Infrastructure helps build new ethics

My comment in the latest issue of Fund Strategy argues that, if conditions are right, investment in infrastructure can be seen as part of an ethic of high expectations.

Infrastructure funds seem to be the latest fad. As Cherry Reynard reports in this week’s cover story several groups have set up such portfolios.

Two key trends seem to be driving the surge in infrastructure investment. First, is the increasing privatisation of utilities and other infrastructure projects. In Britain such projects are part of the Private Finance Initiative (PFI) while internationally they are referred to as Build-Operate-Transfer (BOT). Such privatisations have given private companies the opportunity to invest in infrastructure.

The second driving force is the strong growth of the world economy and the developing world in particular. As poor countries become more developed they need more infrastructure including bridges, roads and telecoms networks. Such investment is vital for rapid growth to be sustained.

If the first trend makes private investment in infrastructure possible the second makes it desirable. In broad terms the more investment in infrastructure the better. It should help bring the developing world closer to the levels of production and consumption enjoyed in the West.

There is always a chance that infrastructure investment can be wasted. But the problem is too little infrastructure rather than too much.

Africa is an example of the difference infrastructure can make. It is in the middle of an economic boom that has lasted several years. However, its growth is heavily dependent on the production of natural resources. Developing infrastructure should make it possible to diversify its growth away from a heavy dependence on raw materials.

The rapid growth of mobile telephone networks is already making a big difference to people’s lives in Africa. From a starting point of nothing many Africans are getting access to mobile phones. A conventional fixed line network would probably have taken a lot more time and effort to extend.

Of course private investors generally invest to make a return rather than for broader social reasons. In this respect infrastructure funds claim to offer risk and return characteristics that put them somewhere between bonds and equities. In this respect they can help diversify portfolios.

But if investors want to invest “ethically” how about an ethic of high horizons? More cars, more roads, universal access to electricity, access to a modern water grid, a mobile phone for all. That is the kind of ethic we could do with.