Infrastructure as an Asset Class

Investment Strategy, Sustainability, Project Finance and PPP

Barbara Weber, Mirjam Staub-Bisang, Hans Wilhelm Alfen

• Publisher: Wiley
• Year: 2016
• Print ISBN:
  9781119226543
• Edition: 2
• eBook ISBN:
  9781119226550
• Topic: Business
• Subtopic: Finance
• Index: Business

Clear, comprehensive guidance toward the global infrastructure investment market

Infrastructure As An Asset Class is the leading infrastructure investment guide, with comprehensive coverage and in-depth expert insight. This new second edition has been fully updated to reflect the current state of the global infrastructure market, its sector and capital requirements, and provides a valuable overview of the knowledge base required to enter the market securely. Step-by-step guidance walks you through individual infrastructure assets, emphasizing project financing structures, risk analysis, instruments to help you understand the mechanics of this complex, but potentially rewarding, market. New chapters explore energy, renewable energy, transmission and sustainability, providing a close analysis of these increasingly lucrative areas.

The risk profile of an asset varies depending on stage, sector and country, but the individual structure is most important in determining the risk/return profile. This book provides clear, detailed explanations and invaluable insight from a leading practitioner to give you a solid understanding of the global infrastructure market.

• Get up to date on the current global infrastructure market
• Investigate individual infrastructure assets step-by-step
• Examine illustrative real-world case studies
• Understand the factors that determine risk/return profiles

Infrastructure continues to be an area of global investment growth, both in the developed world and in emerging markets. Conditions continually change, markets shift and new considerations arise; only the most current reference can supply the right information practitioners need to be successful. Infrastructure As An Asset Class provides clear reference based on the current global infrastructure markets, with in-depth analysis and expert guidance toward effective infrastructure investment.

CHAPTER 1
Infrastructure – An Overview

High investment and maintenance costs for infrastructure assets are a heavy burden on public budgets. As a result, over the last four to five decades all OECD (Organization for Economic Cooperation and Development) countries have steadily reduced their level of infrastructure investment both in absolute and relative terms. This situation is enhanced by the consequences of a severe global financial crisis and the enormous challenges facing infrastructure assets caused by climate change.

In response to this situation, a number of governments have sought to identify new ways of financing adequate infrastructure facilities despite (or even because of) this dearth of state funding, demonstrating a change in attitudes. In almost all of the countries concerned, the outcome has been cooperation with the private sector with a view to ensuring continued domestic economic productivity even in the face of growing populations and insufficient public budgets. Ultimately, the quality of a country's available infrastructure is a vital factor in its future economic growth and, hence, must have first priority.

Already today, around the world, a significant proportion of infrastructure assets are in private hands. This is especially true for the telecommunications sector, to a lesser extent for power generation, transmission and storage and even less for transport, water, waste, and social infrastructure. It is expected that private money will continue to flow into these sectors because governments lack the means to finance and maintain publicly-owned and operated infrastructures, owing to pressure on budgets and tax-raising capacity. At the same time, in an ongoing low interest rate environment, investors will keep looking for attractive, long-term, low risk investment opportunities as presented by many infrastructure assets.

Most Western countries as well as several emerging economies in Asia, the Middle East and Eastern Europe, have implemented extensive legislation to open up the possibility of infrastructure investments by the private sector. For its part, the private sector has recognised the financial benefits of funding, constructing and operating/holding infrastructure assets, whether in the form of long-term concessions or by way of permanent ownership.

Before infrastructure is defined and its general characteristics addressed in some detail, the following section provides a brief overview of the size of the infrastructure market and its investment requirements.

1.1 DEMAND FOR INFRASTRUCTURE

Significant demand for investments in both economic and social infrastructure assets exists around the world. This is because public infrastructure projects/assets in areas such as traffic, supply and disposal, health and social care, education, science and administration are some of the key location factors and growth drivers of any economy. Although governments are responsible for investments in new and existing infrastructure assets, and hence are in a position to influence positively the economic development of their countries, the combination of economic upturn, insufficient investment in these sectors and the inadequate, even most basic, maintenance of existing ageing facilities over the past decades has led to a considerable imbalance between supply and demand when it comes to infrastructure assets. This has been exacerbated by population growth and an increased demand for constructing, modernising or replacing existing assets, which in turn leads to higher costs. The global investment shortfall in infrastructure is estimated to be at least US$1 trillion per annum (WEF, 2014a). The World Bank estimates this excess demand at 1.3% of global gross national product (GNP) (World Bank Database, 2015). Meanwhile, the gap between the need for infrastructure investments and the ability of national budgets to meet this demand is continuing to widen throughout the world.

In less prosperous developing countries and emerging economies, demand for infrastructure investments continues to focus on primary care and utilities in particular. Funding for the development and operation of such projects, most of which are constructed on greenfield sites, has always been scarce. In the past, these requirements have largely been financed with the assistance of development subsidies and multilateral sponsor organisations, while private investors rarely got involved. However, this situation is changing dramatically at least for those emerging economies with dynamic economic growth. In countries such as China and India, infrastructure projects financed with private investment are becoming increasingly common as a means of meeting the vast capital requirements for the construction of basic infrastructure. The same applies to the transitional economies of Eastern Europe, where initially the main focus has been on privatising state-owned enterprises.

Yet, established industrialised nations are also facing growing financial challenges when it comes to providing efficient infrastructure facilities. Their existing infrastructure (brownfield), which is generally well constructed, must be operated, serviced, maintained, modernised and adjusted to meet current requirements, including environmental and social standards. These assets often entail new construction, renovation, expansion or conversion measures. Due to demographic change, this sometimes even requires the dismantling and fundamental redesign of the relevant assets.

