Infrastructure refers to the facilities and businesses used to provide essential services to society. These can be broken into two main categories:
Economic infrastructure, which includes facilities and services such as toll roads, airports, power and water distribution, and communications systems.
Social infrastructure, which includes public facilities traditionally provided by governments such as hospitals, schools, affordable housing and prisons.
As governments worldwide find it increasingly difficult to pay for essential infrastructure, the private sector is stepping in to build, own and operate these facilities. Sometimes projects operate as Private Public Partnerships (PPPs) with the private sector building and owning the physical facilities and the government providing the services which operate in these facilities.
This increased involvement of the private sector is providing more opportunities for investors to participate in infrastructure development.
Why invest in infrastructure?
The characteristics of infrastructure assets provide strong incentive for investors. Not only does infrastructure investment offer attractive yields and potential for strong returns, its low correlation with traditional asset classes allows you to increase your diversification and reduce your investment risk.
In addition, infrastructure investments have distinct characteristics which can be attractive to investors, such as:
Long asset life - assets typically have a 30 to 40 year lifespan, providing predictable income
Monopolies – businesses or industries often have monopolistic characteristics because of high start up or fixed costs which discourage competitors, or because of government regulation which protects them from entry by competitors
Built-in consumer demand which provides long term, stable income
A toll road is a good example. Usually toll road operators will have a contract to collect toll revenue for between 30 and 45 years, with the toll linked to inflation. Once established, the toll road has a stable, long term income. Similarly, airports have strong consumer demand for their services and predictable traffic flow and revenue stream. Investors can also benefit from an increase in the value of the underlying asset. In both instances the high capital cost of establishing these assets is a strong deterrent for competitors, making these businesses natural monopolies. Strict government regulation of toll roads also ensures high barriers to entry by competitors.
When you invest in infrastructure you also have the satisfaction of contributing to projects that directly benefit the community and contribute to economic growth.
