Friday, 24th November 2017
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John Smiles

Qualified Financial Advisor

Why invest in infrastructure?

Infrastructure offers investors a potentially long-term, low-risk, and inflation-linked profile and an alternative asset class that could provide new sources of return and diversification of risk.

Infrastructure assets provide essential services that are necessary for populations and economies to function, prosper, and grow. They include a variety of assets divided into five general sectors:

- Transport (e.g., toll roads, airports, seaports, and rail);

- Energy (e.g., gas and electricity transmission, distribution, and generation);

- Water (e.g., pipelines and treatment plants);

- Communications (e.g., broadcast, satellite, and cable);

- Social (e.g., hospitals, schools, and prisons).

Infrastructure assets operate in an environment of limited competition as a result of natural monopolies, government regulations, or concessions. Most companies have long-term regulatory contracts to operate the assets, which can provide a predictable return over time. As a result, infrastructure assets have the potential to generate consistent, stable cash flow streams, usually with lower volatility than other traditional asset classes. Due to significant economies of scale, they are often regulated to discourage competition. The high barriers to entry often result in a monopoly for existing owners and operators.

Revenues from infrastructure assets are typically linked to inflation and are often embedded in concession agreements, licenses, and regulatory frameworks. In other cases, owners of infrastructure assets are able to pass inflation on to consumers via price increases due to the essential nature of the assets and their inelastic demand. Consequently, the infrastructure asset class may provide investors with a degree of protection from business and economic cycles, as well as attractive income yields and inflation hedge.

It is generally believed the infrastructure asset class is poised for strong growth. With the global population expanding and standards of living becoming higher, there is a vast demand for improved infrastructure. This demand includes the refurbishment and replacement of existing infrastructure worldwide and new infrastructure development in emerging markets.

Financing public infrastructure has traditionally been the responsibility of the state. However, fiscally constrained governments are increasingly turning to the private sector to provide funding for new projects. As a result, the investment opportunities in this sector continue to grow.

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