Infrastructure: Big projects create a small fortune [...] Whether the world economy continues on its growth trajectory or falls victim to the U.S. subprime lending crisis, global population growth and expectations for better living standards are heightening demand for electricity, water and transportation, and other components of infrastructure. A report published this year by the Organization for Economic Cooperation and Development estimates that $53 trillion will be required for roads, railways, electricity transmission and distribution, telecommunications and water services over the next 25 years. Add investment for electricity generation, and the figure rises to $65 trillion, according to the report. Of the $65 trillion, about half will be from filling growing needs in places like China, India and Latin America, according to Barrie Stevens, deputy director of the International Futures Program at the OECD. The other half will go to maintenance and reconfiguration in the developed world to avoid bottlenecks or power blackouts. "If you look at the ports, there are queues and queues of ships getting into port in the United States and Asia," Stevens said. "If you look at the United Kingdom and try to commute, the trains are cram filled. In the OECD countries, there is the problem of decaying water pipes." But with many governments unwilling to saddle taxpayers with the cost of these capital intensive projects, some are turning to the private sector to take some of the risks and reap the rewards.
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Whether the world economy continues on its growth trajectory or falls victim to the U.S. subprime lending crisis, global population growth and expectations for better living standards are heightening demand for electricity, water and transportation, and other components of infrastructure.
A report published this year by the Organization for Economic Cooperation and Development estimates that $53 trillion will be required for roads, railways, electricity transmission and distribution, telecommunications and water services over the next 25 years. Add investment for electricity generation, and the figure rises to $65 trillion, according to the report.
Of the $65 trillion, about half will be from filling growing needs in places like China, India and Latin America, according to Barrie Stevens, deputy director of the International Futures Program at the OECD. The other half will go to maintenance and reconfiguration in the developed world to avoid bottlenecks or power blackouts.
"If you look at the ports, there are queues and queues of ships getting into port in the United States and Asia," Stevens said. "If you look at the United Kingdom and try to commute, the trains are cram filled. In the OECD countries, there is the problem of decaying water pipes."
But with many governments unwilling to saddle taxpayers with the cost of these capital intensive projects, some are turning to the private sector to take some of the risks and reap the rewards.
infrastructure seems a natural thing to do for government. These projects are hugely capital intensive. That means the cost of capital is very important. That in turn means the total cost for the project, that is what it will cost for taxpayers/consumers, to a very large degree is dependent on the cost of capital. That cost will be far lower with state financing compared to corporate financing.
What's all the fuss about taxing? I'd rather pay €75 of tax than €100 of fees to a company.
For those who recognized the opportunity early, like Australia's Macquarie Bank, which dominates the field, structuring some of these assets for investment has proved to be a gold mine. As the Australian government tightened its budget and found it difficult to meet infrastructure expenses, it sold off airports and toll roads; Macquarie matched those assets with pension funds and investment funds, which it sold to investors.
Infrastructure investments are an alternative asset class like private equity and hedge funds, experts argue, because they do not correlate to the stock and bond markets. Instead, investments like toll roads and water systems offer a steady, stable income stream that grow as economies expand. Factor in the monopoly status of many of these projects, and the expectation that the revenue grows with inflation, and you have the appearance of safe, solid long-term performance and protection from volatile economic cycles.
But that steady income stream provides another opportunity: for leverage or financial engineering. And that can be less safe for investors. Since the mid-1990s, Macquarie, through its investment funds, has established ownership stakes or concessions in more than 100 infrastructure assets globally. Other Australian players, like Babcock & Brown, a global investment adviser for specialized funds, and Challenger Infrastructure, part of a financial services company, have also developed infrastructure investment funds. As the field grew, financial institutions like Goldman Sachs, Deutsche Bank, JPMorgan Chase, 3i and Citigroup have entered the field. As a result, some analysts say, there are too many players and too much money chasing too few assets, driving up prices. As long as a year ago, Michael Wilkins, a senior credit analyst in London with Standard & Poor's, warned that "as a result of rampant demand, the infrastructure sector is suffering from the dual curse of overvaluation and excessive leverage - the classic symptom of a bubble, similar to the dot-com era."
Since the mid-1990s, Macquarie, through its investment funds, has established ownership stakes or concessions in more than 100 infrastructure assets globally. Other Australian players, like Babcock & Brown, a global investment adviser for specialized funds, and Challenger Infrastructure, part of a financial services company, have also developed infrastructure investment funds. As the field grew, financial institutions like Goldman Sachs, Deutsche Bank, JPMorgan Chase, 3i and Citigroup have entered the field.
As a result, some analysts say, there are too many players and too much money chasing too few assets, driving up prices.
