You can invest in PFI projects through this specialist fund.
In the last two decades the British government has funded a large number of public infrastructure projects via the private finance initiative (PFI), a system of public-private partnerships whereby infrastructure projects such as schools and hospitals are built using private sector capital. The state then leases the asset and after many years takes full ownership.
PFI investments are particularly suitable for income-seeking investors because their client, the government, the most creditworthy borrower in Britain.
One way for private investors to get a piece of the PFI action is via the shares of the specialist investment fund, HSBC Infrastructure Company (LSE: HICL), which were floated on the stock market in March 2006 at 100p and have been a steady performer ever since, rising to the current share price of 115.5p where they yield 5.7%.
PFI -- efficient or wasteful?
The PFI was invented in Australia in the 1980s in order to fund new roads and railways. It was quickly adopted in Britain and has been used by governments every since. The PFI has been a bit of a political football with the major political parties' attitude towards the PFI depending on whether they were in office ("PFI is good") or in opposition ("PFI is bad").
This story from 2009 sums up the attitudes towards the PFT and investors in private finance projects need to be aware that the PFI is quite controversial. The two opposed views of the PFI can be summed up as:
"PFI is a good way to increase the amount available for investment into public sector projects whilst imposing some private-sector efficiency on the public sector."
"PFI lets the state borrow more money whilst hiding the debt off the balance sheet in a manner worthy of Enron because it claims that PFI payments aren't liabilities in the conventional sense."
It's a big presumption that the private sector is more efficient at operating certain types of project! Meanwhile, the political controversy, combined with the fact that the state is able to unilaterally rewrite its contracts by changing the law, means that PFI assets will always yield more than gilts.
What the company owns
HSBC Infrastructure only buys into PFI projects after they have been built; development is simply not its style. Its portfolio contains 33 different investments, 32 of which are shares of completed PFI projects, most of which are interests in hospitals, schools, colleges and what the company describes as "law & order" (courts, police stations and detention centres).
HSBC Infrastructure also owns 42% of Colchester Garrison, the home base of the British Army' 16th Air Assault Brigade. Bit its most valuable investment is a stake in the public-private partnership Dutch High Speed Rail Link which runs from Schiphol airport to the Belgian border.
Its non-PFI investment is a loan, of roughly 4.8% of its assets, to Kemble Water (the company that owns Thames Water).
The accounts
Investors should note that HSBC Infrastructure quotes two different earnings per share figures (eps) in its accounts. The statutory figure follows the International Financial Reporting Standards (IFRS) as the company is deemed to control four of its projects so their accounts must be consolidated with the parent company's accounts.
HSBC Infrastructure argues that its projects should be viewed as investments because it doesn't have any employees or direct involvement with project management. It thus prefers to present its accounts on an "investment basis."
| Results to end of March | 2010 | 2009 | 2008 | 2007 |
|---|
| "Investment Basis" eps | 6.5p | (6.8p) | 7.8p | 26.0p |
| IFRS eps | 1.6p | (4.3p) | 2.7p | 28.8p |
| Dividend | 6.55p | 6.40p | 6.25p | 6.1p |
| Net Asset Value | 110.7p | 110.5p | 123.1p | 121.5p |
The 2007 results are not particularly representative as they covered the period months from 11 Jan 2006 to 31 March 2007, during which time earnings per share were significantly boosted by one-off gains on investments.
The shares
Due to the nature of its business, HSBC Infrastructure's share price has been relatively stable since the shares floated, having traded between a range of 128p and 97p. Investors should note that the company only updates its asset value in its interim and annual results; whilst it may look like an investment trust where the managers (HSBC) take an annual fee of 1.1% of the assets and 1% of the value of new acquisitions, the company is closer to being a property fund.
One thing which will please many investors is that the company doesn't use much debt. The most recent accounts show net assets (investment basis) of £503 million, with a mere £11 million of liabilities. So there's no risk that the debt on the balance sheet will end up hammering the share price, as has happened with many property companies.
The future
The poor state of the public sector finances combined with the new government's crackdown on public spending and the high cost of the existing PFI commitments means that investors must assume from now on the number of new PFI projects is going to decline. Of course there's always the chance that the government may end up selling off more public assets to fix the state's balance sheet (anyone fancy buying the M1?).
That said the company has already established a substantial portfolio of projects which produce a secure income stream, so it should be able to continue to increase its dividend. The most recent management statement confirms this, stating that the company expects to be paying a dividend of 7p in 2012-13.
Whilst the shares may be too boring for many investors, if you've had too much "excitement" with your investments in the last couple of years then a low volatility share which pays a steady income may be just what the doctor ordered!
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