“Port of Melbourne is a fantastic asset and is exactly what we look for as a business. But there’s a big debate about whether a second port is required and if so when and how do you deliver it. You don’t want to make a substantial investment in an asset and find out government can build a competing asset down the road in a short period of time.”
That little snippet came from our recent interview with Hastings Funds Management executive director Andrew Faber and perfectly captures one of the classic tenets of infrastructure investing: the monopolistic nature of infrastructure assets.
After all, as Faber points out, the last thing you want to do is to pay up to A$7 billion ($4.9 billion; €4.3 billion) for Port of Melbourne only to have the investment case for your 99-year lease neutered by a new, competing port. For an asset like Port of Melbourne, its monopolistic position is one of the keys to mitigating the risk that the cashflows it generates will be disrupted.
That’s why, when you pick up an infrastructure investment brochure, the asset classes’ monopolistic nature always features prominently among the pros. Here’s the catch, though: while monopolies are very much a part of infrastructure investment’s past, we’d argue they will be a much less important part of its future.
Take clean energy infrastructure investments. By dint of their decentralised nature, these investments are practically the antithesis of your archetypical monopolistic infrastructure asset. As Scott Jacobs, co-founder of Generate Capital, a company founded to apply SunEdison’s distributed solar financing model more widely, put it to sister publication Low Carbon Energy Investor: “We believe the infrastructure equation has changed from large-scale, centralised infrastructure to distributed [infrastructure].”
In our keynote interview with Jim Barry (see p.30), BlackRock’s new head of real assets and leader of its infrastructure unit, he estimated that renewables account for about 20 percent of what he called the global addressable infrastructure investment market. However, if we narrow the focus to low-risk infrastructure investments – like PPPs – then renewables probably account for about 30 to 40 percent of that market.
Barry was keen to stress this last figure was anecdotal. But even if we can’t quite nail down the percentages, at the rate renewables are growing, it’s easy to see that a significant part of infrastructure’s low-risk future will be comprised of assets without monopolistic characteristics. And that’s before we throw in other decentralised sustainable infrastructure investments, like energy efficiency or storage, into the mix.
When you add it all up, we may be left with an investment landscape where maybe half of all investible assets going forward will not tick one of the boxes that has traditionally been seen as essential to securing infrastructure’s reputation as a low-risk, cash-yielding investment.
That, in turn, poses a fascinating question: if the future of infrastructure is increasingly decentralised, how does that change the risk profile of monopoly assets? Or put differently: in an increasingly fragmented infrastructure world, is a monopolistic position essential to securing your asset’s cashflows, or a sign you own an asset that is ripe for disruption?