Infrastructure Investing: Managing Risks & Rewards for Pensions, Insurance Companies & Endowments - Rilegato

Sawant, Rajeev J.

Rilegato

ISBN 10: 0470537310 ISBN 13: 9780470537312

Casa editrice: John Wiley & Sons Inc, 2010

Riassunto

Invaluable information regarding one of the biggest worldwide growth areas in investing-infrastructure assets

Infrastructure investing is about to explode on the worldwide scene. The fact is that real money will need to be spent on real projects-which will present real opportunities for stable, long-term returns. But infrastructure assets have unique characteristics and the investments and funds that will likely rise up must be suitably structured to serve investor needs.

Author Rajeev Sawant has been analyzing infrastructure investments, funds, and project financing programs for nearly five years, and with this book, he presents information that will be invaluable to lenders, pension funds, insurance companies, investment funds, rating agencies, and even governments.

• Presents comprehensive data analysis on infrastructure cases worldwide
• Analyzes the opportunities as well as the pitfalls of infrastructure investing
• Focuses on the needs of pensions, insurance companies, and endowments interested in infrastructure investing

For the next decade, worldwide economic growth and increased employment-as well as investment returns-will come from infrastructure projects. This book will help you understand today's dynamic infrastructure asset class and quickly get you up to speed on the unique risks and rewards associated with it.

Su questo libro

Informazioni sull'autore

RAJEEV J. SAWANT is a Research Fellow at the Center for Emerging Market Enterprises at the Fletcher School, Tufts University. Prior to this, heconsulted for JSA Partners (an A.T. Kearney spin-off) in international strategic alliances in aerospace and defense. Sawant is a member of the Academy ofManagement and the Financial Management Association, is an Inlaks Shivdasani Foundation scholar, and has served as Aide de Camp to the President of India. He holds a PhD inbusiness strategy and international management.

Dalla quarta di copertina

Infrastructure investing has exploded onto the worldwide scene. The fact is that real money will need to be spent on real projects?which will present real opportunities for stable, long-term returns. But infrastructure assets have unique characteristics, and the investments and funds that will likely rise up must be suitably structured to serve investor needs.

Financial markets researcher Rajeev Sawant has been analyzing infrastructure investments, funds, and project financing programs for nearly five years, and now, with this book, he presents information that will be invaluable to lenders, pension funds, endowments, insurance companies, investment funds, rating agencies, and even governments.

Written with the serious professional in mind, this reliable resource focuses on infrastructure's economic characteristics, highlights the rewards and perils that infrastructure investors face, and addresses the strategic threats they must mitigate. Chapter by chapter, this informative guide:

• Examines the characteristics of debt versus equity funding by applying the latest theoretical capital structure research to infrastructure funding

• Discusses project finance and the strategic use of capital structure as a risk-mitigation tool

• Explores infrastructure asset valuation issues and the return characteristics of a project finance infrastructure bond portfolio

• Outlines infrastructure risk factors, in particular, the threat of counterparty hold-up and the incentives this threat engenders

• Compares existing equity-based infrastructure indices to broad indices for equities, bonds, and commodities in terms of risk, return, and correlations

• Looks at two case studies that did not live up to the promise of infrastructure and applies the frameworks developed throughout the book

For the next decade, worldwide economic growth and increased employment, as well as investment returns, will come from infrastructure projects. This book will help you understand today's dynamic infrastructure asset class and enhance the returns you are able to obtain from it?all while improving the quality of life for people around the globe.

Dal risvolto di copertina interno

Infrastructure investing has exploded onto the worldwide scene. The fact is that real money will need to be spent on real projectswhich will present real opportunities for stable, long-term returns. But infrastructure assets have unique characteristics, and the investments and funds that will likely rise up must be suitably structured to serve investor needs.

Financial markets researcher Rajeev Sawant has been analyzing infrastructure investments, funds, and project financing programs for nearly five years, and now, with this book, he presents information that will be invaluable to lenders, pension funds, endowments, insurance companies, investment funds, rating agencies, and even governments.

Written with the serious professional in mind, this reliable resource focuses on infrastructure's economic characteristics, highlights the rewards and perils that infrastructure investors face, and addresses the strategic threats they must mitigate. Chapter by chapter, this informative guide:

• Examines the characteristics of debt versus equity funding by applying the latest theoretical capital structure research to infrastructure funding

• Discusses project finance and the strategic use of capital structure as a risk-mitigation tool

• Explores infrastructure asset valuation issues and the return characteristics of a project finance infrastructure bond portfolio

• Outlines infrastructure risk factors, in particular, the threat of counterparty hold-up and the incentives this threat engenders

• Compares existing equity-based infrastructure indices to broad indices for equities, bonds, and commodities in terms of risk, return, and correlations

• Looks at two case studies that did not live up to the promise of infrastructure and applies the frameworks developed throughout the book

For the next decade, worldwide economic growth and increased employment, as well as investment returns, will come from infrastructure projects. This book will help you understand today's dynamic infrastructure asset class and enhance the returns you are able to obtain from itall while improving the quality of life for people around the globe.

