The current coronavirus crisis has exposed many weaknesses, one of them being the chronic under-investment 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, not only for health and disaster management but across the board.
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” seeks answers. The paper gives an overview, facts and figures on worldwide investment in the field, including the activity of institutional investors, the range of traditional and new investment vehicles and the new opportunities. It provides several key conclusions and recommendations for both policy makers and investors.
Good facilities for education, health, care, housing, security, emergencies, culture and recreation 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 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, Australia, France and other EU countries, Korea and also in some Latin American and other remerging 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. What can reasonably by funded by consumers and users of services? What needs to be provided by the public sector in support of the vulnerable or as a public good? Asset recycling or value capture, e.g., could be used more and better, at least for certain segments, in a socially acceptable way. The degree of “financialization” of social infrastructure is, in the end, a matter of political choice, and it should be made in the open to create consensus.
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, competent 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 and other university facilities, care homes and kindergartens, judicial and other public buildings, affordable housing or urban regeneration. Another example is private equity firms/funds that have increased their investment in health care or prisons (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 (e.g. municipal) bonds are well-established while there is an expanding social bond market. More and more investors are trying new investment routes into social housing or community and city development etc. Sustainable, impact and SDG investing are gaining traction, opening a new door for asset owners. Working out an investible pipeline for social projects may be strenuous across financial and social departments but Governments finally need to get their act together.
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?