Infrastructure as an Asset Class

Clear, comprehensive guidance toward the global infrastructure investment market

Infrastructure As An Asset Class is the leading infrastructure investment guide, with comprehensive coverage and in-depth expert insight. This new second edition has been fully updated to reflect the current state of the global infrastructure market, its sector and capital requirements, and provides a valuable overview of the knowledge base required to enter the market securely. Step-by-step guidance walks you through individual infrastructure assets, emphasizing project financing structures, risk analysis, instruments to help you understand the mechanics of this complex, but potentially rewarding, market. New chapters explore energy, renewable energy, transmission and sustainability, providing a close analysis of these increasingly lucrative areas.

The risk profile of an asset varies depending on stage, sector and country, but the individual structure is most important in determining the risk/return profile. This book provides clear, detailed explanations and invaluable insight from a leading practitioner to give you a solid understanding of the global infrastructure market.

• Get up to date on the current global infrastructure market
• Investigate individual infrastructure assets step-by-step
• Examine illustrative real-world case studies
• Understand the factors that determine risk/return profiles

Infrastructure continues to be an area of global investment growth, both in the developed world and in emerging markets. Conditions continually change, markets shift and new considerations arise; only the most current reference can supply the right information practitioners need to be successful. Infrastructure As An Asset Class provides clear reference based on the current global infrastructure markets, with in-depth analysis and expert guidance toward effective infrastructure investment.