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Infrastructure Investing

Managing Risks & Rewards for Pensions, Insurance Companies & EndowmentsBy Rajeev J. Sawant

John Wiley & Sons

Copyright © 2010 John Wiley & Sons, Ltd
All right reserved.
ISBN: 978-0-470-53731-2

Chapter One

Infrastructure Demand and Investment Funds

Bijli, sadak aur paani (Hindi for "Electricity, roads and water") -Election slogan in India, 2004

Roads probably constitute the earliest human demand for infrastructure, and the earliest known constructed roads have existed in Ur in modern-day Iraq since 4000 BC. Indeed, the pyramids couldn't have been built without the roads on which the giant limestone blocks were dragged around between 2600 and 2200 BC. Civilizations advanced or declined around the quality of their road networks. The ancient Roman, Persian, Indian, and Chinese civilizations all built road networks that allowed them to rapidly transport military units while simultaneously encouraging commerce and trade. Trade routes joined the empires of China, India, Asia Minor, North Africa, and Rome. The next major infrastructure development came from the great discoveries of electricity and its applications by Benjamin Franklin, Nikola Tesla, Andr-Marie Ampre, Michael Faraday, Thomas Edison, and many others in the eighteenth and nineteenth centuries.

In the modern era, the term infrastructure refers to a wide array of industries with different characteristics. Traditionally, infrastructure refers to the following sectors of the economy: transportation, energy, telecommunications, water, and sanitation. Transportation refers to road, rail, airports, and ports. Energy refers to oil, gas, petrochemicals, and electricity generation, transmission, and distribution. Telecommunications refers to fixed lines and mobile telephony. Recently, information technology infrastructure that refers to the physical hardware used to connect computers and users is sometimes grouped with traditional infrastructure.

Commentators have also grouped social infrastructure like schools, prisons, hospitals, and courts under the rubric of infrastructure. Grouping fundamentally different industries like mobile telephony with schools and prisons obscures the fact that the risk and return profile of these assets is very different. Consequently these assets demand different investment strategies. We therefore need consistent criteria for classifying infrastructure industries.

In this book, I use asset characteristics as classifying criteria. Using asset characteristics as an analytical scalpel yields insights into infrastructure asset risks that help us design optimal investment strategies. For example, electricity generation using coal, oil, and nuclear fuel differs in fundamental and important ways from alternative energy sources like solar, wind, and so on. Chapter 2 is entirely devoted to this topic. In this chapter I choose the traditional infrastructure industries which Chapter 2 shows possess distinct characteristics-electricity, transportation (road and rail), water and sanitation, fixed-line telecommunication, and pipelines-for analyzing demand across different countries.

Using two distinct methodologies for analyzing infrastructure demand, I make the case that demand is growing and requires large investments that private investors can provide. Demand analysis shows which sectors and geographical areas are likely to be attractive to investors. Furthermore, the returns from these investments match the needs of pension funds and insurance companies in particular and therefore offer attractive investment opportunities.

AN OVERVIEW OF INFRASTRUCTURE DEMAND

Infrastructure demand refers to the investment necessary to satisfy retail consumer demands as well as producer or industry demands based on projected GDP growth. This makes sense because it's reasonable to assume that as disposable income rises, demand for a better quality of life in terms of electricity, water, sanitation, telecommunications, and transportation (air, sea, road, and rail) should increase. Industry, too, demands increased electricity, transportation, telecommunication, energy, commodities, and other inputs to keep pace with growth in its output. Demand, however, is unlikely to be uniform across industries and countries. This has been true historically and is likely to persist in the future. An analysis of sectoral and geographical demand is helpful to investors for targeting the appropriate industry and country. Exhibit 1.1 shows the change in worldwide composition of infrastructure stocks from 1960 to 2010. Water and sanitation is excluded because of lack of data.

Exhibit 1.1 shows that the share of rail dropped from a third to a mere 5 percent and the share of electricity doubled while telecommunications quintupled, albeit from a low 2 percent to 10 percent, over the 50-year period. Therefore, any linear extrapolation into the future based on past trends even in mundane infrastructure must be interpreted with caution.

