The investment road of life is paved with good infrastructure intentions

As the old Volkswagen commercial goes: On the road of life, there are passengers and there are drivers.

These days, the roads – and bridges and tunnels and high-speed railway lines and wind-power farms – are expanding at a faster pace than ever, thanks in (obvious) part to the record amounts of stimulus money put in play post-2008.

It remains to be seen whether the world will end up with more drivers than passengers to use all the stuff being built, but it’s clear that infrastructure is definitely on the upswing. Yet even with all the government presses printing money to fund projects, there still isn’t enough cash to really put in place the kind of infrastructure the world needs.

A recent report from KMPG entitled “The Changing Face of Infrastructure: Public Sector Perspectives” (click here to download the full report in PDF format) focuses on what it purports to be the answer: more private sector collaboration and, in turn, more money from non-government sources for projects.

The survey, the third in a series conducted in collaboration with the Economist Intelligence Unit (EIU), notes that despite the belief that the stimulus monies mobilized in the past two years will help in meeting medium-term infrastructure needs, these funds still fall well short of providing a sustainable solution to the far greater long-term challenges of global infrastructure development.

“It is also clear that given limited public sector resources, many governments and the private sector would be well-advised to work better in partnership to deliver infrastructure more effectively,” the surveyors conclude.

Specifically, 56% of survey respondents said lack of funds remains the largest obstacle to infrastructure development – especially from a longer-term perspective. In other words, it’s one thing to commit billions to building a road; it’s something else to ensure the road actually connects somewhere relevant (see chart below).

Meanwhile, the survey also found general agreement that government and the private sector can and should work more closely – not just to initiate infrastructure projects, but to make sure they are actually completed.

Indeed, some 65% of public officials, 80% of business executives and 40% of infrastructure providers respectively surveyed said governments should work more closely with the private sector to improve the infrastructure delivery process (see chart below).

For investors looking to sink some cash in infrastructure plays, and for private equity and hedge fund shops focused on infrastructure investments, it’s all pretty good news. Other recent reports of ours collectively show just how much interest there is in quality, long-term infrastructure investments – check out a sampling of the AllAboutAlpha infrastructure-focused analysis).

But of course, it ain’t ever that easy. For one, there’s the confidence issue. 81% of public sector respondents believe that government effectiveness is a significant barrier to delivering infrastructure – a sentiment shared by respondents in the earlier KPMG surveys, with 68% of business executives and 69% of private sector infrastructure providers voicing similar concerns. For another, there isn’t always consensus on the right projects to move forward with, and certainly not always consensus on the best approach to take from an investment perspective, particularly given that the private sector is usually more interested in making a profit than the public sector.

So how do alternative investment players figure in to this?

Without a doubt, it means there is plenty of opportunity to make money: by investing in projects directly, buying equity, bonds and other securities and investments that fund infrastructure investments, buying up the land that’s needed to build all the stuff, or even buying into private equity funds or hedge funds with the knowledge, skill and expertise surrounding infrastructure plays.

It also means that the future looks very bright for infrastructure in general, assuming the private sector picks up where the government leaves off on the funding side and the government allows that to happen. Hopefully, the government won’t let projects grind to a halt mid-stream.

But, as the report notes, it also incurs some risk, namely balancing public initiatives with private enterprise. To date, there have been few surveys if any that we’ve come across noting a significant reduction in politics, special interests and even corruption – issues that transcend all borders.

On the investment road of life, it seems the fixing up and paving is only just beginning.

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