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As investment opportunities go, lending money to a consortium building three prisons in rural France does not have the cachet of backing the latest Silicon Valley IPO. A new subway line in Seoul or energy pipelines in Texas will not set many pulses racing, either. Unglamorous as they may be, such investments are vital for economic growth. Yet financing infrastructure is falling out of favor with banks. Can other investors plug the gap?

European lenders, which used to dominate infrastructure financing, are now busy repairing their dented balance-sheets. Meanwhile the new “Basel 3” rules are steering banks away from the long-term loans (often stretching beyond 20 years) required by backers of infrastructure projects. The one exception is Japanese banks, which have stronger balance-sheets and are keen to put money to work.

Banks are not only wary of making long-term loans, they are also reluctant to take as much risk as before. Whereas they used to be happy to lend 90 percent of the construction cost of a large project, such as a toll road in America, that figure is down to something like 70 percent now. This forces the backers to come up with more of their own cash. In the same way that housebuilding slows when banks cut the supply of cheap mortgages, infrastructure construction dries up when financing gets tighter.

All this is contributing to a widening gap between the amount that is being invested in infrastructure and the amount that ought to be. It will cost $57 trillion to build and maintain the world’s roads, power plants, pipelines and the like between now and 2030, reckon consultants at McKinsey (see chart). That is more than the value of today’s infrastructure. By one estimate, infrastructure spending currently amounts to $2.7 trillion a year (about 4 percent of global output), yet $3.7 trillion is needed.

With public finances straitened, governments are unable to make up all of the shortfall. Some, notably China, can pay outright for the stuff that needs to be built. But most others (and private investors such as telecoms firms) rely on financing of a sort which has not been as readily available since the financial crisis.

That is creating a need, and opportunity, for new entrants. Long-term investors such as insurers and pension funds are eager to plough money into infrastructure, as are endowments and sovereign-wealth funds. These financial titans have over $50 trillion to invest. Nobody is suggesting that their entire pile should be used to fill the $57 trillion hole. But only 0.8 percent of their assets are invested in infrastructure projects. That seems too low, given the natural match between the long-term liabilities of such investors and the long-term cash flows that come from these projects.

Better yet, returns from debt secured against real assets are high relative to similarly rated corporate or sovereign bonds. Financial instruments linked to infrastructure are typically hedged against inflation and offer stable returns, with low volatility and little correlation with other asset classes. They are illiquid, but that is of little concern if you are intent on holding on to stuff for decades. And when things go wrong, investors have a better chance of recovering most of their money, says Mike Wilkins of Standard & Poor’s, a ratings agency.

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