• Ark Wingrove

The World has too much money!

Updated: Feb 1

Negative Interest Rates and what it means for infrastructure.


Net Present Value (NPV) is on the syllabus of all good physical asset management training courses.


Until recently it seemed quite an abstract concept. Not one that many people use from day to day.


Part of the reason for this is that the 'cost of money' (Discount Rate, WACC etc) hasn't changed significantly for so long that most organisations decision-making processes hardly notice its effect.


But that might all be about to change…

Negative interest rates - the economics


Central Banks in the US, Europe and Japan are all now embracing negative interest rates. In simple terms, this means charging organisations to keep their money for them. In some quite bizarre circumstances this even results in organisations getting paid to take a loan.


(…pause, stare into space, 'oh yes'!)


In the US alone there are now $15tn of financial assets trading with these negative returns. That's a huge sum of money that is effectively having chunks taken out of it every day.


But why?


This is being used as a way of stimulating liquidity, in short encouraging organisations to get their sometimes vast sums of money 'out there' flowing around the economy and generating growth.


And this is the basis of my wondering....


Back to Infrastructure;


So what if the discount rate also went negative for infrastructure organisations?


This could have some interesting results, in short and in theory;

  • It incentivises the acquisition (i.e. building or buying) of more assets if these have a better return that leaving that money in the bank.

It is obviously not as simple as going on a 'spending spree' - those assets have to have sound economics behind then, to have 'value' (in ISO 55000 terms) with the risks understood and managed across the whole life-cycle.


But hang on a minute...isn't that requirement familiar?


Yes, that's just the same as a Whole Life Value calculation and Asset and Risk Management.


Good asset management organisations should be capable of doing these calculations, of changing their decision-making to reflect the NPV along with revising strategies in line with these different conditions (the 'organizational context').


In short, this should be a natural opportunity for asset managers at all levels - whether it be investing on new assets within an organisation, major new infrastructure for a society or buying infrastructure from a private equity, PPP/PFI/P3 basis.


In simple terms;

  • US bonds now with negative yields = $15tn

  • US Infrastructure Shortfall = $4.5tn*

And that's just the US.


In Europe lots of eyes will be on Christine Lagarde when she takes over at the ECB on 1st November as it is highly likely she will be trying to persuade governments to stimulate eurozone economies using infrastructure spending as one key tool (albeit via Quantitative Easing).


It may be that this turns NPV from a tick-box on an investment case into a trigger for investment itself.


* figures from the American Society of Civil Engineers (ASCE)


With thanks to Mr Adrian Spottiswoode BA BSc MA


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