Texas Senate Committee on Transportation and Homeland Security
Investing in Infrastructure
JULY 22, 2008
Pension Consulting Alliance, Inc.
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Infrastructure Sectors
What is Infrastructure?
 Physical structures, facilities and networks which provide essential services within a
community
 Services provided are crucial to the economic productivity of a community
 Assets are either privately owned or owned/operated by government entities
Economic Infrastructure
Transportation
•Airports
•Bridges
•Rail Systems
•Seaports
•Roadways
•Tunnels
Energy Utilities
•Clean Energy
•Pipelines
•Power Distribution
•Power Transmission
•Renewables
•Water Treatment, Distribution
& Storage
Social Infrastructure
Communications
•Broadcast & Wireless
Towers
•Cable Systems
•Satellite Networks
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•Education Facilities
•Healthcare Facilities
•Judicial Buildings
•Military Housing
•Correctional Facilities
Infrastructure Investment Activity
History of Infrastructure
 Investment activity started in Australia in the 1990s when local governments
had severe financial problems
 In 1992, new laws were enacted which required workers to earmark funds for
retirement savings
 Formation of superannuation funds (pension plans)
 Superannuation funds, armed with capital, needed creative investments to
meet pension plan liabilities
 Firms like Macquarie partnered with government entities to start investing in
transportation infrastructure
 In the late 1990s, Canadian pension plans became very active in
infrastructure investments
 Today funds like OMERS (Borealis), Ontario Teachers and Caisse de Depot
are active global infrastructure investors
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Infrastructure Investment Activity
 Pension plan investors are embracing infrastructure investments and continue to
research the sector
Institutional Investor
Domicile
Total Portfolio
Assets
Classification
Target Infrastructure
Allocation
CalPERS
US
US$246 billion
Inflation-Linked
$2.5 billion
CalSTRS
US
US$171 billion
Fixed Assets
$1.0 billion
TRS
US
US$106 billion
Real Assets
~2.5%
State of New Jersey
US
US$80 billion
Infrastructure
$500m - $1.0 billion
Illinois State Board of
Investments
US
US$11 billion
Infrastructure
5%
Ontario Teachers’
Canada
C$106 billion
Infrastructure
8%
OMERS
Canada
C$48 billion
Infrastructure
15%
CPPIB
Canada
C$120.5 billion
Infrastructure
~ 10%
UniSuper
Australia
A$10 billion
Infrastructure
6.5%
MTAA
Australia
A$2 billion
Infrastructure
25%
UK
₤35 billion
Infrastructure
1%
Europe
€200 billion
Infrastructure
5%
BT Pension Scheme /
Hermes
ABP
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Key Characteristics
Why Invest in Infrastructure?
 Infrastructure is a unique asset class that offers investors a diversified source of
stable, inflation-linked returns
 Long Life Assets – Capital intensive assets with 25 to 99 year concessions,
match for liability duration
 Inflation Protection – Revenues typically linked to CPI
 Monopoly or Quasi Monopoly – High barriers to entry due to scale and
capital cost
 Steady and Predictable Cash Flow – Produce strong and predictable yields
 Low Correlation – Provides portfolio diversification, low beta
 Inelastic Demand – Predictable demand with little volatility, less susceptibility
to economic downturns
 Limited Commodity Risk – Not subject to commodity pricing
 Insensitive to Changes in Technology – Low risk of redundancy or
technology obsolescence
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Infrastructure Opportunity
Demand for Infrastructure
 The assessed condition and capacity of public works for the U.S. was graded a “D” for
its overall infrastructure conditions
State of America’s Infrastructure
SECTOR
2005 GRADE
INVESTMENT NEED
Aviation/Aerospace
D+
$16 billion/year
Bridges
C
$9.4 billion/year
Dams
D+
$10.1 billion/year
Drinking Water
D-
$11 billion/year
Energy
D
$493 billion
Hazardous Waste
D
$1.9 billion/year
Navigable Water Ways
D-
$125 billion
Public Parks & Recreation
C-
$6.1 billion
Rail
C-
$12-$13 billion/year
Roads
D
$34.6 billion/year
Solid Waste
C+
$127 billion
Transit
D+
$20.6 billion
Wastewater
D-
$390 billion
Total
D
$1.6 trillion
Source: American Society of Civil Engineers
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Infrastructure Activity
 Total global infrastructure expenditure requirements estimated at 2.5% of GDP or
$53 trillion through 20301
 Recent infrastructure deals closed by industry
North America
Global
US$74.8B2
US$446.9B2
2%
Social
9%
1%
5%
3%
Social
6%
Industrial
Industrial
26%
28%
Oil and Gas
19%
16%
Other
Other
Petrochemical
1%
26%
9%
Petrochemical
1%
Power
2%
Oil and Gas
Power
Transport
Transport
Water and
Sewage
46%
Water and
Sewage
1. Source: OECD. “Infrastructure to 2030: Mapping Policy for Electricity, Water, and Transport. Estimate increases to 3.5% of world GDP with the inclusion of electricity generation and other
energy related infrastructure.
2. Source: Infrastructure Journal. Data represents activity during last 36-months as of November 2007.
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Types of Infrastructure Structures
Private vs. Public-Private Partnerships
 Private Transactions – Majority of infrastructure transactions within the U.S.
(energy companies, utilities, communication companies, etc.)
