Infrastructure: A new asset class in Australia

For more than 2,000 years, infrastructure has been central to economic and social development in concentrations of human settlement. Economic infrastructure facilitates trade and commerce and social infrastructure provides the health, education and the social services that are at the heart of quality of life and social development. With isolated exceptions, infrastructure is provided by government, mainly in the form of public goods. In the Australian colonies, this method of provision existed throughout the 19th Century and was an important feature of early colonial economic development. In the 20th Century, the new Commonwealth and State Governments maintained a central role in the operation of the economy including participation in competitive industries such as sea and air transport, manufacturing, banking and insurance and non-competitive essential services such as telecommunications, post and telegraph. In 1989, nearly all utilities were still owned and operated by government agencies and business enterprises.The belief that Australian governments should play a central role in the economy was challenged in the years that followed the world recession of 1990-91. The rapid globalization of trade and capital markets, international competition and poor domestic economic performance led to a change in political economy and a revival in 19th Century economic liberalism. A consequence was the privatisation of public assets and businesses, deregulation and microeconomic reform. Infrastructure was central to Commonwealth and State Government schemes to lower unemployment and inflation and raise growth, productivity and employment with the introduction of competition reforms and private sector standards of enterprise structure, governance and management. In the past 14 years, infrastructure emerged as an asset class with growing levels of private sector participation. This project canvasses the dimensions, role and development of economic infrastructure as an asset class in Australia. It contributes to our understanding of an important and pervasive group of assets using a review of empirical evidence, analysis of the operational and financial characteristics of public and private enterprises and a study of the investment characteristics of infrastructure assets using capital markets and case studies of unlisted securities.The project finds that infrastructure is one of Australia's largest and most important asset groups playing a central role in the nation's output, growth, productivity and microeconomic performance. It is identified as a diverse group of hybrid assets whose performance is influenced more by industry structure, regulation and contracts than by market forces. There is considerable variation in the structure, economics, operational and investment characteristics of the various industries that make up the sector suggesting that asset characteristics possess both generic and industry-specific attributes. As a listed asset, infrastructure securities are quickly assimilating with mainstream equity investments and moving toward market averages in most of the leading performance indicators. However, listed infrastructure securities respond differently to leading economic indicators than other asset classes and share a shortterm correlation with developers and contractors and direct property suggesting a diversification role in mixed asset portfolios. Unlisted investment is characterized by high leverage, finite tenure economics, a high return on equity and gross profit and, frequent trading of assets to exploit capital gains recognized by asset revaluation and refinancing. The thesis finds that infrastructure is a hybrid asset group possessing few of the physical, operating or investment characteristics of other asset classes.