Governments’ growing fiscal constraints are expected to reshape investment opportunities as private capital takes on a greater role in funding the next generation of infrastructure projects, according to Escala.
The private wealth investment and advisory firm argued that investors will increasingly be called upon to finance assets ranging from artificial intelligence (AI) infrastructure and data centres to energy networks and advanced manufacturing as governments struggle to fund nation-building projects on their own.
Escala chief investment officer Tracey McNaughton said the scale of future investment needs was unprecedented, arriving at a time when government finances are already under pressure.
“Historically, governments were the primary funders, financiers, of nation-building. If a country wanted to build highways, electricity networks or space programs, governments generally had the fiscal capacity to do it,” McNaughton said.
“Today the ambition is just as great, perhaps even greater but the fiscal space is more limited.
“Countries need more of the traditional nation building stuff – defence, energy, transport. But now they need the infrastructure to support artificial intelligence.”
According to McNaughton, the shift has important implications for investors as sovereign borrowing costs become more sensitive to fiscal strength, with bond markets showing signs of becoming more selective.
“For most of our investing careers we’ve almost taken government borrowing for granted,” she said. “There was an assumption that governments could simply issue more debt whenever they needed to.
“I think markets may begin demanding greater compensation for providing capital to governments. That’s really what a sovereign risk premium is.”
McNaughton said countries with stronger fiscal positions could continue borrowing relatively cheaply, while weaker balance sheets may face steadily rising funding costs, making sovereign risk an increasingly important consideration for investors.
She pointed to recent debt market pricing as evidence of the changing landscape, noting that “the bond market is providing debt finance to Amazon at a lower interest rate that it is to the US government on a 10 year basis”.
As governments are forced to prioritise spending, McNaughton believes private capital will become increasingly central to delivering strategic infrastructure.
“When you step back, there really aren’t that many options,” she said.
“Governments can borrow more – funding it by taxing more. We have seen what that does to the tenure of political leaders in Europe. Or they can rely on private sector capital who in some case, as with Amazon, can fund it more cheaply.”
She argued governments were evolving from being the owner-builders of major infrastructure projects to becoming policy setters that increasingly rely on private investment to fund strategic capabilities.
That shift, she said, creates significant investment opportunities but also raises questions about how the economic benefits of privately owned nation-building assets are shared across society.
Looking to international examples, McNaughton said South Korea’s approach to semiconductors, artificial intelligence and robotics demonstrated how governments were partnering with companies rather than directly funding every strategic project.
“Its sovereignty strategy” centred on creating policy frameworks and enabling infrastructure while businesses provided much of the capital, technology and execution, she said.
McNaughton also suggested Australia’s $4.5 trillion superannuation system could play an increasingly important role in financing long-term infrastructure, although she stressed trustees must remain focused on members’ retirement outcomes.
“If governments are looking for patient, long-term capital to fund nation-building assets, it’s only natural that they’ll look towards superannuation,” she said. “But there is an important distinction we need to preserve. Governments naturally look at superannuation and see a source of capital.
“Trustees look at exactly the same money and see something very different. They see the retirement savings of millions of Australians. Their responsibility isn’t to deliver government policy.
“Their responsibility is to maximise long-term risk-adjusted returns for their members. Maintaining that distinction is fundamental to the integrity of our superannuation system.”
