Infrastructure: economic vs social, greenfield vs brownfield

What is infrastructure, and who owns it?

Infrastructure is made up of real, capital-intensive, long-lived assets intended for public use that provide essential services: airports, health care facilities, sewage treatment plants and the like. It usually combines land, buildings and other fixed assets, and it has a societal purpose, supporting economic, technological and social development.

Early infrastructure was often built by private companies seeking profit. Governments took over much of the funding in the twentieth century and still finance, own and operate most assets today, with a large share of public money in developing countries. Since the late twentieth century, privatizations of public transport and other assets have grown the market for private capital.

A public–private partnership (PPP) is a long-term contract under which the private sector delivers a project or service that the public sector traditionally provided. Investors in PPPs may lease the asset back to the government, sell a newly built asset to it, or hold and operate it. The concession agreement that governs a PPP is covered in the lesson on ownership structures.

Investors also work alongside development finance institutions : specialized intermediaries that supply risk capital for development projects on a non-commercial basis. Examples exist at global, regional, national and local level.

Infrastructure investing resembles real estate in one respect: existing assets are unique and illiquid, with distinct locations, features and uses. It differs in how cash arrives, as the next sections show. Large projects often use a consortium that pairs strategic partners (operators with technical skills) with financial investors.

What are economic and social infrastructure?

The broadest split depends on what the asset serves.

Infrastructure investmentsasked first: what does the asset serve?

• Economic infrastructure Memorize supports economic activity
  • Transportation Memorize roads, bridges, tunnels, airports, seaports, railways
  • Information and communication technology (ICT) Memorize telecom towers, data centers
  • Utilities and energy Memorize power generation, transmission and distribution, water, gas storage and distribution, liquefied natural gas (LNG) terminals, oil and gas, waste treatment
• Social infrastructure Memorize serves people: schools, hospitals, social housing, prisons, government and municipal buildings

Economic infrastructure investments support economic activity. They have three groups:

• Transportation assets : roads, bridges, tunnels, airports, seaports and railways. Income usually follows demand (traffic, port and airport charges, tolls, fares), so it carries market risk.
• Information and communication technology (ICT) assets : infrastructure that stores, broadcasts and transmits data, such as telecom towers and data centers.
• Utility and energy assets : generate power and produce drinking water, and transmit, store and distribute gas, water and electricity, plus waste treatment. Many new projects are renewable, such as solar, wind and waste-to-energy. Income can carry demand risk, because buyers’ needs change.

Social infrastructure investments serve human activity: educational, health care, social housing and correctional facilities, and in some countries government and municipal buildings. The investor provides, operates and maintains the building, while the services inside are delivered separately by the public authority or a contracted provider. Income is typically a lease-type payment based on availability and on maintaining the asset to set standards.

Economic: transportation	Economic: ICT	Economic: utilities and energy	Social
roads, bridges, tunnels, airports, seaports, railways	telecom towers, data centers	power generation and grids, water, gas storage, liquefied natural gas (LNG) terminals, waste treatment	schools, hospitals, social housing, prisons, government buildings

How does infrastructure get paid?

Infrastructure cash flows are mostly contractual payments, not rents from tenants. There are three main kinds.

Contractual paymentsnot leases from commercial or residential tenants

• Availability payments Memorize paid for keeping the facility available, whatever the use; typical of social infrastructure
• Usage-based payments Memorize tolls and fees for using the asset; carry demand (market) risk
• Take-or-pay Memorize buyer pays a minimum price for a pre-agreed volume, taken or not; typical of utilities and energy

Availability payments are paid to make the facility available. A government pays an investor-owned hospital a fixed annual sum for keeping it ready and well maintained, whether the hospital is quiet or full.

Usage-based payments are tolls and fees for using the asset. Revenue moves with traffic or demand, which is why transportation income is said to carry market risk.

