Infrastructure debate: The business of building

CH, 3i The UK continues to be strong but increasingly competitive. Europe is exciting but has taken longer to develop than some would have anticipated. There is a shortage of opportunity relative to the amount of money chasing those opportunities outside the UK. The US should be the largest market in the world but there’s a question mark around the pace of development. Some of the most exciting opportunities are outside the developed world. Our business has strong growth in India. Central Europe is introducing a lot of private capital into projects. Spanish investors are doing an increasing amount in South America.

DMH, Caja Madrid We will probably see large transactions in Mexico. The concession business in Mexico has not been very successful in the past and grantors have had to rescue more than 40% of the concessions. That was done by a special entity called Farac, which holds all the rescued assets. These assets are now being privatized and a couple of months ago we saw the first privatization of four roads. The legal framework in Mexico has improved, but it’s still an emerging market and some banks will require multilateral institutions on the debt side to gain additional comfort.

The same can be said for Brazil, which has huge potential. Brazil is working on a road programme that is very attractive, but again not all international banks are happy to take the risk. Chile is a very mature market. Other countries in Latin America are less attractive. There are a couple of deals in eastern Europe that are interesting because of their size – transactions of €500 million or even €1 billion. We are looking seriously at Hungary, Poland, the Czech Republic and Slovakia. In western Europe, the UK continues to be the number one spot for project finance business. Spain and Portugal are also powerful markets. If you add the infrastructure financing volume of the UK and Spain, it’s about the same size as the US. But there will be a big push in US infrastructure in 2008/09. Up to now there have been only a few infrastructure transactions in the US, such as the Indiana toll road, Chicago Skyway and the Pocahontas Parkway. There will be a couple of concession tenders next year, probably in Florida and Pennsylvania. Finally, in the Middle East region, it’s rather more an energy/utilities market than an infrastructure one. There are only a limited number of transport projects in the region, but with large financing volumes. The margins are tight, but there are and will be lots of opportunities.

DG, ABP ABP has been investing in infrastructure for a couple of years. We’re looking for long-term, low-risk, inflation-linked assets. ABP is also looking at sustainable investments, such as wind farms. We’re active in all of the US infrastructure sectors. However, some assets such as wind deals in the US have significant tax benefits we cannot fully utilize because we do not have a tax base there and these transactions require more structuring. We’re seeing a lot of energy infrastructure transactions in the US, including the utilities, particularly gas and water. With the TXU transaction being completed, maybe electrics will open up. There’s also going to be more activity in US coal. Currently, one of the most active areas we are seeing fund proposals for is India. There is also an explosion of opportunity in the Middle East, more than most infrastructure funds may have appetite for.

CB, Alinda The US is the fastest-growing infrastructure market. There is a perception among many European infrastructure fund managers that, after a few large road auctions, the US market has been slow to develop. But at Alinda we’ve found no shortage of US deals to invest in because we’ve focused on small and medium-sized transactions that we’ve sourced directly. It is a lot easier to invest in operating infrastructure assets in the US than in construction of infrastructure in the emerging markets, which is what those markets need. The US road sector is going to be massive. We estimate that the value of the US interstate highway system is $3 trillion. There are at least six or seven states with current road privatization programmes. The US needs $60 billion to upgrade its water supply, about the same amount for waste-water treatment, and about the same amount for electricity transmission upgrades. The US is going to be the world’s largest infrastructure investment market.

MW, JPMorgan Is there the risk appetite for equity outside the OECD?

LN, Watson Wyatt The safe OECD-type infrastructure may not be a return-seeking asset class but it provides diversification at a total portfolio level and helps investors get exposure to cashflows that have a link to inflation in relevant markets. It is a defensive investment in its nature as opposed to investing in emerging markets, which is usually a return-seeking strategy. We haven’t seen a lot of interest in emerging markets but that may change, and it may come out of a different part of the overall asset allocation.

MW, JPMorgan Some central and eastern Europe countries are within the OECD, as is Mexico. Is there delineation, or are investors comfortable accepting some exposure to the higher-risk countries within the OECD?

LN, Watson Wyatt Our investors hire managers to help them make those decisions. If there is an allocation to the higher-risk, higher-return markets that is still safe enough from the regulatory perspective, it may be attractive. But so far most of the allocations have been to Europe and the US.