A complex interplay of factors influences demand in different infrastructure sectors. Some of these include technology, substitutability (mobile for fixed line, road for rail), complementarities (electricity generation to electric trains), sectoral structure (number and strength of established firms resistant to change), macroeconomic factors (GDP per capita), and so on. Technology has affected demand for fixed-line telecommunications with mobile telephony replacing fixed lines in high income countries and leap-frogging investments in fixed lines in low- and middle income countries. Technology also influences oil, gas, and electricity generation with the development of alternative energy sources, although these are not likely to catch up with traditional oil, gas, and coal even by 2030. Exhibit 1.2 displays the factors affecting demand for each sector and the interaction of the sectors.

In addition to the factors and interactions shown in Exhibit 1.2, investors must take into account cultural attitudes and government policy encouraging or discouraging particular infrastructure industries in order to forecast infrastructure demand with any degree of precision. The next section develops broad estimates of infrastructure investments up to 2030. Note that forecasts tend to lose accuracy as the forecasting period increases, and a forecasting period up to 2030 is still very long. The forecasts presented are therefore meant to be interpreted as providing broad estimates and are meant to provide insights into asset allocations across industries and geographies.

Forecasting Infrastructure Demand

In this chapter I explore the methodology followed by the World Bank and the Organisation for Economic Co-operation and Development (OECD) to forecast investments for new assets as well as maintenance of existing infrastructure assets, using historical investment patterns as a percentage of gross domestic product (GDP). In addition, I use gross national income (GNI) to compare infrastructure stocks across countries with different levels of GNI. In the GNI method I extrapolate the future demand in low and middle income countries to match infrastructure in the high income countries.

In the percentage of GDP methodology, total spending on new infrastructure and maintenance varies with the GDP of countries. Developing countries need to spend a higher proportion of their GDP on infrastructure because of their lower infrastructure stocks and their greater growth rates. Estimates for new investments in developing countries range from 4 percent of GDP in the World Development Report to 3.2 percent in Fey and Yepes (2003). Middle income countries spend about 2.6 percent of GDP while high income economies spend about 0.4 percent of GDP on new infrastructure investment. The estimates for maintenance follow a similar pattern, with low income countries estimated to spend about 3.73 percent, middle income countries about 2.5 percent, and high income countries about 0.42 percent.

Apart from the demand for new infrastructure stocks, investments are also required for maintenance and replacement of existing stocks. Although total investments required in infrastructure should include funds for maintenance, maintenance funds essentially comprise costs required to keep the assets functioning smoothly. For the purposes of analyzing investment strategies, these costs determine working capital requirements and available free cash flows which in turn determine the return over investment. High maintenance costs naturally reduce free cash flow and returns. I do not consider maintenance funds further here since maintenance funds are not investments and do not translate into claims on assets. Suffice it to say that maintenance funds for electricity, road, and rail make up about 2 percent of the replacement cost of the capital stock, 3 percent for water and sanitation, and up to 8 percent for telecom fixed lines.

Should we consider funds for replacement of existing infrastructure stocks? The amount of funds needed for the replacement of existing infrastructure depends on the level of existing infrastructure stock, the total life of the stock, and the rate of depreciation. For example, if we assume that the life of roads is 30 years and the rate of depreciation is spread out equally over the 30 years, then 1/30 of the road stock needs to be replaced every year. In the case of developing countries, since the level of stocks is low to begin with and the need to develop new infrastructure is high, funds needed for replacement as compared to new investments are likely to be low. In the case of developed countries, however, replacement funds are likely to constitute a large proportion of infrastructure spending. For investors, however, it is important to note that investment in replacement assets must translate into clearly defined claims over the assets.

Unfortunately, replacement investments do not readily translate into claims over the assets because of the lumpy nature of infrastructure assets, although there are certainly creative solutions. For example, it would be difficult to segregate revenues from replacing or adding an additional lane on a road, but a portion of the road could be replaced and converted into a toll road; or a portion of a transmission grid could be replaced-for example, from overhead lines to underground cables-and revenues generated from the replaced portion separated from revenues from the rest of the grid. This needs evaluation on a case-by-case basis and is akin to investing in existing assets.