As long as a year ago, Michael Wilkins, a senior credit analyst in London with Standard & Poor's, warned that "as a result of rampant demand, the infrastructure sector is suffering from the dual curse of overvaluation and excessive leverage - the classic symptom of a bubble, similar to the dot-com era."
Wait a minute...
[...] In the United States the debate is particularly sharp. The repeal of the Public Utilities Holding Company Act in 2005 made it easier for private equity firms like KKR to buy TXU, a Texas utility, and for Macquarie to bid on Portland Energy, which it did last month. The Public Utilities Holding Company Act had been in place since 1935, after more than 20 percent of U.S. utilities went into bankruptcy after being securitized by financial holding companies like the Insull Trust.
In the United States the debate is particularly sharp. The repeal of the Public Utilities Holding Company Act in 2005 made it easier for private equity firms like KKR to buy TXU, a Texas utility, and for Macquarie to bid on Portland Energy, which it did last month.
The Public Utilities Holding Company Act had been in place since 1935, after more than 20 percent of U.S. utilities went into bankruptcy after being securitized by financial holding companies like the Insull Trust.
Thank god highly leveraged, overvalued, bubbly, frothy, vital public utilities won't be... uh?
Many players expect the reins of government to continue to loosen.
At 3i, which introduced an infrastructure fund on the London Stock Exchange this year, Michael Queen, managing partner for infrastructure, predicted that financial woes in the United States would force governments to welcome private sector ownership. "The fiscal deficit at the state and federal level will not disappear any time soon," he said, "and politicians are beginning to understand it is not just a financial issue, it is also a liability issue."
"The fiscal deficit at the state and federal level will not disappear any time soon," he said, "and politicians are beginning to understand it is not just a financial issue, it is also a liability issue."
Meanwhile, Queen said, 3i intended to be active in infrastructure projects in India, where the regulatory environment has already improved. "This is going to be a major asset class," Queen said, "although it will not happen in a straight line."
"This is going to be a major asset class," Queen said, "although it will not happen in a straight line."
</rant> Peak oil is not an energy crisis. It is a liquid fuel crisis.
Don't you know the entire purpose of everything is to create new asset classes? Assetliness is next to godliness, as they say...
The SNP Government's policy is a sort of "non-toxic" PFI - the Scottish Futures Trust
They plan to keep assets in trust on behalf of the public and borrow against them at better rates than the private sector, thereby cutting financing costs. Unfortunately, they are up against the good old "Public Sector Borrowing Requirement" and their chances of getting this scheme past the UK Chancellor, Mr Darling, are zero.
Our approach is to put the assets into trust, but not to borrow against them.
Instead we simply "unitise" the revenues by using a UK LLP (a US LLC would work just as well over there) as a framework, and issue billions of proportional shares ("nth's") in an agreed "Capital Rental" stream, which either rises with inflation (property eg affordable housing) or varies with use (Edinburgh Tram).
In Canada, gross revenues of privately (listed Company) owned assets are unitised very similarly using "Income Trusts" - and pension funds can't get enough of this new "asset class".
We are using a much simpler legal structure than trusts, where the interests of all the stakeholders are aligned.
So yes, infrastructure is a vast new asset class, potentially, but it need not be a goldmine for investors and for Wall Street & the City.
The world is awash in Capital seeking secure long term index-linked revenue streams. The price of Capital - which in a sane monetary system is distinct from the cost of Credit (and neither has anything whetever to do with the price Central Banks set for money) - is simply a matter of supply and demand, and it has been reducing over the centuries, as the supply of productive Capital - particularly land - has increased.
It is likely that the rate of return on such government owned infrastructure probably would not need to be much more than 1 to 2% (quite recognisable to the Victorians, in a pre-inflationary, pre "Debt Money" era) in view of the fact that it would be index-linked.
While such public assets must be maintained, and buildings etc depreciated over time, for the most part assets such as land do not depreciate and therefore there is no reason why any capital should be repaid in respect of it, as it is with secured loans.
So this asset class constitutes a new form of "Not for Loss" quasi-Equity.
The Scots politicians liked the fact that:
(a) no capital repayments reduces finance costs;
(b) index-linking reduces return on capital in cash terms;
(c) no need for any new legislation - which appeals to a minority government;
(d) a "sustainable " development model, since developers are service providers with a stake in the outcome, not intermediaries.
Moreover, this asset class is Islamically sound at a deep level - and strangely enough, the UK Treasury issued a consultation on this subject only this week.
So bugger the National Debt: there demonstrably is no such thing as a "Public Sector Borrowing Requirement" -that is merely a convention, and an unsustainable one.
Let's have a "National Equity" instead: because Ethical is Optimal. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
