strategies.”
Long-term horizon
They go on to say: “The most sophisticated institutional investors have also sought ways of organizing their investment decision making, so as to dampen short-term temptation, while taking a strategic view as to the advantages of long-term commitment. If the market is transfixed with short-term volatility, this is an opportunity for savvy investors to develop long-term strategies that step aside from the current incentive structures.”
What then if there was a marketplace underpinned entirely by long-horizon thinking?
Professor Ian Reeves, EIX’s chairman says: “To list all of the reasons why perfectly feasible projects do not get implemented here would be to invite pages and pages of hugely debatable material. It is safe to say though, that anyone who has spent any length of time in this business can list dozens of them off the top of their heads.
“EIX will bring a major international focus for infrastructure investment. With the transparency, liquidity and structured pricing comparators that come naturally with an exchange this will have the potential to transform the efficiency of infrastructure investment markets.”
Sources:
https://www.demos.co.uk/files/Ministerial_Churn.pdf
http://www.cms-lawnow.com/publications/2017/11/infrastructure-index-a-new-direction
https://lpi.worldbank.org/international/scorecard/radar/254/C/GBR/2016#chartarea
http://www.infrastructure-intelligence.com/article/jan-2018/infrastructure-it%E2%80%99s-political
https://www.gresham.ac.uk/lectures-and-events/the-sir-thomas-gresham-docklands-lecture-get-shorty
https://link.springer.com/article/10.1057/pm.2012.10