guest article investment strategy What in the world is infrastructure? The definition is crucial: if we don’t know what it is we’re talking about, there is no way we can confidently invest in infrastructure, writesJeffrey E. Fulmer GOVERNMENTS ARE PROJECTED to spend Infrastructure assets are the physical structures, fa- electric power, fuel, transportation, and com- about three percent of the world’s GDP on cilities, and networks that provide essential services to munications are among the most fundamen- infrastructure in 2009 to meet the needs of the public. These assets include transportation struc- tal of societal services. Each of these services expanding populations and to desperately at- tures (roads, bridges, tunnels, railways, airports, and is characterised by expansive systems that link tempt to prop up crumbling bridges, highways, seaports), energy and utility companies, communica- supply and demand and involve intercon- water pipelines, and other system components. tion entities, and social services such as educational nected assets performing different functions The investment community is establishing facilities and hospitals (Chambers, 2007). and enabling the operability of their respec- evermore equity and debt investment vehicles tive networks. targeting global infrastructure. Yet, when some- Certain definitions have been so broad as to Primary infrastructure sectors certainly one mentions infrastructure, we reply out of include people as infrastructure. Reimut Jo- include electric power, oil and gas, potable necessity, “How are you defininginfrastructure ?” chimesen’s 1966 book, Theorie der Infrastruk- and waste water, transportation, and com- Attempts to define infrastructure have been tur, Grundlagen der marktwirtschaftlichen Ent- munications. A defensible, but less obvious made by national agencies, provinces and wicklung, focused on infrastructure’s role in list of sectors includes food and agriculture, states, municipalities, professional and trade the development of a market economy. He chemical, financial, and social infrastruc- organisations, the financial community, defines infrastructure as the sum of the mate- ture. Although embraced by the investment academia and, of course, dictionaries. Incon- rial, institutional, and personal foundations of community, social infrastructure is perhaps sistencies and sector-specific biases abound, an economy that contribute to realising the the most difficult to defend. Its physical but common threads run through the myriad assimilation of factor remuneration, given an components include schools, courthouses, of definitions. Nearly all mention or imply the expedient allocation of resources. Jochimesen prisons, and hospitals. Networks for these so- following characteristics: interrelated systems, uses the term “personal infrastructure” to en- cial assets, however, are almost entirely non- physical components and societal needs. compass the number and qualities of people physical and can be only loosely described by in the market economy. educational, judicial, penal, and health care Some sample definitions include: A practical definition of infrastructure is systems. Having understandably attractive sought that satisfies standard uses of the term investment characteristics that include long- The infrastructure supporting human activities by integrating the common themes of systems, term contracts and fee-based structures, so- includes complex and interrelated physical, social, physical assets, and societal needs. Addition- cial infrastructure is similar to other physical ecological, economic, and technological systems ally, a listing of primary infrastructure compo- assets that are broadly not termed infrastruc- such as transportation and energy production and nents is thought useful in assisting infrastruc- ture; e.g., church buildings, condominium distribution; water resources management; waste ture-related discussions. complexes, and entertainment venues. management; facilities supporting urban and These “systems” also attract investment and rural communities; communications; sustainable INTERRELATED SYSTEMS satisfy certain societal needs. resources development; and environmental protec- An electric power grid is a system of power tion (American Society of Civil Engineers, Infrastructure systems or networks of inter- plants, substations, power lines, and control 2009). related components are the analogous arter- centres that are more specifically described ies and veins attaching society to the essential as interconnected generators, transformers, The essential facilities and services that the economic commodities and services required to uphold transmission lines, buses, circuit breakers, productivity of a community or organisation de- or improve the