In its May 2007 report, 'Infrastructure to 2030′, the Organisation for Economic Cooperation and Development (OECD) cautioned both member and non-member states on what it sees as the increasing demand for infrastructure coupled with the Government's limited ability to finance it. The OECD report identified the infrastructure needs of various countries and listed a series of recommendations on how countries could strategically develop their infrastructure. The report also stressed that countries must facilitate private sector involvement in the funding of infrastructure in order to satisfy the increasing demand on existing infrastructure and need for new infrastructure.

The term 'infrastructure' has been expanding to capture not just the traditional concession projects that have a government off-take arrangement, such as public-private partnerships/private finance initiative (PPP/PFI) schools, prisons, toll roads and hospital projects, but also almost any standalone monopolistic or quasi-monopolistic asset or group of assets such as airports, ports or telecommunications networks.

Each country has different infrastructure needs. However, some common drivers include the urbanisation of the world's populations, economic growth, the increasing need for energy and climate change. While infrastructure in OECD countries is being challenged by ageing populations and the ageing of their existing infrastructure, developing countries – in particular, countries in the Middle East, Central and Eastern Europe (CEE) and Brazil, Russia, India, and China (BRIC) – are faced with a need for all types of 'hard' infrastructure (such as toll roads, rail and airports) and 'soft' infrastructure (such as schools and hospitals) to facilitate the expansion of their economies and the lifestyle demands of their growing middle classes.

This demand for infrastructure coincides with the private sector's increasing appetite for infrastructure assets.

As a result of this two-pronged demand, bankable infrastructure projects are no longer dominated by 'hard' infrastructure projects in western Europe or natural resource projects. For example, governments of countries in the Middle East are procuring hard and soft infrastructure projects, such as rail networks, schools and hospitals; and the CEE countries and the BRICs, which five years ago were considered unattractively risky to invest in or even unbankable, are rolling out PPP/PFI procurement programmes based on the principles developed in mature markets.

If these countries follow western Europe's lead, their infrastructure assets could soon be part of a secondary market where the assets are bundled, repackaged, refinanced, spun off, listed or securitised as the private sector's appetite for assets with long-term and stable cash flow increases.

The demand for infrastructure assets in western Europe has been heightened by the stable and relatively high level of returns on the assets, the investment opportunities when those assets are pooled and the availability of cheap debt. Traditional infrastructure asset participants such as construction companies and specialised infrastructure funds are finding that they are competing for infrastructure assets with private equity funds, investment banks, hedge funds and pension funds. This is illustrated by the recent establishment of infrastructure funds by some of the major global financial institutions, such as Goldman Sachs Infrastructure Fund, and the intense competition for infrastructure assets, such as the acquisition of BAA and Thames Water – where successful consortia have paid double-digit multiples of earnings before interest, taxes, depreciation and amortisation – and the multitude of bidders for the Secondary Market Infrastructure Fund.

Once infrastructure assets have been acquired, investors and financiers are becoming more imaginative in how they seek to enhance their returns, treating infrastructure assets almost like commoditised assets with the resulting transactions often structured like classic M&A transactions. For example, Macquarie Infrastructure Group recently sold its interests in three toll roads in Sydney, Australia, to fund acquisitions of infrastructure assets in other jurisdictions.

The pooling of infrastructure assets has led to innovative financial engineering which has in turn generated significant value for investors and financiers. For example, the creation of a portfolio of infrastructure assets by the Secondary Market Infrastructure Fund allowed shareholders to improve returns, firstly through the leveraging of the portfolio's PPP/PFI cash flows (without impacting on the underlying refinancing position of the specific infrastructure assets which were part of that portfolio), and secondly through the subsequent sale of the portfolio to Land Securities Trillium.

This convergence of the demand for infrastructure around the globe and the private sector's appetite for infrastructure assets, is good news for infrastructure lawyers. The key areas where lawyers will be engaged is in negotiating the increasing regulatory framework, the expanding secondary market for infrastructure assets and innovative financial engineering. The level of complexity of the transactions will be determined by the type and value of the assets, the maturity of the jurisdiction where the transaction occurs, who is involved in the transaction and the cost and availability of debt.

As governments heed the OECD's call to adopt more innovative approaches to encouraging the private sector to finance infrastructure, the regulatory framework will become more complicated. The level of complication arises from governments' attempts to protect the interests of taxpayers and consumers and ensure that the investors and financiers of infrastructure assets are accountable.

Governments will seek to achieve this accountability through enhanced monitoring of the private sector's operation of infrastructure assets as well as scrutiny of the returns to investors and financiers both from operating infrastructure assets and from selling and on-selling of infrastructure assets. In the UK, an example of where the former is already in place is the regulated fares increases for operators of rail franchises. The latter has also been foreshadowed by the proposals for government to share in the gain on disposals of equity in the UK PFI secondary market.

Coupled with this increased regulation will be a drive towards the standardisation of the infrastructure procurement contracts as governments strive to create transparent and fair processes, for example, the UK's rail franchising programme and Standardisation of PFI Contracts Version Four. However, there will be procurements where the type of asset and the novelty of a particular transaction will require a unique structure, such as the London Underground PPP.

Infrastructure assets will increasingly be located in emerging market jurisdictions and these jurisdictions are currently seeking to fast-track the implementation of infrastructure procurement frameworks and establish vibrant secondary markets. The fact that emerging market jurisdictions are putting these structures in place is indicative of the need and the willingness of governments to seek private sector involvement in procuring infrastructure and also recognition by those governments of the diverse range of private sector participants and their different levels of willingness to bear risk.

Lawyers will play an increasingly important role in balancing the interests of consortia members who have increasingly different interests and mandates. Specialist legal knowledge of the areas of infrastructure regulation will be key to ensuring the success of government procurement programmes and to creating and maintaining viable secondary markets in infrastructure assets. The recent auctions for infrastructure assets have seen multi-disciplinary
legal teams advising on diverse areas such as competitive on-market takeover regulation, antitrust and competition issues and finance.

While some may argue that infrastructure assets are currently over-valued and that the infrastructure sector is experiencing another asset class bubble, the evidence indicates that while the gap between the infrastructure requirements of countries and the capacity of the public sector to fund those requirements from traditional sources continues to increase, the opportunities for private sector participants to invest in infrastructure are also set to expand, resulting in further interesting times and deals ahead.

Alex Carver is a partner and Amber Cerny a senior associate in the energy and infrastructure group at Freshfields Bruckhaus Deringer.