Report: More Private Investment in European Infrastructure Expected

Governments in Europe, particularly those in growing Eastern European countries, are being pressured to build more highways, rail links and other infrastructure to keep up with population and economic growth. But governments are limited in how much they can spend on infrastructure and are increasingly looking to form public private partnerships. Bridging the Gap, Investing in European Infrastructure 2008, a study released this week by Ernst & Young, looks at the current conditions as well as future opportunities for private investment in European infrastructure. In addition to forming more public private partnerships to pay the costs and share the risks, governments are also selling interests in state-owned companies to private investors and privatizing assets to raise capital. The report notes that Deutsche Bank is among the financial institutions that have created international funds to invest in European infrastructure. Private equity funds and other investors have been particularly attracted to Eastern Europe in recent years and that trend is expected to continue. “Governments in the increasingly modernizing economies of the emerging European markets are starting to compete for increased amounts of foreign investment,” James Neal, head of Ernst & Young’s Infrastructure Advisory Group, said in a press release about the report. “We expect traditional infrastructure investment hotspots such as the U.K. to remain attractive, but investors are also reaching out to emerging markets in an effort to maximize returns on their infrastructure capital.” The report predicts more private investment in infrastructure markets to occur over the next two years in countries such as Turkey, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. In recent years, Hungary, Poland and the Czech Republic have approved PPP legislation to encourage private investment in their infrastructure. Late last year, South African-based company Group Five, was part of a consortium that also included German, French and U.K. firms that had the winning bid on a 1.1 billion-euro project to build and maintain a stretch of the M6 motorway in Hungary. But there are challenges facing both private investors and the European Union nations that are trying to plan, finance, build and operate infrastructure, particularly if long-term contracts are involved. Neal noted in the report that foreign investors often don’t want to go through the expense and time to just bid on one or two projects. “They would rather know there is a program,” he said of private investors. “Governments need to have an efficient, competitive bidding process, and a consistent deal flow.” In the Czech Republic, for example, after several contracts were canceled for hospital and university construction, several government agencies released a report last May urging more standardization and due diligence in assessing projects. The government has since gone out to bid on a 36-year, 380 million-euro concession to build and operate a segment of the D3 Motorway. It is also preparing requests for proposals and feasibility studies for a prison, a court building and hospital that total nearly 150 million euros. The report notes that the Czech Republic is also planning expansion of its highway system. The Ernst & Young report does state that the global credit crunch has slightly cooled foreign investment in European infrastructure because it is harder to put deals together. But Neal noted that the “issue is more the cost of capital than the availability.” He added that investors generally see infrastructure as a “conservative investment class with predictable, consistent cash flows.”