According to Blackrock the world needs to build US$57 trillion of new infrastructure by 2030 – a huge amount that governments cannot finance alone. Combine infrastructure demand, financing needs and relatively stable long term returns, and it is easy to understand why interest in infrastructure investment continues to grow. In this commentary John Berry looks at the “what” “why” and “how” of infrastructure. This includes thinking about where infrastructure fits in a portfolio and how NZ investors can access these investments.
What is infrastructure?
Infrastructure consists of physical structures together with associated networks and services that connect society and enable its orderly operation. Infrastructure drives a functioning modern economy, covering transport, telecommunications, schools and healthcare, as well as resources like water and energy.
Given the essential nature of infrastructure and the large capital requirements, it has often been the responsibility of governments. However as fiscal budgets have tightened and capital spending needs increased, partial or full privatization of infrastructure will be increasingly common.
Infrastructure is normally categorized as “economic” or “social”. Economic infrastructure provides the structural backbone to the economy including transport (airports, ports, roading etc), telecommunication (transmission networks, cell towers etc) and utilities (water, electricity and gas networks etc). Social infrastructure provides key services vital to the functioning of society (healthcare facilities, education, correctional facilities etc).
Individual infrastructure investments can also be analysed by their stage of development. New infrastructure projects are often referred to as “greenfield” projects. These are at a growth stage and first require designing, financing and building. They can give investors equity-like returns.
More mature or aging infrastructure projects are referred to as “brownfield”. These have already been designed and built but may require rehabilitation. These typically have long term cash flows and can provide investors with stable income like returns.
Read the full Infrastructure Investing by Pathfinder Asset Management – July 2016 article (PDF).