http://www.economist.com/news/finance-and-economics/21599394-world-needs-more-infrastructure-how-will-it-pay-it-long-and-winding
Banks are no longer financing investments in infrastructure as much as they use to. Infrastructure is a long-term investment, which is not what banks are looking to finance. One reason why banks are less willing to finance infrastructure is because many are still "repairing their dented balance sheets." According to consultants at McKinsey, the need for infrastructure spending is about $3.7 trillion per year, but the world is only spending $2.7 trillion per year.
One possible alternative to banks or government spending financing infrastructure are insurers, endowments, sovereign wealth funds and pension funds. According to the Economist, only 0.8% of these financiers' funds are invested in infrastructure, so they can afford move more funds into infrastructure. These financiers share many of the concerns banks do. 30 year loans lead to uncertainty and many chances for something to go wrong. According to the Economist, The best way to attract concerned investors is with simple deals and smart planning by the government in order to minimize the risk of such long investments.
2 comments:
The article raises a couple of key issues that will only become more important as time moves forward. The first is the how much Western banks are concentrating on short term returns over long term investments. The irony of this is that the problem seems to stem from the fact that many banks lack consistent sources of income so they only want to give money out that they'll get back quickly. However, large scale infrastructure investments would give consistent returns over very long periods of time, helping to alleviate the amount of volatility that seems to be frightening so many large banks.
The Japanese, as they often are, are well ahead of the curve. The nature of Japanese businesses are much more open to very long term investments and slow but consistent returns. The success of this model should provide an effective example for emulation by insurers, endowments, sovereign wealth funds and pension funds.
I found this article to be quite interesting. The key issues as mentioned above are also interesting to think about. Short term returns will only get the budget so far, and infrastructure is a long term project. Banks must loan out to longer term projects, but it seems as though they are uncertain about the timing of returns to their investment and for loan holders. The consistent returns that can be expected from long term borrowing seem to be consistent, but banks must be more trusting in their loans.
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