Take-or-pay arrangements oblige a buyer to pay a minimum price for a pre-agreed volume, whether or not the buyer takes it. Utilities use them to lock in revenue, and buyers usually have recourse if supply is late or poor.

$$\text{Payment} = \max(Q_{taken},\,Q_{min}) \times P$$

Usage-based revenue is a simple product, and it shows where the risk sits.

$$\text{Revenue} = \text{Volume per day} \times \text{Price} \times 365$$

What are the stages of infrastructure investment?

A second way to classify infrastructure is by the stage of the underlying asset.

Development stagerisk and expected return fall as the asset matures

• Greenfield Memorize build new assets; opportunistic; highest risk and return
  • Build Use it approval and construction; negative cash flow
  • Operate Use it concession agreement sets how income is earned
  • Transfer Use it to the government, sold to a third party or decommissioned
• Brownfield Memorize expand, redevelop or privatize existing assets; middle risk; short build, immediate cash flow, operating history
• Secondary-stage Memorize fully operational, no further investment needed; lowest risk and return

Greenfield investments develop new assets. They are opportunistic: the investor may lease or sell the finished asset to the government, or hold and operate it, perhaps until it matures and is sold to new investors (which delivers the capital gain that pays for the construction and commissioning risk). Greenfield investors usually invest alongside strategic investors or developers who specialize in building the asset. In PPPs the life cycle is called build-operate-transfer (BOT) :

1. Build. Approval and construction take a long time with negative cash flows.
2. Operate. A concession agreement sets the parameters by which the investor earns income.
3. Transfer. The asset goes to a government entity on pre-agreed terms, is sold to a third party, or is decommissioned.

Brownfield investments expand existing facilities. They may involve privatizing a public asset or a sale-leaseback of a completed greenfield project. The investment period is shorter, with immediate cash flows and some operating history, so strategic operators and financial investors seeking stable long-term returns can both be interested.

Secondary-stage investments are existing, fully operating assets that need no further investment or development over the holding period. They produce immediate cash flows and returns. Some assets never reach this stage because they keep needing capital.

Stage	What it is	Risk and return
Greenfield	build new assets; sell or lease to government or operate them	highest
Brownfield	expand, redevelop or privatize existing assets	middle
Secondary-stage	operational assets with a track record	lowest

How can you invest in infrastructure?

Direct infrastructure investment means owning the underlying asset. It gives control and the chance to capture full value, but it needs large sums and brings concentration and liquidity risk during the long holding period. For that reason direct investment is usually done in a consortium of strategic investors, such as large pension funds or sovereign wealth funds, that share the financial risk and take specific roles in building, running or managing the asset.

Indirect infrastructure investment goes through infrastructure funds (set up like private equity funds, closed end or open end), infrastructure exchange-traded funds (ETFs), or shares in listed infrastructure companies, including master limited partnerships that pass income through to investors. Listed securities give liquidity, reasonable fees, transparent governance and observable prices, although they are a small part of the market and cluster in some asset types.

Forms of investmentmostly equity; some debt

• Direct Use it control and full value; large, concentrated and illiquid, so usually done in a consortium
• Indirect Use it infrastructure funds (closed or open end), exchange-traded funds (ETFs), listed infrastructure shares, master limited partnerships
• Debt Know the idea private loans or infrastructure bonds; flexible terms for long build periods

Most investors buy equity, but there is also debt: private loans and infrastructure bonds, with flexible terms to cover long build periods and years with no cash flow.

Exam tip To classify an infrastructure question quickly, ask two things in order: what does it serve (economic or social), and is it built yet (greenfield, brownfield or operating)?

Go deeper Why consortia combine strategic and financial investors

Operating an airport or a port takes specialist skills that a pension fund does not have, while a strategic operator may lack the capital for a large stake. A consortium splits the roles: the strategic partner runs the asset and the financial investors supply long-term, patient money. Each partner carries a share of the risk, and the combination also lowers the concentration risk that a single direct holding would bring.

Go deeper Concessions and handback

Under a concession, a private company builds and operates an asset for a fixed term and earns the income in return. At the end of the term the asset is handed back to the public authority, usually in a required condition. The value of a concession therefore shrinks as the end date approaches, which is why long, stable concessions are prized and why investors price the handback terms carefully.