Digging for infrastructure gold

Digging for infrastructure gold

Infrastructure is arguably not the most glamorous of asset classes. 

In the alternatives mix, it doesn’t come with the glint of gold, or the shiny façade of a new property development. But if you like inflation-linked asset classes, often backed by a government balance sheet and with a yield significantly above government bonds, they tick a lot of boxes. 

In part, this is why companies in the infrastructure investment company sector have historically traded on such a rich premium to net asset value. 

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Yet time and again, history reminds us that there’s no such thing as a free lunch.

Given the scope of sectors such as the infrastructure investment company sector, investing in projects the length and breadth of the globe, from transport and schools through to the health service, it is not surprising to see it become something of a political football. 

Infrastructure has always been about much more than those stable income yields, and always had potential to make it into those political speeches. And whether it’s political posturing or plain hyperbole, this is perhaps rightly so.

In hindsight, then, in the UK it is no wonder that shadow chancellor John McDonnell’s 2017 Labour conference speech targeted the sector, even if his threats that a Labour government would bring “wasteful” private finance initiatives contracts back into the public sector were unfortunate, to say the least.

His comments hit share prices in the infrastructure investment company sector hard, leaving question marks regarding the sector’s vulnerability to political meddling.

The collapse of Carillion at the start of this year underscored further that while the infrastructure investment company sector may be about predictable income streams, it is far from risk-free. Fast forward to October’s 2018 Budget, it was no surprise to see chancellor Philip Hammond mention infrastructure in his speech. 

Yet Mr Hammond’s announcement on PFI in the Budget was, in fact, an absolute non-announcement. In other words, if you look at ‘new’ PFI flow in recent years, this has largely tailed off, so really, he did not announce stopping very much at all. But given that risks posed by infrastructure – and more specifically for the purposes of this article, the infrastructure investment company sector – are now more widely known, let’s take a look at some of those risks in more detail.

Revenue risk

Comments on PFI are relevant to a particular group of (public) infrastructure assets, with relatively stable cash flows. However, this is not the case for all infrastructure assets.

Moving up the infrastructure risk scale involves moving from assets such as hospitals and schools to airports and ferries. The latter are clearly much more exposed to economic cycles.