One particular challenge is financing the construction and operation of international, cross-border infrastructure facilities that are extremely important for the integration of international economic communities, as evidenced by the examples of the Trans-European Transport Network (TEN-T), the Trans-European Energy Network (TEN-E), and the Trans-European Telecommunications Network (eTEN).

All country types – developing, emerging and industrialised – have a financing gap of some sort that they need to close. However, there are considerable differences in terms of the political, legal and economic conditions and requirements for closing this gap with the aid of private capital. One particular consideration is the substantial variation in economic growth combined with the national debt and existing tax and contribution ratios of the respective countries. Industrialised nations often show low levels of growth and rapidly dwindling scope for financing infrastructure via new borrowing or further increasing the burden on taxpayers and users. Therefore, it is important for these countries to realise efficiency benefits through the expansion, maintenance and operation of the existing infrastructure. As a consequence, these countries can only get hold of extra cash by making savings in their bureaucratic structures, in other words they need to cover future expenses by reforming their already overburdened administrative machinery and adjust their budgets accordingly. In this context, value-for-money comparisons (effectiveness and efficiency) – both between infrastructure assets of the same kind and/or in the same sector as well as conventional procurement vs. private-sector participation/partnerships – play a decisive role. This is even more crucial once governments aim to attract private capital to fill the financing gaps.

In contrast, the financial liquidity aspect is considerably more important in high-growth countries, because the required infrastructure needs to be available for use as quickly as possible – ‘whatever the cost’ – in order to not only meet urgent needs but also further support economic growth. In a scenario reminiscent of the post-World War II economic boom in Germany, the aim here is to offset the resulting new (government) debt with growing revenues generated in other areas. In both cases, though, the acquisition of private capital to supplement governments' efforts is one of the primary objectives.

Building on this qualitative analysis of the demand structure, the following paragraphs aim to quantify the costs for these infrastructure requirements to some extent.

According to estimates by the World Bank, global operating and maintenance costs for existing infrastructure assets alone amount to 1.2% of global GNP, almost equal to the excess demand for new investments of 1.3% mentioned earlier (World Bank Database, 2015). These costs may be due in part, although by no means exclusively, to overall rising raw material costs.

The growth in healthcare costs and pension obligations owing to an ageing population accompanied by reduced tax receipts has led to a further deterioration in the financing options available to governments. In high-tax countries, such as Germany or Scandinavia in particular, tax increases are not a feasible option for funding infrastructure assets. Using fixed-income securities as alternatives has a negative impact on the public purse and the financial rating, plus it can be used to finance only an extremely limited number of projects. In short, the current public policy and regulatory and planning frameworks in most countries appear inadequately equipped and structured to tackle the multifaceted challenges facing infrastructure development in general and sustainable infrastructure in particular over the next 25 years.

According to the comprehensive two-volume Infrastructure 2030 OECD study published in 2006/2007 – this is still the only study of its kind to which all newer studies keep referring – government spending on infrastructure in OECD countries amounted to 2.2% of GNP between 1997 and 2002, compared with 2.6% in 1991–1997 (OECD, 2006, 2007). Figure 1.1 illustrates this development, broken down by a selected number of OECD countries over a period of 30 years from 1970 to 2002. With the exception of the US in 2002, the ratio of government infrastructure spending to total spending in the respective countries declined or stagnated over the same periods. A more recent OECD report on transport infrastructure only shows that investment rates for OECD countries have decreased even further from 2002 to 2011, floating between 0.8 and 0.9% of GNP (OECD/ITF, 2013).

Figure 1.1 Government infrastructure investments as a percentage of total outlays in OECD countries

Source: OECD (2006)

Figure 1.2 compares the key European Union (EU) countries as well as all 15 EU countries over a 30-year period. It shows a substantial downward trend in public investment in the EU from 1970–2003 as well, not only in relative but also in absolute terms. A 2015 report illustrates a continuation of this trend with public investment in infrastructure for the (now) 28 EU countries in 2013 down by a further 11% compared to 2010 (Ammermann, 2015).

Figure 1.2 Infrastructure investments of EU governments

Source: OECD (2006)

According to estimates contained in the Infrastructure 2030 OECD study 2006/2007 and a 2013 report by McKinsey (McKinsey Global Institute, 2013), the need for infrastructure investments – including additions, renewals and upgrades – has increased so significantly at a global level that investments totalling some US$60 trillion will be required between 2013 and 2030 in order to improve the key infrastructure facilities around the world in line with requirements. This corresponds to around 3.5% of global GDP annually. Although the OECD study fails to provide details of the assumptions underlying these estimates and whether the investments constitute a politician's wish list or essential requirements in the respective countries, there is no reason to doubt the prevailing trend. According to the study, the 30 OECD member states ha...

Table of contents

• Cover
• Epigraph
• Series
• Title page
• Copyright
• Preface
• A Note from the Publisher
• Acknowledgements
• About the Authors
• Introduction
• CHAPTER 1 Infrastructure – An Overview
• CHAPTER 2 Infrastructure Investments
• CHAPTER 3 Organisational Model
• CHAPTER 4 Characteristics of Selected Infrastructure Sectors and Subsectors
• CHAPTER 5 Risks
• CHAPTER 6 Project Finance
• CHAPTER 7 Financing Instruments
• Concluding Remarks
• APPENDIX A Sample Page from CDC Toolkit on ESG for Fund Managers
• APPENDIX B Credit List for Envision's Sustainable Infrastructure Rating System
• APPENDIX C Infrastructure Sustainability Rating System (Australia) – Themes and Categories
• APPENDIX D National Appropriate Mitigation Actions (NAMAs)
• References
• Index
• EULA