 Public-Private Partnerships (PPPs)
 Different structures and models
 All models can be used for both brownfield (existing) and greenfield (new)
assets
Build
Transfer
Build
Lease
Transfer
Build
Transfer
Operate
Build
Operate
Transfer
Public Responsibility
Build
Own
Operate
Transfer
Build
Own
Operate
Private Responsibility
Lease
Existing Services and Facilities
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Concession
Divestiture
Infrastructure Opportunity
Public-Private Partnership versus Issuing Public Debt
 $1.6 trillion required on infrastructure projects over the next 5 years in the U.S.
 Governments facing budgetary constraints looking for new ways to address
infrastructure spending shortfalls
 Infrastructure spending as a % of GDP has declined by 1/3 over last 40 years
 Issuing an abundance of debt will influence cost and credit ratings of both new and
existing debt instruments
 Ability to use cash proceeds from PPPs to address immediate public issues while
maintaining ownership of assets
 Healthcare, education, housing, etc.
 Ability to generate jobs with projects and improve operations
 Govts should look to address infrastructure creatively to develop the appropriate
structure and process for each state
Source: Carlyle Group/American Society of Civil Engineers, Views and Estimates of the US Congressional Committee on Transportation and Infrastructure for 2005
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Infrastructure Performance
 Infrastructure offers attractive returns with lower risks
Illustrative Investment Performance
Risk
Cash Yield
Avg. Equity IRR
Capital
Appreciation
Toll Roads
Low-Medium
4-9%
8-12%
Limited
PFIs/PPPs
Low-Medium
6-12%
9-14%
Limited
Regulated Assets
Low-Medium
6-10%
10-15%
Limited
Rail
Medium
8-12%
14-18%
Yes
Airports
Medium
5-10%
15-18%
Yes
Toll Roads-Greenfield
Medium-High
3-5%
12-16%
Yes
Broadcast Networks
Medium-High
8-10%
15-20%
Yes
High
4-12%
12-25%
Yes
Medium
5-9%
10-15%
Modest
Asset Type
Power Generation
Average
Source: JPMorgan Asset Management
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Infrastructure Risks
 Potential Institutional Investor/Pension Plan Concerns
Leverage
Deals are typically leveraged between 40% and 80%
Possibly transform low risk assets into risky investments
Changes in credit environment alters refinancing risk
Market Inefficiency
Over $50 billion of new funds in market in 2006/2007
Competitive auctions - overpaying
Current pricing – deal outliers or trend setters
Management teams with proven track record are important
Limited history and track record in infrastructure space
Political and Headline
Risk
Public acceptance of privatization
Different political landscape in every state and municipality
Regulatory Risk
Regulated assets subject to changes
Government influence on pricing
Potential negative impact bottom line
Construction and
Development
Project overruns and delays transfer to construction partners
Volume/demand risk for new developments
Availability payments
Structuring
Concerns over possible changes in UBTI rules
Labor Issues
Greenfield projects could generate new jobs while the privatization of brownfield assets could
eliminate skilled labor members
Adherence with Responsible Contracting and Public Outsourcing Policies
Concession agreements must address labor members and involve labor participation early in the
process
Asset Control
Stipulations via concession agreements limit some management control (pricing, growth, decision
approvals, etc.)
Asset control needs to be appropriately priced
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Infrastructure Risks
Things That Can Go Wrong
 Trans-Texas Corridor
 Political Risk - The Texas House of Representatives imposed a 2 year moratorium
on privatization of transportation assets.
 Chicago Skyway
 Labor Risk - Toll road employees chose not to work for the new private
management team and the City of Chicago had to absorb all toll road employees.
 Black Warrior Parkway Toll Bridge
 Headline Risk - Alinda project in Alabama is being highly protested due to a $0.50
increase in tolls.
 Detroit Windsor Tunnel
 Regulatory Risk - Tunnel opened in early 2001 as a short-cut to Canada. After 9/11
traffic moved slowly due to increased homeland security measures.
 Atlanta Water Privatization
 Partnership Risk - Concession agreement for the privatization of water was
terminated when certain performance measurements were not met.
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Infrastructure Investing
Pension Plan Benefits of Infrastructure
 High stable yields
Attractive risk adjusted returns
 Low correlation
Low beta relative to traditional asset classes
Portfolio diversification
 Duration hedging
Long lived assets to match liability duration 25
to 99 year cash flows
 Inflation protection
Regulation or concession within pricing
 Low cyclicality
Inelastic demand and monopolistic position
supports stable cash flows
 Risk transfer
Via partnership arrangements risks transferred
to subcontractors or back to public entity
 Low volatility
Limited exposure to economic downturns
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Infrastructure Investing
Next Steps for Investing in Infrastructure
Strategy
Management Selection
Structure
• Sector definition
• Experience
• Internal structure and team
• Risk tolerance
• Track record
• Allocation
• Investment criteria
• Team size
• Greenfield vs. Brownfield
• Market presence
• Routes to market
• Partnership relationships
• Deal flow
• Fees
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Portfolio
Construction
PCA Recommendations
Infrastructure as an Emerging Asset Class
 PCA believes the focus on infrastructure is important as the needs within the US have
been overlooked for decades
 Compelling risk and return characteristics support infrastructure as a component of a
real return or new asset class
 Portfolio diversification and return enhancement
 Opportunity to generate competitive risk adjusted returns relative to other asset classes with
less dependence on asset appreciation
 Low correlation to traditional asset classes
 Given market inefficiencies and a plethora of new players next steps should be taken
cautiously
 Fund management selection is crucial
 Transaction risks need to be properly researched and priced
 Infrastructure criteria to be developed (definition, benchmarks, risk tolerance, strategy, portfolio
construction, fees, etc.)
 Governments should look into the various infrastructure structures that have been utilized to
develop the structure that best meets their goals
 Be cautious, take your time and do your homework!
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