THE INFRASTRUCTURE INVESTMENT MARKET

Governments have traditionally financed (that is, paid for) infrastructure assets because of the sheer size and cost of many of these large projects.

Today, while governments continue to be key decision makers in initiating large infrastructure projects, they are looking to the private sector to help securitise (in other words, structure and package for investment purposes) and finance these large projects. This allows governments to focus spending more clearly on other policy priorities such as health, welfare and education, while also avoiding the development and operational risk that is often attached to large infrastructure projects.

Key characteristics of infrastructure investment:

High barriers to entry

Infrastructure projects are capital intensive (that is, they require a lot of money) and are long term in nature. When governments initiate infrastructure projects, they are often seeking the interest of large consortia that have significant financial resources. Today, greater numbers of retail investors are enjoying the many benefits of an infrastructure investment through the continued development and launch of specialist infrastructure investment funds.

Predictable cashflows

Infrastructure, by its very nature, services a large population; often an entire city or state. The largest infrastructure projects may service an entire nation which often places significant demand on the infrastructure asset once built. Often infrastructure assets have long term contracts with third parties that lock in the volume and/or price of services which combined with the underlying demand for these important services typically translates into regular and predictable cashflows that are often tax-advantaged due to depreciation allowances.

Further, because infrastructure assets typically provide essential services, they are usually protected from economic downturns or pricing pressures to a greater extent than more traditional asset classes such as shares and property.

Low correlation to other asset classes

In simple terms, this means that as an asset class, infrastructure assets perform differently to other asset classes (such as shares and property). This provides important diversification benefits, because infrastructure assets can perform best when other assets classes are under-performing. It therefore makes sense that a well-diversified investment portfolio contain some exposure to infrastructure assets. Infrastructure is often referred to as a 'defensive' asset, because it tends to provide a steady rate of return regardless of the underlying economic or investment cycle that may, by comparison, negatively impact upon returns from shares or property.

A well-diversified portfolio may also seek diversification across different types of infrastructure assets. For example, investors can today gain exposure across a broad range of infrastructure assets including airports, power and water utilities, water and gas pipelines, tollroads/bridges/tunnels, ports and railways.

Long term cash flows

Infrastructure assets are popular with long term investors, because by their nature, infrastructure assets are designed to have a long life. In particular, infrastructure assets are a popular investment with super funds, as those funds prefer assets that provide long investment horizons to match their long term pension liabilities. The capital invested in large infrastructure projects to fund the initial development of the asset often requires high upfront capital expenditure, providing investors a payback over the asset's generally lengthy life.

Essential or monopolistic assets

Many infrastructure assets enjoy a unique position within their chosen market, because they provide basic services that the entire community requires. In many cases, infrastructure assets enjoy a monopoly position. As a result of these monopolistic characteristics, infrastructure assets are sometimes subject to government or contractual regulation, particularly in relation to pricing (for example, the returns that can be made from owning monopoly assets such as electricity transmission facilities). This provides investors in infrastructure, a level of confidence regarding the income streams that will likely flow from the asset.