standards of living. They are reclosers, protective relays, switches, voltage pends on. As a real return asset class, infrastructure often monopolistic in terms of local or region- control devices, distribution lines, and com- includes those assets that are involved in the move- al control of a good or service and typically puters. Each component or collection of com- ment of goods, people, water, and energy (Weisdorf, involve substantial capital investment. Pro- ponents (e.g., the varied subcomponents of a 2007). viding access to water supply and treatment, substation) plays its operability role through 30 infrastructure investor july/august 09 investment strategy guest article accepting inputs and yielding outputs. A sub- vessels; and commonly rail and/or barge of- these two characteristics by themselves do not station’s input is voltage at one level, and its floading facilities. adequately define the term. To be character- output is voltage at another level. ised as infrastructure, the networked assets must Natural gas systems encompass wells, gath- SOCIETAL NEEDS be designed to address a societal need. ering pipelines, sales meters, compressors, Infrastructure systems are costly and their processing plants, natural gas liquids (NGL) While interrelated systems and physical com- focus is not on individuals, segregated groups, pipelines, fractionation plants, transmission ponents are essential infrastructure traits, or independent companies, but on broader pipelines, control centers, market hubs, storage facilities, city gates, distribution pipelines, and a multitude of meters, valves, Sector Function Primary Components and emergency shut-off mechanisms. These ELECTRIC POWER Power Generation Coal Power Plants physical components are connected and in- Nuclear Power Plants terrelated to form a functioning system. Natural Gas Power Plants Hydroelectric Power Plants (Dams, Pump Storage, and Run-of-River) PHYSICAL COMPONENTS Fuel Oil Power Plants Dual-Fired Power Plants Alternate/Renewable Energy Power Plants Infrastructure assets, as defined herein, are Distributed Power Plants those physical links and nodes of networks. Back-up Generators Power Plant Substations They can be built, touched, enabled, or disa- Power Transmission Transmission Lines and Towers bled. The assets are like the individual links in Transmission Substations DC Converter Stations a physical chain that have shared-dependency Regional Control Centers on each other to provide an overall function. Power Distribution Distribution Lines Distribution Substations In the absence of redundant links or worka- Step Down Transformers rounds, a broken link weakens or disables a portion (if not all) of its associated infrastruc- OIL AND GAS Exploration and Production Offshore Drilling and Production Platforms ture network. Subsea Facilities The commodities that flow through the Permanent Onshore Drilling Facilities Wells (Production, Injection, Observation, infrastructure are not a part of the infra- and Disposal) structure system. Some physical assets rely on Oil and Gas Gathering Crude Oil Gathering Pipelines and Separation Gas Oil Separation Plants non-physical services; e.g., the transmission of Tank Batteries (Field Seperation and Storage) voice and data packets integral to communica- Crude Oil Lease Automatic Custody Transfer Units Gas Gathering Pipelines and Compressors tion networks. These “invisible components” Field Gas Processing Plants (Dehydration, Sweetening, are no more an infrastructure asset than is the and Nitrogen Rejection) electric power flowing through transmission Gas Sales Meters Oil Storage, Refining, Transport Bulk Storage Facilities (Terminal, Refinery, and lines, crude oil flowing through pipelines, or and Distriburion Pipeline Breakout) the influent flowing into a sewage treatment Offshore Mooring Systems Underground Crude Storage plant. Infrastructure systems and their physi- Refineries cal components enable the flow of commodi- Oil Main Pipelines and Interconnections Pumping Stations ties and services but can be either physically or Control Centers financially sensitive or insensitive to variations Truck and Rail Racks in the amount of commodities and services Natural Gas Processing, Transport, Gas Processing Plants and Storage NGL Fractionation Plants being conveyed. Gas Transmission Pipelines and Interconnections Supporting components are integral to Transmission Compressor Stations Control Centers each of the primary infrastructure compo- Natural Gas Market Hubs nents. As an example, a seaport usually in- Natural Gas Storage Facilities City Gates and Distribution Pipelines cludes most, if not all of the following sup- LNG Trains and Regasification Facilities porting infrastructure components: wharfs, LPG/Propane Interconnected