List of Figures xiii

List of Tables xv

Preface xvii

A Note from the Publisher xix

Acknowledgements xxi

About the Authors xxiii

Introduction xxv

Chapter 1 Infrastructure – An Overview 1

1.1 Demand for Infrastructure 2

1.2 Sustainability and Infrastructure 7

1.2.1 Sustainability and sustainable development – a brief history 8

1.2.2 The need for sustainable infrastructure 9

1.3 Definition and Characteristics of Infrastructure 10

1.3.1 Differentiation of terms: project – asset – facility 13

1.3.2 Characteristics 15

1.3.3 Cross-sector characteristics 16

1.3.4 Types of infrastructure companies 16

1.3.5 Role of the private sector 18

1.3.6 Value chain elements 19

1.3.7 Greenfield versus brownfield investments 21

1.3.8 Yield-driven versus IRR-driven investors 22

1.3.9 Sources of revenue and financing 24

1.3.10 Competition and regulation 25

Chapter 2 Infrastructure Investments 27

2.1 Infrastructure as an Asset Class 28

2.1.1 Investors in infrastructure 29

2.1.2 Risk-return profiles of unlisted infrastructure investments 33

2.1.3 Benchmarking infrastructure investments 40

2.1.4 Portfolio diversification through infrastructure 46

2.2 Sustainable Infrastructure Investing 56

2.2.1 Concept of sustainable investing 56

2.2.2 Why invest in sustainable infrastructure? 62

2.2.3 How to invest in infrastructure sustainably 64

2.2.4 Challenges of sustainable infrastructure investing 68

2.3 Approaches to Infrastructure Investing 69

2.3.1 Listed infrastructure investments 69

2.3.2 Unlisted infrastructure investments 73

Chapter 3 Organisational Model 87

3.1 Privatisation Models 87

3.1.1 Privatisation versus PPP 88

3.1.2 Formal privatisation 94

3.1.3 Functional privatisation 95

3.1.4 Material privatisation 96

3.2 Partnership Models 100

3.3 Business Models 102

3.3.1 Availability payment models 103

3.3.2 User-driven payment models 105

3.3.3 Direct-user payment models 106

3.4 Contractual Models 107

3.5 Financing Models 110

3.6 Interim Summary – Various ‘Privatisation Paths’ 110

Chapter 4 Characteristics of Selected Infrastructure Sectors and Subsectors 113

4.1 Transport 114

4.1.1 Cross-sector characteristics 114

4.1.2 Road transport 118

4.1.3 Rail transport 125

4.1.4 Air transport 133

4.1.5 Water transport 141

4.1.6 Sustainability considerations 149

4.2 Water Supply and Sewage Disposal 152

4.2.1 Characteristics and organisation 152

4.2.2 Sources of revenue and value chain elements 158

4.2.3 Competition and regulation 160

4.2.4 Private-sector involvement 161

4.2.5 Sustainability considerations 164

4.3 Waste Disposal 166

4.3.1 Characteristics and organisation 166

4.3.2 Sources of revenue and value chain elements 172

4.3.3 Competition and regulation 175

4.3.4 Private-sector involvement 176

4.3.5 Sustainability considerations 178

4.4 Energy – Electricity 180

4.4.1 Overview 181

4.4.2 Generation – renewable electricity – cross-sector characteristics 186

4.4.3 Generation – solar energy 191

4.4.4 Generation – wind energy – onshore 193

4.4.5 Generation – wind energy – offshore 195

4.4.6 Generation – hyrdoelectric energy 197

4.4.7 Generation – bioenergy 199

4.4.8 Transmission and distribution 203

4.4.9 Electricity storage 215

4.4.10 Sustainability considerations 228

4.5 Energy – Natural Gas Networks 234

4.5.1 Characteristics and organisation 234

4.5.2 Transmission 235

4.5.3 Storage 236

4.5.4 Distribution 237

4.5.5 Sources of revenue and value chain elements 237

4.5.6 Competition and regulation 238

4.5.7 Private-sector involvement 239

4.5.8 Sustainability considerations 240

4.6 Energy – District Energy Systems (DES) 241

4.6.1 Characteristics and organisation 242

4.6.2 Sources of revenue and value chain elements 244

4.6.3 Competition and regulation 246

4.6.4 Private-sector involvement 247

4.6.5 Sustainability considerations 248

4.7 Social Infrastructure 249

4.7.1 Healthcare facilities 250

4.7.2 Education facilities 253

4.7.3 Administrative facilities 255

4.7.4 Sustainability considerations 256

Chapter 5 Risks 259

5.1 Risk Management 259

5.2 General Risks 265

5.2.1 Market risk 265

5.2.2 Interest rate risk 269

5.2.3 Exchange rate risk 270

5.2.4 Environmental, social and governance (ESG) risk 270

5.2.5 Political, legal and regulatory risk 277

5.2.6 Force majeure 282

5.3 Project/Asset-specific Risks 283

5.3.1 Planning, construction and completion risk 284

5.3.2 Technical risk 285

5.3.3 Financing risk 287

5.3.4 Syndication risk 288

5.3.5 Operational risk 289

5.3.6 Contractual and counterparty risk 290

5.3.7 Realisation risk 290

5.4 Sector-specific Risks 291

Chapter 6 Project Finance 295

6.1 Project Finance Basics 295

6.2 Project Finance and PPP 297

6.3 Basic Structure of Project Finance 299

6.3.1 Key characteristics 299

6.3.2 Participants and other stakeholders 302

6.3.3 Objectives and contributions of project participants 308

6.3.4 Typical contractual framework for project finance 310

6.4 Structuring Project Financings – Traditional and in PPPs 312

6.4.1 Phase I – Advisory 316

6.4.2 Phase II – Project assessment 316

6.4.3 Phase III – Risk analysis and allocation 318

6.4.4 Phase IV – Financing 319

6.4.5 Phase V – Implementation and monitoring 324

Chapter 7 Financing Instruments 327

7.1 Equity 328

7.2 Mezzanine Capital 330

7.3 Debt 331

7.3.1 Senior loans 331

7.3.2 Bonds 334

7.3.3 Short-term finance 339

7.4 Government Support Schemes 339

7.4.1 National development banks 340

7.4.2 European Investment Bank (EIB) 341

7.4.3 European PPP Expertise Centre (EPEC) 343

7.4.4 Governmental export credit and direct investment insurance – ECAs 343

7.5 Asset-backed Securities 344

7.6 Sale and Leaseback 346

7.7 Derivatives 346

7.7.1 Futures 347

7.7.2 Options 348

Concluding Remarks 349

Appendix A Sample Page from CDC Toolkit on ESG for Fund Managers 351

Appendix B Credit List for Envision’s Sustainable Infrastructure Rating System 353

Appendix C Infrastructure Sustainability Rating System (Australia) – Themes and Categories 355

Appendix D National Appropriate Mitigation Actions (NAMAs) 357

References 361

Index 381

BARBARA WEBER is founding partner of B Capital Partners AG in Zurich, an investment advisory firm focused on institutional private equity portfolios and specialising in infrastructure and clean energy.

MIRJAM STAUB-BISANG is CEO of Independent Capital Group AG in Zurich, an asset management and real estate investment company focused on sustainable investing across asset classes.

HANS WILHELM ALFEN is chair of construction economics at the Bauhaus-Universität Weimar in Germany and general manager and founder of Alfen Consult GmbH, Weimar.

Investors in infrastructure such as pension funds, insurance companies and sovereign wealth funds, pursue multiple objectives. First and foremost, they seek long-term stable returns to match their long-term liabilities. Second, they look for portfolio diversification. Infrastructure investments, due to their often low correlation with other asset classes, enable investors to improve the overall risk-return profile of portfolios.

Infrastructure as an Asset Class is considered by many as the standard work of infrastructure investing, thanks to its comprehensive guidance for investors, especially during these challenging times. This Second Edition has been extensively updated and expanded. It now also covers the energy sector–from generation to transmission, storage and district energy systems – and sheds light on sustainable investing in infrastructure, an indispensable topic, which any long-term professional investor can no longer ignore. It introduces a strategic approach to benchmarking the financial performance of infrastructure investments and presents various sustainability benchmarking tools used across the industry.

Bringing together the topics of infrastructure investments, project finance and public private partnerships (PPPs), has proven to be crucial for equipping investors with the essentials of theory, fundamentals and practical examples needed to fully master the key aspects of infrastructure investing. Mirjam Staub-Bisang joins the powerhouse team of lead author Barbara Weber and Hans Wilhelm Alfen to bring sustainability knowledge and insight to this new edition’s heightened focus on environmental, social and governance (ESG) issues. This single-source guide for newcomers and experienced investors alike covers all aspects from basic fundamentals to highly specific infrastructure investment-related questions such as: How to define infrastructure, how to classify the ownership structures and business models in various industry sectors; what the main characteristics, sources of revenue and value chain elements, competition and regulation and investment opportunities in the various infrastructure sectors are; and how the broad spectrum of risks can be systematically analysed, evaluated and mitigated through adequate structuring of transactions. It also explains in detail how project finance works both in a traditional and in a PPP context.

This updated edition includes the latest developments on the subjects covered, which makes it an extremely relevant source of guidance for infrastructure investors in both industrial and emerging market countries, and enables them to:

• Know about relevant developments in current infrastructure markets
• Assess individual infrastructure assets step by step for their suitability within an investment strategy, including sustainability aspects
• Understand all factors determining risk-return profiles of infrastructure assets, including ESG and, in particular, climate change risk and how to mitigate such risks
• Learn from illustrative real-world case studies on infrastructure assets across countries

Even experienced infrastructure investors who have read the first edition will find this revised standard work Infrastructure as an Asset Class, Second Edition, very useful as it supports them in their tasks of identifying and assessing suitable investment opportunities and making well-informed investment decisions.