I interpret the investment needs identified here as the demand for stocks of infrastructure, such as miles or kilometers of paved highways or pipelines or rails. I do not consider their intensity of use. In developing countries the intensity of use is typically higher than in high income countries. This lowers the overall demand for infrastructure stocks. It also increases revenues from subscribers for the same level of fees but at the same time increases maintenance costs. The net effect on operating profits and free cash flow available to investors as return on investment depends on relative rate of increases in revenues and costs, which in turn depends on the intensity of use. This raises the issue of the optimum intensity level that maximizes revenues while simultaneously limiting maintenance costs. The fees charged to subscribers are subject to market conditions and political constraints, especially in the case of infrastructure. The monopoly nature of infrastructure services implies that customer segmentation strategies (i.e., providing a higher level of service to higher paying customers or denying service to some users) are difficult for political reasons. Strategies for achieving optimum intensity levels through fees, user incentives, user segmentation, and so on, therefore require detailed analysis on a case-by-case basis. In the next sections I explore the percentage of GDP methodology, followed by the GNI methodology.

Percentage of GDP Methodology

I begin by getting a sense of the magnitude of investments required using a simple percentage of GDP methodology. The methodology uses historical investment trends identifying infrastructure spending as a percentage of GDP and projecting these into the future over a GDP growth rate assumption. Exhibit 1.3 presents these worldwide estimates on an annual basis over the next two decades.

The estimates range from annual expenditure of approximately 3.5 percent of GDP between 2000 and 2010 to 2.44 percent between 2020 and 2030. The total annual expected demand for new infrastructure is around $6.8 trillion, with investment requirement of 0.66 percent of world GDP for electricity generation using traditional oil, gas, and coal investments. By 2030 investments required will be of the magnitude of $65 trillion, rising to $71 trillion if other energy-related investments are included in the estimates.

These massive investments are similar in magnitude to estimates developed using more complex models that explicitly incorporate different factors impacting demand. The International Energy Agency (IEA) estimates electricity demand using different fuel types based on increased capacity additions. Exhibit 1.4 displays IEA estimates for electricity generation, transmission, and distribution to 2030.

The IEA uses a methodology that includes four major factors to estimate investments in energy infrastructure: GDP growth, population growth, energy prices, and technology. The methodology is delineated as follows.

1. GDP growth. The primary driver of energy demand is GDP growth. The IEA uses the income elasticity of demand (percentage change in energy demand for a 1 percent change in GDP) to estimate energy demand. Between 1971 and 1990 it was 0.66 percent, dropping to 0.44 percent in 1990-2000 and recovering to 0.68 percent in 2000-2006. A drop in energy intensity is likely to prevail, however, due to conservation efforts arising from the challenges of global warming and rising energy prices. The IEA uses International Monetary Fund (IMF) assumptions of economic growth, predicting that the GDP growth will recover to 4.5 percent per year by 2010 and then slow to an average of 3.3 percent per year to 2030. GDP growth is expected to average 4.2 percent per year in 20062015 and 2.8 percent per year in 2015-2030.

2. Population growth. Population as a driver of energy demand affects demand not only through overall population growth but also through the location of growth. Urban population growth increases energy demand significantly since most energy is consumed within or close to cities. The rapid urbanization of most countries in the developing world along with their higher growth rates affects the geographical distribution of energy demand.

3. Energy prices. Energy prices are an exogenous input in the IEA model, and price determines demand and supply of electricity. The oil price is assumed to average $100 per barrel in 2007 dollars till 2015, rising to $122 per barrel by 2030. The IEA assumes coal prices will settle at $120 per ton in real terms and then fall back to about $110 per ton by 2030. The IEA further assumes that gas prices linked to oil prices through indexation in long-term supply contracts or competition between end-users will remain at 60 to 70 percent of oil prices. The IEA model also considers policies by governments that reduce subsidies for energy since a large portion of the demand for energy comes from countries that subsidize energy.

4. Technology. The demand for energy from fossil fuels is very sensitive to the assumptions made about technology. The IEA does not assume any radical technological change. On the demand side it assumes that the efficiency of cars and trucks, heating and cooling equipment, boilers, and so on, will improve. On the supply side the IEA assumes that efficiency of electricity generating plants, oil and gas exploration, and rates of recovery will increase with the availability of new technologies like carbon capture and storage, the conversion of coal to liquids, and the second generation of biofuels.

(Continues...)

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Dettagli dell'edizione

• Editore: John Wiley & Sons Inc
• Data di pubblicazione: 2010
• Lingua: Inglese
• ISBN 10: 0470537310
• ISBN 13: 9780470537312
• Rilegatura: Copertina rigida
• Numero di pagine: 270
• Contatto del produttore: non disponibile
• Persona responsabile: Wiley-VCH GmbH; product_safety@wiley.com; ; Boschstrasse 12; Weinheim; 69469; Germania