7 Infrastructure Investment and the Management of Risk

Abstract

Infrastructure is a rapidly emerging urban economic sector. This arises from a variety of forces including fiscal conservatism by governments and the associated privatization and corporatization of public utilities. These have created opportunities for infrastructure to be mobilized as a financial product. The product is assigned important attributes especially a claim for predictable and stable returns over long time periods which make it attractive to pension fund managers. Importantly, the emergence of the infrastructure sector and its financial mobilization have seen its rapid evolution from a set of hard physical structures and flows to a field of urban flows and connections involving everyday commercial, public, and private life. This chapter examines the issues involved in this evolution alongside the reformulation of infrastructure as a financial product, through a case study of Macquarie Bank, one of Australia's international infrastructure banks, concentrating on the strategies devised by Macquarie to control risk. These have a number of dimensions, such as a set of human resources strategies that mobilizes its young professionals to devise and negotiate new infrastructure products within a set of risk controls. Critical to the success of the Macquarie's risk control strategy is achieving an appropriate balance between financial product invention, IPOs, and holding products for capital gains and fees generation. This means that the daily operations of the contemporary city are increasingly bound to the investment and risk management strategies of the major infrastructure banks. The implications of this entanglement are explored.