UK and Europe’s great expectations
While governments have been forced to come to the rescue to support their economies amid the pandemic, different financial starting points will mean different approaches to post-Covid-19 spending plans.
In the UK and mainland Europe, governments have strongly intervened to support businesses of all sizes and the investment community expects these governments to use infrastructure as a tool to reinvigorate their economies and create new jobs as they emerge from the crisis.
The UK Government has put in place several financing programmes to support companies at both ends of the spectrum, from the Covid Corporate Finance Facility for those with public ratings to the Coronavirus Business Interruption Loan Scheme for smaller businesses. Similar schemes have been rolled out in France, Germany, Italy, the Netherlands and Spain.
Looking ahead at a post-Covid-19 environment, the investment community is in widespread agreement that governments will push harder on their existing carbon-cutting policies.
“I do think that infrastructure investments will act as a catalyst for the recovery of the economy,” says deputy CEO of the UK Government’s Infrastructure and Projects Authority Matthew Vickerstaff. “The irony of Covid-19 is that it has underlined the environmental benefits of reducing carbon emissions. For this reason, I expect the net zero 2050 objective to remain high up in the UK Government’s agenda.”
However, he acknowledges that the extent to which the government will be able to invest will very much depend on its financial situation once the crisis has passed.
A green focus
Director and market area manager for the UK and Ireland at technical adviser DNV GL Michael Dodd expects the UK Government to continue to push on carbon-cutting policies but does not necessarily expect any additional impetus.
“I do believe the government will continue on the trajectory it had before Covid-19, but we also see corporate policies accelerating the energy transition and pushing on cutting their carbon emissions,” Dodd says. “It is quite encouraging to see the BP announcement about not cutting capital expenditure on its renewables strategy, for instance.”
At a European level, there also seems to be a consensus that governments will focus more on implementing policies in line with the European Green Deal, which aims to make Europe climate neutral by 2050 and cut greenhouse gas emissions by at least 50% by 2030.
“There is strong consensus around both the Green Deal and social infrastructure investments more generally across the member states,” says CEO of French fund manager Meridiam Thierry Déau. “The French and Dutch governments, for instance, have rolled out €10bn packages to support businesses if they implement [policies that cut their carbon footprint]. Fund investors are particularly keen to see more investments in green energy as environmental, social and corporate governance becomes an increasingly important component of their portfolios.”
Déau also highlights that, compared with the global financial crisis of 2008, European governments have been much quicker to react and offer support mechanisms as Covid-19 has posed a more immediate and tangible threat to their industries – and therefore their overall economies.
North America’s diverging approaches
Looking across the Atlantic, many are pondering whether the US will follow suit in prioritising energy transition and sustainable investments in the wake of Covid-19. A president who is a climate change sceptic and local oil production basins might make it even harder for green policies to gain traction.
Group strategic development director at consultancy Mott MacDonald Simon Harrison says: “As oil remains extremely low-priced, the US Government might not be keen to put a lot of energy into decarbonisation given that it has access to in-house, oil-producing basins.”
The US’s stance stands in contrast to many other Western countries, among them North American neighbour Canada.
In response to the challenges posed to the sector by Covid-19, Canada’s infrastructure and communities minister Catherine McKenna has announced proposed changes to the C$33.5bn ($24.5bn) Investing in Canada Infrastructure Program’s bilateral agreements with each province and territory, introducing new flexibilities, expanding project eligibility and accelerating approvals.
These changes include creating a new Covid-19 response funding stream from existing funding that will provide an increased federal cost share for a broader range of projects, as well as quicker project approvals in the short term.
Within that, green policies are a priority on which the Canadian Government plans to work hand in hand with the private sector through the Canada Infrastructure Bank (CIB).
“We remain committed to contributing to the achievement of Canada’s climate goals,” says a spokesperson for Infrastructure Canada, the Canadian federal department responsible for public infrastructure. “The CIB is an additional tool for governments to use to attract private sector investment in green projects as well as other priorities in transportation, public transit and broadband… The CIB has been allocated C$5bn for investments in green infrastructure.”
At federal level, the Quebec Government shares this intention to commit to infrastructure spending.
“On 10 March, we submitted to the National Assembly a C$130.5bn infrastructure investment plan for 2020 to 2030… In mid-May, the Government of Quebec gave the green light to C$2.9bn-worth of investments in the sector in 2020–21… We are prioritising projects in the health, education and transport sectors,” says a spokesperson for the Government of Quebec.
Latam question marks
The finances of countries in Latin America mean they are likely to be in a poorer position in terms of government support for infrastructure and energy projects in a post-pandemic environment.
According to a Fitch Ratings report published at the end of May, infrastructure projects in Latin America face a heightened risk of grantor payment delays driven by the increased pressure Covid-19 is placing on government finances.
“Sharper delays, depending on materiality and duration, could rapidly lessen payment capacity of projects with an already weak liquidity position,” said Fitch senior director Astra Castillo.
In some projects, liquidity requirements were underestimated and the longer-than-anticipated collection days resulted in unexpected stress on cash flows, the report adds.
In Colombia, the government’s fifth-generation public-private partnership (PPP) road programme is taking a hit, and while the government is keen to keep on supporting the infrastructure sector and assist it in attracting private investors, significant levels of debt may yet curtail these ambitions.
Former PPP financial manager at Colombia’s National Infrastructure Agency (ANI) Oscar Rosero says: “The three airports that ANI was developing have all closed construction until the end of June. Private investors are all waiting for the government to develop a clear strategy as to how it will boost the construction sector and protect it from the delays caused by Covid-19.
“However, the government had to intervene to support the health sector and address wider economic issues, and has been racking up debt, which will have an impact on road constructions.”
Colombia has a limit to the number of new PPP projects in relation to its GDP. In the current circumstances, it is likely that GDP prospects for the rest of 2020 will be cut in June’s finance budget and so will the new pipeline for PPPs.
Viola Caon is a senior editor at Investment Monitor and joined New Statesman Media Group from Euromoney’s IJGlobal.