Importance of Investing in Infrastructure

Importance of Investing in Infrastructure


Infrastructure is an important aspect of the functioning society and the economy. Physical constructs and essential services that are used to facilitate the operation of society are what we consider infrastructure. It also provides important connections within the society as well. The quality of life of a person is impacted by the infrastructure as this sets the bar for the essential resources that the individual can access like energy, water, communications, transport etc.

There is a high capital cost for infrastructure as well and this is why the responsibility for a country’s infrastructure falls under the purview of the current government traditionally. However, there are some aspects of infrastructure that are accessible to private investors. Infrastructure has gained popularity among those that invest as a specific asset class. Infrastructure can be divided into economic and social infrastructure. The categories under economic infrastructure are utilities and transport. Utilities include waste, water, generation of power, transmission and distribution of electricity etc. Transport includes rail, bridges, sea ports, airports etc. There are also aspects under economic infrastructure that doesn’t come under these categories which are storage facilities, parking, communication infrastructure etc. Under social infrastructure, we have public transportation, healthcare, education, housing and judicial and defence facilities.

There is only limited direct access to social infrastructure as it is traditionally under the purview of local governments. There are some countries where public private partnerships (PPPs) have emerged. Some countries allow for private sector capital to fund certain projects under social infrastructure. There is a gradual shift where financing infrastructure is moving toward private investments and PPPs. You can also divide infrastructure according to brownfield and greenfield assets. Brownfield assets refer to existing assets that can be acquired by a private owner. They can immediately yield cash after they are acquired. Greenfield assets are new infrastructure that has to be constructed and these will require some time to be realised. There are also certain risks in construction. You can find capital partners to identify potential long-term investments in infrastructure with a tolerance for risk that you can bear. These assets can deliver long term returns. Infrastructure assets have performed far better than bonds and equities. They carry less risk than equities and they come with attractive return and risk profiles.

Infrastructure companies are in ownership of physical assets that can economically be sustained for several decades. There are some equity sectors that are open to investors who want to get into this market such as energy and utilities. Some of the examples are publicly traded companies that have the ownership and the permission to operate power generation plants, oil and gas pipelines, water networks, electric and gas networks etc. They can also branch out to invest in transportation or communication infrastructure. When you invest in these categories, you have the potential to gain an absolute return. However, there will be significant ups and downs when compared to the broader market. Infrastructure investments can have more upsides than bonds and they can deliver better relative returns compared to other investment opportunities. They also have a lower downside when compared to bonds or equities.

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