* Western governments signal pipeline of infrastructure work
* Wealth funds have struggled to source suitable deals
* Prefer existing asset upgrades over riskier new builds
By Claire Milhench
LONDON, Dec 14 Sovereign wealth funds are
queuing up to finance the West's overhauls of crumbling roads,
bridges and ports as public purse strings are loosened after a
period of austerity, but they still face project delays and
fierce competition for deals.
Offering strong and stable cashflows generated by service
users, these investments hold huge appeal for a $6.5 trillion
industry that, with its focus on future generations, is able to
lock up capital for years.
Qatar's sovereign fund was first off the blocks this week,
promising $10 billion for U.S. infrastructure after
President-elect Donald Trump floated plans to spend up to $1
trillion on projects that will take years to complete.
Britain has flagged projects worth nearly 500 billion pounds
($632 billion) including expanding Heathrow airport and
high-speed rail, European governments are backing more spending
on energy, transport and telecoms, and Canada is speaking to
SWFs and pension funds to create an infrastructure bank.
Among developing economies, India has huge power and
expressway projects under way.
But there are few signs yet that the imbalance between SWF
demand for infrastructure assets and accessible supply is
"Never have I seen such a global infrastructure deficit
particularly in the OECD countries, at a time when a lot of
these governments are struggling financially," Adrian Orr, chief
executive of the New Zealand Super Fund, told Reuters. "Yet
third-party capital is struggling to get access."
The fund has 3 percent of its investments in infrastructure.
Since the global financial crisis, cash-strapped Western
governments have been forced to put projects on ice. Some have
also resisted foreign ownership of strategic assets, with an
outcry over national security forcing UAE-based DP World to sell
management leases for six U.S. ports in 2006.
This summer, Britain held up a $24 billion power project on
concerns over Chinese investment in nuclear infrastructure.
The difficulty that SWFs have encountered sourcing deals
whose appeal has risen as bond yields have sunk and equities
turned more volatile, means that almost two-thirds are
underweight infrastructure relative to their target allocation,
according to a study by asset manager Invesco.
A second study by research provider Preqin found that
infrastructure funds, which raise money from investors including
SWFs, had accumulated $141 billion in "dry powder" to invest in
2016 - an all-time high.
With so much capital chasing a limited number of deals,
prices have risen, particularly for the most attractive assets.
Preqin found the average infrastructure deal size hit a
record $528 million in 2015, up from $486 million in 2014 as
many winning bids came in higher than expected.
These included the $7.4 billion paid by a consortium
involving SWFs for a 99-year lease of Australia's TransGrid
electricity network, and the $7.3 billion paid by another group
for a 50-year lease of the Port of Melbourne.
To get into the biggest deals, many SWFs co-invest with
peers, and consortia comprising SWFs and major infrastructure
funds - such as the one that bought a majority stake in
Britain's gas pipe network - are typical.
Now the changing mood music from Western governments heralds
a flood of new opportunities, though this will in many cases
mean taking on the extra risk involved in construction projects.
"Therefore investors will typically look for a higher return
component than if they are improving existing facilities," said
Declan Canavan, head of alternatives EMEA at JPMorgan Asset
Investors may also have to prepare for lengthy delays as
governments will still need to raise funds for new projects via
taxation or borrowing, while local municipalities have shown
little appetite for privatisation.
"There's a limit to what a population is prepared to pay,
and that won't suddenly rise in huge amounts," said Gershon
Cohen, head of infrastructure at Aberdeen Asset Management.
Cohen, who is sceptical about how much Trump can achieve,
says infrastructure is a hard sell for politicians who are often
reluctant to commit to long-term projects they may not get to
cut the ribbon on.
"There's a mismatch between long-term investment decisions
and short-term political thinking," he said. "They need to bring
projects forwards - waiting 30 years for a runway is quite
clearly an error."
Successive British governments have spoken about a new
airport or runway in South East England since the late 1970s.
($1 = 0.7911 pounds)
(Additional reporting by Karin Strohecker; editing by John