The Financial Times is out with a new report today about the China Investment Corporation (CIC) looking to invest in infrastructure projects located in the west, starting with a high speed rail line in the United Kingdom. Historically, CIC, which is China’s sovereign wealth fund, has taken non-control stakes in order to mitigate political opposition. Attempts by state-owned Chinese companies to initiate control stakes in western companies have, at times, been faced with political opposition. In 2005, the state-owned China National Offshore Oil Corporation (CNOOC) bid for California-based Unocal. However, in less than two months, CNOOC was withdrew their bid amid the political opposition.
However, times have changed. Western governments are looking for ways to close budget deficits that have deepened in the current economic malaise. In New Zealand, the newly re-elected Prime Minister John Key had asset sales as one of the parts of his political platform. Whether Sinophobia will prevail remains to be seen. In contrast to CNOOC’s strategy of full acquisition, the CIC has proposed investing as part of a fund consortium or through public-private-partnerships.
What could derail the investment process might not be Sinophobia; rather, the opposition might come on financial grounds, especially for investments with better risk-reward profiles. While the short-term orientation of the western political process does not make us think it would be as probable a reason for opposition, a few infrastructure deals have experienced high-profile seller’s remorse. In an attempt to close the Chicago’s deficit, the administration of Mayor Richard Daley decided to sell Chicago’s parking meters to Morgan Stanley. The decision proved to be a political debacle. Although the deal is de facto irreversible, Daley’s successor, Rahm Emanuel, has pledged to make sure that Chicago would not make the same mistake again.
From an investment perspective, the asset class has a stability of cash flows that, at least for some projects, can be uncorrelated with the general economy. One type of competitive advantage for these projects can be geographic. Take for example, the Golden Gate Bridge. It essentially has a monopoly on transportation between Marin County and San Francisco. No matter what the economy is doing, people who live on one side of the bridge but work on the other have no choice but to use the bridge.
If you take a look at the financial data of the Golden Gate Bridge, the greatest decline in traffic during the postwar era was -5.19% for 1973-74. But in the following fiscal year, they were able to increase revenues from $9.5mn to $12.5mn. During the burst of the TMT bubble, traffic flow was -3.49% in 2001-02 and -4.52% in 2002-03. But they were able to pass a toll hike in 2002-03, raising revenues from $59.5mn to $79.4mn.
This stability also enables investors to lever their returns at a greater ratio than they would for more volatile asset classes.
Although most people think of infrastructure investing as something that happens when times are good and governments are experiencing increasing revenues, for the private investor, the investment windows in developed countries tend to be more countercyclical, when governments are trying to find easy fixes to their budget problems. In this age of austerity, the CIC might just have the perfect timing…