Sample Questions
Question 1
Easy
Political risk in infrastructure investing refers to:
Solution
C is correct.
Political risk encompasses the range of government actions that can adversely affect infrastructure investments: (1) Regulatory changes — modifying allowed returns, tariff structures, or environmental requirements. (2) Contract renegotiation — governments pressuring concession holders to accept less favorable terms. (3) Tax changes — imposing new taxes on infrastructure revenues. (4) Expropriation — in extreme cases, government seizure of private infrastructure assets. This risk is particularly relevant for infrastructure because: long concession periods span multiple political administrations, and essential services are politically sensitive.
Political risk encompasses the range of government actions that can adversely affect infrastructure investments: (1) Regulatory changes — modifying allowed returns, tariff structures, or environmental requirements. (2) Contract renegotiation — governments pressuring concession holders to accept less favorable terms. (3) Tax changes — imposing new taxes on infrastructure revenues. (4) Expropriation — in extreme cases, government seizure of private infrastructure assets. This risk is particularly relevant for infrastructure because: long concession periods span multiple political administrations, and essential services are politically sensitive.
Question 2
Medium
An investor is analyzing the risk profile of different infrastructure sectors. Ranking from lowest to highest demand risk, the correct order is:
Solution
A is correct.
The demand risk ranking from lowest to highest:
1. Regulated water utility (lowest demand risk) — Water is an essential service with highly inelastic demand. Consumption is relatively stable regardless of economic conditions, and the regulated rate framework provides revenue stability.
2. Contracted power plant with PPA (moderate demand risk) — A power purchase agreement guarantees a buyer for the plant's output at agreed prices. Demand risk is transferred to the off-taker (utility). Risk is limited to off-taker credit risk and any uncontracted capacity.
3. Merchant toll road (highest demand risk) — Traffic volumes are sensitive to economic conditions, fuel prices, competing routes, and local development patterns. Without a minimum revenue guarantee, the toll road bears full volume risk.
The demand risk ranking from lowest to highest:
1. Regulated water utility (lowest demand risk) — Water is an essential service with highly inelastic demand. Consumption is relatively stable regardless of economic conditions, and the regulated rate framework provides revenue stability.
2. Contracted power plant with PPA (moderate demand risk) — A power purchase agreement guarantees a buyer for the plant's output at agreed prices. Demand risk is transferred to the off-taker (utility). Risk is limited to off-taker credit risk and any uncontracted capacity.
3. Merchant toll road (highest demand risk) — Traffic volumes are sensitive to economic conditions, fuel prices, competing routes, and local development patterns. Without a minimum revenue guarantee, the toll road bears full volume risk.
Question 3
Hard
Considering the pension fund's three stated objectives and the data in Exhibit 1, which single asset BEST satisfies all three objectives simultaneously?
Solution
A is correct. The three objectives must be tested jointly. NorthStar is the only asset that clears all three: its tolls are CPI-indexed (inflation protection satisfied); its Year-1 cash yield of 6.0% exceeds the 5% hurdle in the first three years of ownership (current-yield objective satisfied in the relevant window); and its 35-year brownfield concession is the longest of the three, best matching long-duration pension liabilities (liability-matching objective satisfied). Helios and Meridian each fail at least one criterion, so they cannot be the single best fit even though their return profiles are attractive on other dimensions.
