How to make infrastructure attractive to the investor

When talking about infrastructure investment, one thinks of various types of risks starting from political risks, operational risks, over-running cost & time risks, and so-on. These types of risks make the investment unattractive to investors.

Government, then, plays an important role to drive all these projects. However, government itself also has some limitations of driving them successfully as planned.

To make infrastructure investment attractive to investors, we may have to deal with various phase of the investment – in this case I will divide into three phase (1) Greenfield, (2) Brownfield, and (3) Enhancement. Each phase will have different risk-return profile suitable for types of investors

GreenfieldThe phase has the highest risks but it hardly demand highest return as theory said. Government must lead the process by funding through government budget or loans – domestic or foreign.

Generally, government carefully watches out the spending aligning with the government revenue in order to maintain the proper level of public debt and its capacity to service. To loan from the public domestically, for example, government will issue its fixed-rate long-term bond at the market rate.

With the uncertainty of the economy, we see the more attractive rate should be inflation plus 50 to 100 bps with the trade off for the government in terms of funding. Hence, the government budget for infrastructure has to factor in the inflation cost during the construction period.

BrownfieldThe phase could reduce the government burden on its balance sheet when it splits out to the public. The operating assets will be attractive institutional investors due to the nature of the demand to those assets but it could be less attractive to retail investors due to demand risks. Long-term funds are looking for these types of assets to match their asset-liabilities.

EnhancementThe phase should be planned at the beginning for grouping the same types of operating assets. With well planned, government could attract retail investors by listing the infrastructure fund. The growing fund size should add more supply to the assets and creating longer term view on developing the fund and the market.

I am of the view that government has to work real hard on pushing up the infrastructure investment. With good master plan for the demand and supply of the funding these projects, the government will be in a good position to run it successfully.