Institutional investment in social infrastructure has been very low compared with economic infrastructure, writes Georg Inderst. Will the current crisis help change that?
The COVID-19 crisis has exposed many weaknesses, one of them being the chronic underinvestment in social infrastructure in most countries – advanced and emerging. After a long period of neglect and decay, the gap between needs and investment was already huge before this crisis.
The global financial crisis, austerity policies and other unfavourable regional developments, led to a pronounced dearth of social investment by the public sector, notably in Europe but elsewhere as well. Private-sector finance of social infrastructure, too, has widely fallen back over the past decade – in contrast to economic infrastructure. Important questions arise about why this is the case, and what can be done. A first systematic global study of social infrastructure and institutional investors has sought some answers.
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, poverty and social cohesion. Demographic factors will put even more pressure on care and health spending. Even from a pure infrastructure investor perspective, the operation of transport, energy, communications 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 and strategies. However, overall investment volumes have remained small even at times of booming (economic) 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. Over the past 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-COVID-19 will look. 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, embedded in a proper social policy vision. 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, good management and 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 in developed markets, even more so in developing economies. Many policy initiatives to mobilise more private capital have not been very effective. It is worth investigating what approaches have worked successfully in the past for different infrastructure assets, at least in some places.
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 and urban regeneration. Private equity firms that have increased their investment in the health sector is another example.
Smaller investors, in particular, would need more diversified (and cheap) products or investment platforms in this field. Then there are the established sub-government revenue bonds and the emerging social bond markets. Sustainable, impact, community and sustainable-development-goal 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?
Georg Inderst is an independent consultant and author of the report Social Infrastructure Finance and Institutional Investors: A global perspective