By investing in infrastructure, it ensures our cities and towns are sustainable and resilient to climate change, improves access to public services and safe and affordable housing, and creates career and business opportunities.
It also reduces the cost of producing goods, facilitates the physical mobility of people and products, increases competitiveness, encourages the growth of new industries, and promotes scientific research and innovation. In short, it improves our quality of life.
What is infrastructure?
Infrastructure is a broad asset class. It includes social infrastructure – such as hospitals, schools, GP surgeries, water supply and waste processing systems – and economical infrastructure, which includes transport (toll roads, tunnels and railways), energy transition (renewable energy such as solar and wind, gas and electricity transmission and distribution infrastructure), and digital communication systems (telecoms towers, data centres, satellites and fibre broadband networks).
Who pays for infrastructure projects?
These infrastructure assets typically have high development costs, so they tend to be managed and financed on a long-term basis. Historically, Governments funded, provided, and managed these assets for the benefit of the population.
However, as public finances have deteriorated, the private sector has increasingly stepped in to help meet the scale of investment required to upgrade and build out our ageing infrastructure.
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Governments have deployed various co-funding models to deliver essential infrastructure. This has reduced the burden on taxpayers and created significant investment opportunities for private investors who also benefit from long-term contracted payments from Governments or regulated access to the revenues generated.
This ensures highly visible, secure and, typically, inflation-linked income streams.
What’s more, as the infrastructure involves the provision of vital services, asset owners tend to be compensated for availability rather than use, and demand remains relatively stable during economic downturns.
The UK’s National Infrastructure Commission recommends that overall investment into UK infrastructure must increase from an average of around £55bn per year over the last decade (around 10% of UK investment) to around £70bn-£80bn per year in the 2030s, and £60bn-£70bn per year in the 2040s, with the private sector expected to foot roughly 50% of the bill (source: The Second National Infrastructure Assessment).
What are the risks of investing in infrastructure?
There are three key risks to infrastructure investment. The first is specific to the underlying infrastructure asset such as the design, construction, and operation.
Just cast your mind back to the collapse of Carillion in 2018, which held a vast number of Government contracts, spanning UK education, justice, defence and transport.
The second is in respect to the broader asset class such as market/economic forces. The current high-interest-rate environment, higher energy prices as a consequence of the Russian invasion of Ukraine, and elevated inflation have proved challenging to finance and complete large projects.
For example, in 2023, the UK’s fifth Contract for Difference Auction failed to secure a single bid to build offshore wind projects due to a challenging economic backdrop.
The third is regulatory/political risk, such as the scrapping of the HS2 high-speed rail line from the West Midlands to Manchester.
Three ways to invest in infrastructure
For retail investors, the opportunities include investing directly in the publicly traded securities (shares and corporate bonds) of infrastructure-related companies, and funds that offer a portfolio of companies focused on investing in key infrastructure challenges.
1) Infrastructure companies
Investors can get exposure to infrastructure companies by buying their publicly traded shares or corporate bonds. These could be companies such as electricity or gas suppliers, through to those that undertake construction and maintenance of things like road and rail networks.
Investing in corporate bonds can potentially be lower risk than investing in equities. This is because interest and capital of the debt tends to be paid before dividends, so the returns on the debt investment are more reliable than the returns on equity.
Another consideration is that, unlike equity dividend income, which can grow in line with inflation depending on market conditions, bonds pay a fixed income.
2) Open-ended infrastructure funds
Open-ended infrastructure funds invest in a portfolio of shares or bonds issued by listed companies involved in the provision of infrastructure around the world. They invest in a broad range of infrastructure sub-sectors across a large number of companies and geographies.
These can offer increased diversification for retail investors not keen to put all their eggs in one basket. Because, as with all investments, their value in the short term can depend less on the characteristics of the underlying business(es) and more on sentiment.
3) Closed-ended investment companies
In the UK, we are also very fortunate in that there are a number of listed closed-ended investment companies (CICs) that themselves invest in a range of infrastructure projects, and can offer exposure to targeted sub-sectors such as renewable infrastructure or social infrastructure. These listed CICs can invest directly in both the equity and debt of projects.
As projects tend to be large and complicated, these CICs can invest alongside other institutional investors including sovereign wealth funds, pension schemes, Governments, and private equity, pooling together resources and collective knowledge to ensure the success of these project investments.
Unlike publicly traded corporate bonds, which pay a fixed income, these CICs can invest in debt where interest payments are aligned with interest rate movements in the financial system. To be precise, the interest charged offers a margin over a short-term interest benchmark and is typically referred to as floating rate debt.
Shayan Ratnasingam is senior research analyst at Gravis Advisory Limited
