infrastructure sector

In the Perspective section of today’s AFR there is an interesting article on the Infrastructure Sector.

Toll Roads, Airports, Tunnels, Communication Towers, Energy Pipelines, Ports, Renewable Energy. They are among the most sought after financial assets around. What a change in perspective on stocks in the last 10 years.
When the Keating Govt introduced national compulsory superannuation, Macquarie Bank saw their opportunity. In one way or another they established controlling interests in these assets.
They then repackaged, restructured and financially engineered these assets. MBL travelled the world and educated such organisations as the Ontario Teacher Pension in the long term revenue reliability of such assets.
Infrastructure is a top performing asset class and now constitutes 6% of the market in Australia.
Global index constructors such as Standard and Poor’s and Morgan and Stanley have not as yet recognised this asset class. So it is true that this asset class is only understood in Australia and too a lesser extent in Spain (Cintra and Ferrovial) and Italy (Autostade). Most of the credit for this goes to MBL.
Deutsche, ABM Amro, BNB, Westpac and the Commonwealth Hastings and latterly Challenger are following the lead of MBL.
The sector’s out performance has been highlighted by UBS bank which has commissioned Standard and Poor’s to calculate an Infrastructure and Utilities Index.
Craig Stafford Head researcher of Infrastructure and Utilities at UBS says that some sort of compulsory superannuation is commonplace in OECD type countries. And so Billions of dollars and Euros are seeking a home with reliable revenue (largely predictable cash-flows over a long period…the average concession period for MIG is now 66yrs) and steady growth for the long term pension liabilities. Revenue is assured to match or better CPI rises or in Ontario completely in the hands of the operator. Most other asset classes are cyclical in nature.
Lately we are witnessing a spate of privatisations of Toll Roads and Airports and Gas Pipelines in Western Europe and the US and Canada.

Yet for all this success there are detractors.
The underlying problem is that many people do not understand the sophisticated multi-layered financial structure. The way this financial re-engineering is done is not entirely transparent just like the theory of relativity is not transparent. It takes ability and time to master the process.
Everything revolves around the PRICING OF RISK. There is considerable work being done currently in establishing a RISK SPECTRUM. At the moment Airports and established Toll Roads are in the centre of the spectrum. Greenfield projects at the highest end and Inexus at the lower end. MBL has made an art form of this. The history of the constitution and reconstitution of MIG is lesson in this understanding of RISK.
The financial engineering is another layer of RISK.

Most the posters on HC, SS OZESTOCK are valuing Infrastructure stocks in the same way as they value Banks, Brewers, or Retailers. Posters on HC, SS OZESTOCK seemingly fail to value the extremely long life of the asset, and its underlying reliable revenue.

The standard valuation tool is IRR. Simply this matches incoming and outgoing cash flows over time.
Duetsche Securities gives the following example of what financial engineering can do. The French tolls that are being privatised have an IRR of 6.2% and 3.2% 5 yr yield. A Macquarie Eiffage consortium changes this into a 9% IRR and 9% 9 yr yield.
UBS says this trend will increase in steepness and last into indefinite future. Political parties left or right or centre is committed to this process. These assets are classified as strategic and not as essential