Historical underinvestment in infrastructure, accompanied by a diminished role of government, is leading to increased reliance on the private sector. This is being addressed through privatization and the outsourcing of new projects. Regulatory and structural changes in North America, the United Kingdom, Western Europe and Australia are further catalyzing this change. This has led to a convergence of public- and private-sector financing and operational participation in infrastructure businesses.
This huge and dramatically expanding financing need in mature markets, let alone those in developing countries, is creating a substantial investment opportunity. This demand is drawing large and growing alternative investment global capital inflows. Investors are also forming alliances with multinational infrastructure operating companies to invest in infrastructure opportunities.
Infrastructure investments have different risk and return profiles from traditional investments. These differences can be a source of alpha as well as a valuable investment diversification tool for investors. Typically, demand for infrastructure services is relatively unaffected by the business cycle, resulting in a relatively low correlation between returns on infrastructure and market returns.
The United States, Canada, the United Kingdom, Western Europe and Australia are at different stages of maturity when it comes to deploying private financing vehicles for meeting public ends. However, they all share one thing in common — namely, that the market opportunity over the next decade is significant.
Opinions differ as to what constitutes an infrastructure asset, but it is generally accepted to comprise large, stationary, physical assets with a long, useful economic life, and that support the overall functioning of society. Within this description, infrastructure can be categorized as either economic infrastructure or social infrastructure.
Economic infrastructure assets are those where the users (be they households, passengers, commercial entities, etc.) have the means and the will to pay for the service provided. Consequently, these assets derive revenues principally from consumers or corporate customers, and include transportation, energy, communications and water assets.
Social infrastructure assets — including hospitals, schools, courts, prisons, government offices, etc. — are those where the user is unable or unprepared to pay for the service. Consequently, these assets derive their revenue principally from government payments. Where social infrastructure is provided by the private sector, it is almost always under some form of public-private partnerships; a long-term concession with defined scope and payment mechanism, financed with private-sector capital.
Private investment in social infrastructure depends on the government’s ability to pay the private sector for the service and on the government’s political support for public-private partnership.
Sameer Jain is founder of ActiveAllocator.com and former managing director with Citi Alternative Investments. This article was originally published in longer form in Institutional Investing in Infrastructure, a sister publication to this magazine. Read the article at this link: https://bit.ly/2QkLRwB