Chapter A2: Infrastructure projects

Question 1

How to invest in infrastructure? (3)

Answer 1

1. Invest directly in the asset (property type investment)
2. Provide debt finance
3. Provide equity finance

Question 2

What risks surround infrastructure projects?

Answer 2

1. Project specific risks: Design, construction and operation
   - Cost of designing and building can be higher than expected
   - Time overrun, longer time before there is a revenue stream
   - Failure of technology - redesign
   - Usage under-estimated
2. Asset specific risks: market, economical, regulation and political risks
   - Economic downturn
   - Inflation cause construction to be higher than expected
   - Environmentally friendly
   - Global pandemic

Question 3

Risk characteristics of infrastructure investments

Answer 3

There are risks specific to the infrastructure asset, including risks relating to design, construction and operation.

These may have low correlation with the risks arising on other types of asset.

The specific risks will depend on factors such as the size and type of project, its geographic location (and how concentrated) and the length of the contract.

There may be marketability and liquidity risk, dependent upon:

• how attractive the asset is to a range of investors
• the term of the project and degree of uncertainty over cashflows.

There are also broader asset class risks, including general economic risks (eg impact of a recession) and risks relating to political or regulatory involvement.

Infrastructure investments are tangible assets and therefore have intrinsic value, which reduces the risk of total loss.

Returns are often linked to an inflation measure, reducing the risk that they are eroded in real terms.