New York City is facing an $80 million per year problem. That’s the amount of money that it stands to lose as a new infrastructure spending plan makes its way through Congress this week. The six-year plan–rather than keeping infrastructure spending flat–cuts it by nearly half. That loss of $80 million per year in transit dollars stinks for NYC. But it also stinks for residents across the United States. The cuts in spending will affect everyone from coast to coast.
And while some politicians, pundits and other newsmakers have been calling for just the opposite, those calls have recently been falling on deaf ears.
The problem in many developed nations, including the U.S., is that much of the infrastructure is older than 50 years. For example, sections of London’s sewer system that are still in use are older than 100 years. The general dilapidated state of these vital economic assets requires major overhaul in order for developed nations to remain competitive on a global scale. The current system of “patch and pray” has become more about “walking away.”
The spending–and it’s a hefty amount–will have to be done. And it seems that the private sector is going to have to pick-up the pieces. Luckily for investors, infrastructure can pay some pretty big dividends.
Big Time Dollars
The Organization for Economic Co-operation and Development (OECD) estimates that governments around the world will need to spend $53 trillion over the next 15 years on infrastructure improvements. That’s trillion with a “T”—and basically three times the entire Eurozone’s current GDP. And yes, that number is a global total. But even still, required infrastructure spending here in the U.S. isn’t a drop in the bucket either. The United States alone will need to spend $2.2 trillion over the next five years on its aging bridges, roads and water systems.
These are some serious dollar amounts. Despite the fact that budget cuts and austerity programs are becoming the norm, infrastructure improvements can only be ignored for so long. Bridges will eventually crumble; pipes will burst. Dwindling government budgets will open opportunities in the private sector. A prime example of what’s to come is the 2005 deal with regards to the City of Chicago’s Skyway Bridge and its ninety-nine year operating concession.
These sort of public-to-private partnerships (PPPs), as well as for scratch build-outs, are just what the doctor ordered. They allow cash-strapped governments much-needed funds, while still improving the rusty and crumbling roadways, bridges and other pieces of infrastructure.
Big Time Benefits
Even though you and I aren’t pension funds or big time institutional investors that can go out and by a bridge, we still can benefit from the asset class—especially on the dividend front.
Infrastructure works as a portfolio addition in several ways—from low correlations to diversification benefits—but the cash flows are the key. Cash flows, such as the payments for use of a cellular towers or highway tolls, produce stable revenues. This income is often inflation resistant as many infrastructure businesses use pricing formulas that change with economic conditions. Those cash flows come back to investors in the way of big time dividends.
A broad ETF like the iShares S&P Global Infrastructure Index (IGF ) makes a lot of sense for income seekers. The iShares fund serves as a way to play the operators of toll roads, airports and pipelines with a 3% dividend yield—but it’s not the only fund to explore theme. The ProShares DJ Brookfield Global Infrastructure (TOLZ ) and FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA ) are just two examples.
There are plenty of single firms that have dedicated themselves to the theme as well. Canada’s Brookfield (BAM ) and Australia’s Macquarie Bank are two examples of the transition to private operation of infrastructure. Macquarie was one of the partners in the Chicago Skyway deal. The pair offers several publically traded options that invest in infrastructure assets.
Brookfield Infrastructure Partners (BIP ) owns a host of assets including timberlands, ports, transmission lines and social infrastructure (hospitals, prisons, etc.), while Brookfield Renewable Energy (BEP ) owns plenty of wind, solar and other renewable generation assets. The Macquarie Infrastructure Company (MIC) includes investment in airport services, bulk liquid storage facilities and natural gas distribution. All three throw off major cash flows and dividends.
Infrastructure Spending WILL Increase
The truth is even if Congress decides to cut spending on these vital societal needs, the spending is going to happen and it’s going to come from the private sector looking to make a buck. With that in mind, investing in infrastructure could be one of the best portfolio positions around these days—especially for those investor’s looking to beef up their income.