Infrastructure investments

Building for the future

When you invest in infrastructure your money is used to invest in infrastructure projects like roads, railways, ports, airports, telecommunications facilities, electricity generation, gas or electricity transmission or distribution, water supply, sewerage or hospitals.

Infrastructure is a long-term investment and some projects may take a long time to generate cash flows.

Before you invest you should take time to understand the unique characteristics and risks of the infrastructure investment. Here are some things to look out for before putting your money on the line. 

How infrastructure investments work

Your money is channelled into infrastructure projects through infrastructure 'entities'. These are either registered managed investment schemes and/or infrastructure companies. These investments are usually listed on a public market such as the Australian Securities Exchange (ASX). 

A small number of unlisted companies and unlisted unit trusts are also available to investors and can be accessed by dealing directly with the entity itself.

Infrastructure assets are often very different from other investments such as shares. Here are some of their features:

  • Infrastructure entities may only be contracted to operate an infrastructure asset for a set period of time.
  • Infrastructure entities may own less than 100% of their infrastructure assets so may not have total control over their assets.
  • Some infrastructure projects are subject to government regulation. For example, the prices that some infrastructure entities can charge are set by the government.
  • Infrastructure projects are often unique, and difficult to compare.

Investments in unlisted infrastructure entities are less liquid than some other investments, which means they cannot be as easily sold and converted to cash. This could limit your ability to withdraw your money when you need it. If you need flexibility, think about investing in listed infrastructure entities only or other financial products.

It's important to diversify your investments across a range of investments.

Know the risks

Infrastructure investments can be risky because of the following issues:

  • Cash flow forecasts - Infrastructure entities may be too optimistic in their cash flow assumptions. If they don't generate enough cash flow to meet their costs and debt repayments, they may not be able to pay you distributions or return your money (or the value of your investment) when you ask for it.
  • Performance and usage forecasts - Infrastructure entities often rely on forecasts of the future use and performance of an asset and if their assumptions are incorrect, the value of the investment may decrease.
  • Hard to sell - Unlisted infrastructure projects are often unique so it can be difficult to compare one to another and this can also make your investment difficult to sell.

The risks of investing in infrastructure entities were highlighted during the global financial crisis. Some infrastructure companies collapsed at this time and investors suffered significant losses as the value of investments decreased due to the unexpected high cost of infrastructure projects.

If you decide to invest in unlisted entities, be aware that many do not allow you to get your money back before the project ends. Even if withdrawal is allowed there may be penalties or you may still have to wait a long time. Before investing, make sure you can wait for the required period of time.

What to check for

The product disclosure statement (PDS) or prospectus will describe the characteristics and risks of an infrastructure investment. By law, these documents must also disclose any information that might impact your decision to invest. It's important to read the whole document before you invest.

Here are specific things you should focus on when reading a prospectus or PDS about an infrastructure investment.

Business plans

Check what the entity plans to do with your money. This information should be clearly set out in the prospectus, but you should ask the entity any questions you have.

Business model, assets and debts

If you are acquiring existing securities in a listed infrastructure entity, make sure you understand the entity's business model, the entity's assets (including their location) and how much debt the entity has.

Development timeframe, future growth, valuation and cash flow

If your money will be used to develop infrastructure assets (rather than to acquire existing operational assets), think about these extra risks:

  • Will the development be completed on time and on budget?
  • What assumptions has the infrastructure entity made about the use of the asset in the future and the growth of this usage?
  • How is the development valued?
  • How will the entity meet their cash flow needs before the asset is completed?

Payments to management

Are payments to management linked to the performance of the entity? Incentive-based payments (for example, bonuses) to management should be linked primarily to the entity's performance and not to the performance of other related entities.

Corporate structure

Is it designed to maximise returns to investors or to the entity or people operating the entity?

Costs

Do all investors have the same rights? Are your units or shares in the entity fully paid, or could you owe money later?

Other information

ASIC's regulatory guide, Infrastructure entities: Improving disclosure for retail investors outlines other key information the company should disclose to you so you can assess the risks.

See ASIC's guide to Investing in infrastructure and MoneySmart tips on how to read prospectuses.

Think about your goals and risk tolerance before you invest in infrastructure entities. If you're not comfortable with the risks, look at less risky financial products instead.


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Last updated: 14 Aug 2015