Infrastructure investors, especially in developing economies, must think of infrastructure projects not just in terms of the hard, real asset, and instead take into account numerous other “soft” factors that determine how the asset achieves its returns, delegates heard at the International Asset Owners Summit in Hong Kong yesterday.
Infrastructure investment has long been categorised as investment in “real assets”, with claims to inflation hedging and a guard against volatility. However, director of the Labor and Worklife Program at Harvard University, Larry Beeferman, challenged this perception, positing that infrastructure is much more about the people than the facilities.
Beeferman outlined four central pillars of infrastructure investments: the importance of the services it provides to the general population; the footprint of the investor, in terms of geography or capital; the scale that this footprint can give the physical infrastructure asset; and the role of government and policies. “When you combine all these, you see that infrastructure is really defined in terms of the people: who gets served, and the relationship between investors and the government,” Beeferman summarised.
Ben Way, head of north Asia and Russia at Macquarie Infrastructure and Real Assets, concurred that there is much more to infrastructure than the “stable, predictable cash flows” that investors have come to associate it with.
“Some assets, such as ports, have a strong link to GDP growth and trade, but other assets grow irrespective of GDP,” Way said. “The regulations of particular places have a large impact.” Way also pointed out that infrastructure investment comes with very high barriers to entry not just because of the size of the assets, but because of the complicated contracts involved and the operating capacity needed.
“The demand for infrastructure investment will only intensify, especially in developing economies,” Way said on the panel. But making money from infrastructure through long-term operating contracts with governments can get complicated when governments change hands. “The new parties can question the terms of the contract set forth by the previous party,” Beeferman added.
In developing economies like Asia, the “people” aspect of infrastructure becomes starkly apparent, even for experienced infrastructure investors, Way added. “When we sit down with a Chinese state-owned enterprise, I don’t think the fact that we’ve built similar projects in Australia means much to them,” he confessed.
For pensions that don’t have expertise in infrastructure or emerging countries, the question is how to deploy the capital the countries’ infrastructure needs, according to Hamid Tawfiki, chief executive of boutique investment banking firm CDG Capital in Morocco. One possible way is through debt platforms, he suggested, which the International Finance Corporation are trying to set up for some emerging countries at this point, he said.