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2. Investable Infrastructure Assets

© New York University/Stern School of Business, CC BY 4.0 http://dx.doi.org/10.11647/OBP.0106.02

To economists, infrastructure is a type of durable capital not provided efficiently by the private market alone. Because the market generally does a reasonably good job of providing housing and commercial office buildings, these types of long-lived capital are typically not considered infrastructure. Specialized buildings used mainly by a government agency, however, are sometimes included in definitions of infrastructure.

Durable capital that provides infrastructure services is typically configured as a “network” in physical space. Examples include a system of roads, water conduits, sewer pipes, electrical transmission and communication lines. When network services are provided in an unregulated market, they tend toward monopoly because a larger network is relatively more efficient at delivering services than a smaller one. So there is almost always a role for some government entity in providing infrastructure services. For example, some types of network capital such as roads are mainly provided by government agencies. Others, such as telecoms or power grids, are often provided by regulated private firms.

The World Economic Forum (2014) has taken an expansive view, defining infrastructure as “the physical structures — roads, bridges, airports, electrical grids, schools, hospitals — that are essential for a society to function and an economy to operate”.1 This section partitions the infrastructure universe along several relevant dimensions. Table 1 presents one possible taxonomy by OECD in terms of the associated sectors.

Table 1. Key Infrastructure Sectors (Source: OECD, 2014)

Sectors

Examples

Power and energy

Energy productions, power distribution

Water and sewerage

Plants for management of the water cycle

Telecom

Satellite communication networks

Transportation

Highways, tunnels, bridges, light rails, ports/harbours, airports

Social infrastructures

Social Housing, Hospitals, prisons, schools

Infrastructure encompasses a very broad set of asset types, and the line separating the free market from a regulated market or government provision differs among societies. Consequently, there is some divergence as to what sectors are included and excluded from infrastructure in various economies.

An example from data provider MSCI illustrates this point. MSCI constructs the World Core Infrastructure Index (WCII), the World Infrastructure Index (WII), and the Emerging Markets Infrastructure Index (EMII), three widely followed benchmark indexes of publicly listed infrastructure firms.

Table 2 presents the Global Industry Classification Standard (GICS) names of the constituent sectors, as well as each subsector’s weight in the indexes on 6 May 2015.

The WCII and WII assign the largest weight to Utilities (with subsectors Electric, Gas, Water, and Multi-Utilities, as well as Oil & Gas Storage & Transportation). The WCII gives a large weight to Transport Infrastructure, while the other two indexes weight Telecommunication Infrastructure more heavily.

Wireless telecom is subject to much weaker local scale economies than services provided by a physical network. For example, it is much easier for several different wireless service providers to have customers in the same city block than for several water suppliers to do the same. One might argue that investments in a wireless network are more like commercial office buildings and should not count as infrastructure. Nevertheless, wireless telecom holds a particularly prominent place in the EMII. The WCII excludes social infrastructure.

These differences in industry composition lead to substantial divergence in asset return performance and affect the optimal size of “infrastructure” as an asset class in institutional portfolios. Definitions matter, so we aim to be precise about our definition of infrastructure here.

Table 2. Infrastructure Sector and Subsector Weights (Source: MSCI, 2015)

GICS Sub-industry

WCII

WII

EMII

Oil & Gas Storage & Transportation

16.7

10.5

2.5

Electric Utilities

14.4

21.3

12.4

Gas Utilities

11.1

2.9

4.7

Water Utilities

4.1

1.1

2.3

Multi-Utilities

13.9

15.4

Utilities

60.2

51.1

21.9

Railroads

14.1

Airport Services

3.6

0.8

2.8

Highways & Rail tracks

10.4

1.6

2.5

Marine Ports & Services

2.0

0.3

3.2

Transport Infrastructure

30.2

2.71

8.46

Specialized REITs

9.6

Alternative Carriers

1.1

Integrated Telecommunication Services

32.4

15.8

Wireless Telecommunication Services

10.8

47.5

Telecommunications Infrastructure

9.6

44.3

63.2

Education Services

0.1

Health Care Facilities

1.8

4.1

Social Infrastructure

0.0

1.8

4.1

100.0

100.0

100.0

100.0

97.7

97.7

RARE Infrastructure Limited (2013) estimates the total size of all global infrastructure assets in 2012 at $20 trillion. A division of infrastructure by asset ownership suggests that 75% is government owned and 25% is privately owned (see Figure 1).

The world investable market portfolio contains about $100 trillion in private assets, and non-governmental infrastructure assets represent 5% of the world market portfolio. Equity invested in publicly listed and unlisted funds represents approximately $3 trillion of this $5 trillion, with debt representing the remaining $2 trillion in private capital. Unlisted equity (direct investment) contributes about $450 billion, and this amount is likely to grow substantially. The number of unlisted funds investing in infrastructure tripled between 2007 and 2015. Pension funds and sovereign wealth funds have expressed strong interest in further expanding their infrastructure asset allocations.

Figure 1. Infrastructure Participation (Source: World Bank, FactSet Research System, RARE calculations, Preqin)

Some infrastructure assets are for social use, such as prisons or educational or medical facilities, while others are for economic use, such as toll roads or airports. Some infrastructure services are used by a government agency to provide a final service, and others are provided directly to consumers and private firms. Many types of privately provided infrastructure (e.g., toll roads) come with demand guarantees from a government agency.

Figure 2 shows the spectrum of possible private involvement in infrastructure investment, listing the combinations of private and public ownership, use, and operations.

Figure 2. Extent of Private Participation

One can also divide the infrastructure universe by asset stage into “greenfield” and “brownfield”. Greenfield projects involve constructing a new asset on previously undeveloped terrain, and they often generate little or no income in the near term. Brownfield projects redevelop an existing site for infrastructure purposes, converting it to a new use or expanding its existing use.

The asset location matters, but labels such as mature, maturing, and emerging markets are of questionable usefulness. More important are the location’s political risk, regulatory risk, and management and governance risk (e.g., corruption). Under the definition suggested by economists, efficiently providing infrastructure requires an active role by some government entity. Infrastructure can therefore suffer from a government that is either too weak or too expansive.

Finally, the nature of the income stream is a crucial driver of risk and returns. Assets whereby the investor has a long-term contract or concession with a sovereign counterparty that delivers predictable (or even regulator-determined) revenues and costs represent one extreme of the spectrum. Assets with market-based revenue streams that have income volatility because of less reputable counterparties represent the other. Table 3 combines the various asset characteristics into an increasing risk-and-return profile ranging from mature infrastructure assets (low risk) to growth infrastructure assets (moderate risk) to development projects (high risk). The nature of the income risk and the mix of capital stake and fee structure determine whether the asset is more bond- or more stock-like. That in turn affects the relevant valuation framework.

Table 3. Asset Return and Risk Profiles (Source and © MSCI, 2014)


1 World Economic Forum, op. cit. above.