Sounds weird, but time is now to invest in public assets

You can make real money when you buck the trend, when you challenge conventional wisdom. Of course, you have to be right when everyone else is wrong, which doesn’t happen often. Sometimes, though, you simply have to take advantage of mispriced assets.

Negative interest rates are actually an invitation to invest, even though their root cause may be an indication of the reluctance to do so. When we start paying banks to look after our money, it is surely because we can’t find anything else to do with it, or simply don’t have the confidence to take the risk. This prevailing lack of confidence affects those firms in the business of capital projects, such as construction, where we can already see the fallout.

On the other side of the consequence scale, with such unattractive yields in bonds, money is driven into equities, inflating prices and earnings multiples to a point where it is difficult to find value there.

The bond market too is expensive, as corporates have tapped yield-seeking investors for easy money. Close to $2.5trillion has been issued so far in 2019, more than in any other year over the last decade. Something has to give.

We’ve seen increasing asset prices across the board, without a commensurate increase in economic activity. As ever, when prices suggest no obvious value, the brave and foresighted will find opportunity.

These opportunities will be in project-specific finance, in huge long-term capital investment. Even where interest rates aren’t negative in absolute terms, in many economies (particularly in Europe) they are negative in real terms, below inflation making the success of debt-funded projects likely.

In fact, it seems downright silly not to borrow to invest in these circumstances. Our problem, and that of so many companies and countries, is that our balance sheets can’t bear any more borrowings.

The strained, overgeared balance sheets in the private sector, but more particularly in the public sector, have come about not through overinvestment in good capital projects, but from funding inefficient capital projects, consumption expenditure or the cost of the socioeconomic gap created by the absence of successful projects.

No construction means no jobs, which in turn requires bigger social safety-net funding, and so the spiral continues. We will not trade out of this conundrum, and yet we cannot afford to stand still.

Now is the time to invest in public assets. It is time to move off balance sheet into projects in the public interest, specifically funded, not cross-subsidised and not contaminated by strained sovereign balance sheets. It is time to invest in government infrastructure projects sufficiently certain and attractive so as not to require the support of the government balance sheet.

The economic models of utilities, particularly monopoly utilities, have specific characteristics that make them ideal for such ring-fenced capital raising.

Eskom is a case in point. Demand is known, supply is known. It follows that price can be discovered (or, in this case, dictated). The product is a commodity. Cost of (efficient) production is known.

On the face of it, Eskom (and other infrastructure projects with tried and tested economic models — such as roads and railways and public schools and hospitals, and water delivery — present balanced equations, simple to price and raise capital for. These balanced equations fall apart, however, if all of the inputs to the financial model don’t behave themselves.

When capital cost is out of line with industry benchmarks, when other inputs and ratios miss the mark, or when users of the product don’t have to pay for it, then, of course, it can’t be forecast and it won’t work.

Likewise, changing policy and management expertise can’t be modelled, but those boxes must be ticked and costed before you start. Eskom did not require taxpayers’ money at the outset. The predictable cash flows and achieved, industry-standard ratios were sufficient to attract capital on a stand-alone basis, at the right price.

These unexciting projects have exciting consequences (and cures) for the imbalances in the real economy, such as unemployment.

Public capital then need not go where private capital has already found the solution. It would, for instance, be difficult to imagine a public transport system more efficient and competitive than our existing system of taxis (regulatory challenges acknowledged).

The skewed value of uncertain times provides, ironically, a great opportunity to build things. Construction companies, artisans and unskilled labour will come to the party they need the work.