Rethinking Infrastructure: An Investor's View
What we’re looking for is boring, predictable, long-term cash flows. And so the more seasoned the asset is, the more interesting it becomes to us, the more we’re willing to pay, and the better the alignment of interest.
October 2015 | by Robert Harris
There’s good news for debt- and deficit-strapped governments looking to build or rebuild essential infrastructure today. “There’s a tremendous amount of capital right now that’s interested in investing. Much of that capital is available from sources such as pension funds and sovereign-wealth funds. Yet it’s often tricky to align the interests of lenders and government borrowers on projects that pay back over the next quarter century, as opposed to the next quarter. In emerging markets, it is particularly difficult to find regulatory regimes that sufficiently reduce risk for institutional investors whose investment perspectives are tuned to lower risk and returns.
Attracting Institutional Investors
To really make infrastructure investing attractive in a given jurisdiction for us, we need that consistency and predictability of the regulatory framework. When you’re investing (as I like to say) in quarter centuries, as opposed to the next quarter, 90 days, that regulatory framework and that consistency have to actually transcend any given government. Because the asset is going to outlive a government, which may only be around for five years, let’s say, in a typical democratic state.
If a jurisdiction can prove that and demonstrate that over a period of time, capital will find its way to that jurisdiction. The United Kingdom, Australia, and Chile are the three best examples in our mind. Others are coming along. But we think those are the leading lights. By and large, in emerging markets, it’s actually still difficult to get appropriately rewarded for the risk associated with investing in infrastructure.
When you think about it, what is your alternative? Your alternative is you can buy a liquid long bond. And the spread of the infrastructure asset against that long bond in some cases is nil. So governments have to be focused on trying to reduce that idiosyncratic risk by the nature of the concessions and the nature of the regulatory environment, as much as they can. There’s a tremendous amount of capital right now that’s interested in investing. So it’s not a question of there not being a supply of capital. The question is, “Can you, in your jurisdiction, compete for that capital effectively by reducing that idiosyncratic risk?” So we’re willing to take on the risk of, let’s say, a toll road—a risk on the traffic and how much traffic will be there.
What we’re worried about, though, is the risk that the regulatory environment might change. We’re worried about the risks involved with certain promises or undertakings, in terms of what roads are going to connect in with that toll road, the ability of somebody to build a competing road next door, et cetera, et cetera. That’s the idiosyncratic risk to the asset, that it essentially widens the spread over the long bond. And so what government should be thinking about doing is, “How do we create an environment that we can narrow that spread as tight as we can?”