The cash flow characteristics of global listed infrastructure companies are what differentiate the asset class from its peers. These companies are the owners and operators of assets such as electricity transmission and distribution grids, oil and gas pipelines, water pipeline networks, communications infrastructure, airports, toll roads and ports. The unique nature of their cash flows result from the essential services provided by infrastructure projects, their strong monopolistic characteristics, long life, stable regulatory or contract frameworks, and a degree of protection from macroeconomic risks, such as inflation.
Infrastructure is the backbone for economies to develop and remain competitive
The need for infrastructure investment is a never ending cycle. Investment in infrastructure helps stimulate sustainable long-term economic growth which then creates a further need for infrastructure. Ultimately, infrastructure promotes higher living standards as it fosters economic growth and creates jobs.
The World Economic Forum estimates that every dollar spent on infrastructure generates an economic return of between 5 to 25%. Infrastructure is the backbone for economies to develop and remain competitive. The future growth in infrastructure will not only be driven by the need for new infrastructure, particularly in developing economies, but also to replace existing ageing infrastructure, perhaps first constructed decades ago in developed economies.
Since the 1970s, real public infrastructure investment in advanced economies has been falling as a percentage of Gross Domestic Product (GDP), as demonstrated in the chart below. This has left many infrastructure projects deferred and even abandoned, ultimately magnifying the infrastructure gap that is only expected to widen going forward.
The need for infrastructure investment is dominated by the core industry sectors
- Water: Demand is expected to exceed supply
- Energy: Investments in energy efficiency will be important
- Transport: Many forms of transport are set to double or triple in demand
- Communication: Global mobile traffic is expected to rise nearly 10-fold between 2014 and 2019
The role of government
Governments have traditionally been the providers of a nation’s infrastructure investment. Most of this has been financed by a combination of tax revenues and tax revenue-backed debt. However, since the financial crisis, government finances have come under considerable stress due to lower tax revenues and increasing expenditures. This has resulted in many embarking on austerity measures aimed at reducing spending. With only minimal success to date, and further structural pressures on government finances in the developed world from their ageing populations, the ability of governments to maintain their role as the primary provider of infrastructure will weaken.
The dynamics of a greater investment need and the financial constraints governments now face led the Business 20 (B20) Infrastructure and Investment Taskforce to identify that an infrastructure shortfall of US$25 trillion would accumulate by 2030. That is, of the Organisation for Economic Cooperation and Development’s (OECD) estimated US$70 trillion investment requirement, only US$45 trillion would be spent. This already includes a sizeable participation from the private sector.
The shortfall highlights the challenge facing governments in sourcing additional funding at a time when many are already running budget deficits. Further involvement of the private sector in the provision of infrastructure is therefore inevitable.
Investing in global listed infrastructure
Investors have been increasingly recognising the benefits of global listed infrastructure and its stable, reliable and growing cash flows. In addition, global listed infrastructure also displays complementary attributes to other asset classes in a balanced portfolio. It can play the role of a low-risk bedrock within a global equities allocation. It may be a low-risk alternative for fixed income investments, and it can quickly increase a real asset exposure due its liquidity. With such unique investment characteristics, built on the stable, reliable and growing cash flows, global listed infrastructure can play a number of roles in a balanced portfolio and we believe it should be a key consideration for every investor.
To find out more about the opportunities in this space, please read the full report.