Brownfield Infrastructure: Buying Something Already Running

Brownfield infrastructure is an asset that was already producing cash on the day it was bought. Nilgiri Real Assets Fund I, invented, paid Rs 90,00,00,000 for an operating solar generation asset that sells its output under a twenty-five year contract with fifteen years still to run, and it produced net operating income of Rs 9,90,00,000, being 11.0 per cent on that fund's own cost.

The whole of the word depends on one small fact about timing. The asset had already been built, tested, connected and switched on before the money changed hands. That timing is all the word reports. The word is not a report about the asset's age, its condition, its quality, its size or how risky it is, and a reader who hears it as any of those has quietly turned a description of a stage into a description of a character. The word describes when, not how good. That distinction matters, because almost every mistake worked through below begins by forgetting it.

What does the word brownfield actually describe?

Start on an ordinary street. There are two tea stalls for sale on the same corner. The first one is open. The open one has a kettle, a counter, a queue at eight in the morning and a man who has been running it for a decade, and anybody can stand across the road on a Tuesday and count the cups. The second one is a drawing, a rented patch of pavement, a quotation from somebody who builds counters, and a promise that it will be open by the end of the year. A buyer is being asked for money for either one.

The two stalls are not different in quality. The two might be one stall at different moments of its life. The two stalls differ in what is still unknown, and that difference is the only thing the word is reporting. A brownfieldAn asset that was already built and already producing on the day it was bought. asset is the first stall. The first stall exists, it works, and somebody has already found out whether it works.

Nilgiri Real Assets Fund I, invented, is a closed-end property and infrastructure vehicle managed by Nilgiri Alternatives Advisors Private Limited, invented. The fund holds five real assets, and only one of them is worked through below: asset 3, an operating solar generation asset, bought for Rs 90,00,00,000. Asset 3 was generating and selling before this fund arrived. Somebody else chose the site, argued about the site, ordered the equipment, waited for it, installed it, and put it through commissioningThe stage at which a finished asset is tested and allowed to start producing.. Commissioning is the stage where a finished asset is tested and allowed to begin producing for real. All of that was over. The fund did not buy a project; it bought a machine with a payment history attached to it.

The word leaves a great deal unsaid, and the omissions matter just as much. Brownfield is silent on whether the asset is new, well built, well run, or in good repair. The word is equally silent on whether the asset will produce as much next year as it did last year. Age, condition and next year's output are separate questions with separate answers, and the word brownfield does not touch any of them. Brownfield closes exactly one file.

Which questions had already been answered before this fund arrived?

Three. A reader who cannot name them will keep believing the word did more work than it did, so they are worth naming one at a time.

The first is whether the thing ever gets finished. Anybody who has watched a house go up on their own lane knows this question has teeth. Money goes in for two years and there is still no roof, and the question is not whether the house will be nice, it is whether there will be a house. On asset 3 that question was closed before the fund put in a rupee. The second is whether it gets finished to the specification somebody wrote down. A finished thing that does not do what the drawing said is a different asset from the one that was priced. Closed as well: it was built against a specification and it had been tested against one. The third is whether it ever gets commissioned and connected. That step is where a completed asset stops being an object and starts being a source of income. Closed, and provably so. Asset 3 was already selling output.

The three questions were not answered by this fund and were not answered for free: somebody else carried them, and the price the fund paid reflects that they had already been settled. That last clause is the part people skip, and the section on price comes back to it.

And which questions did the purchase leave exactly where they were?

Three again, and they are of an entirely different kind. The remaining three are not questions about a building site. All three are questions about the fifteen years ahead.

The first is whether the party that buys the output actually pays for it. Think of a canteen that supplies lunch to one office building under a two-year arrangement. The arrangement is real, the price is written down, and none of that puts money in the till if the office stops paying. A contract creates an obligation. An obligation does not create a payment. The party on the other side of the contract is the counterpartyThe party on the other side of a contract, who has to actually make the payment., and the whole of that question sits with them and not with the machine.

The second is whether the asset keeps producing. Equipment in year twelve is not equipment in year one. Output can drift, parts fail, and a year of poor conditions is a year of poor conditions whatever any document says. Nothing about being already built settles what happens next.

The third is the asset's worth on the day the contract behind its income runs out. Residual value is the largest of the three, and neither this fund's own record nor anybody else's answers it.

What is actually inside an output contract, and what does this record hold?

An output contractAn agreement to buy what an asset produces, at a set price, for a set number of years. is an agreement to buy what an asset produces, at a set price, for a set number of years. When somebody who reads these documents for a living opens one, they are looking for four things, and the four sit in four different places in the paper.

What price. For how much output. For how many years still to run. And who is obliged to pay. Those four are the list, and the list is short enough to memorise, so memorise it.

Held honestly against that list, this fund's record produces an uncomfortable and useful result. The record for asset 3 of Nilgiri Real Assets Fund I, invented, holds exactly one of the four: fifteen years still to run at the record date, out of twenty-five signed. The record does not hold the contracted price for a unit of output. Nor does it hold the contracted quantity. And it does not name the party that owes the money. Three of the four questions a professional reader asks of an output contract are simply absent from this record, and nothing on the record can supply them.

An objection is available: the record does give a figure, Rs 9,90,00,000 a year of net operating income. The record does, and that figure is downstream of the price and the quantity rather than either of them. Rs 9,90,00,000 is what was left after the running costs, on one year, on one asset. Reading a price out of it would require assuming a quantity, and assuming a quantity is the sort of quiet invention that produces an account which looks complete and is partly made up.

Why do the fifteen remaining years matter more than the twenty-five signed?

Because one of those numbers is a fact about a document and the other is a fact about what is being bought, and only the second one is on offer.

A shopkeeper on a market street holds a twenty-five year lease on his unit. He wants to hand it over and move away, and he describes it as a twenty-five year lease. It is. He signed it ten years ago. The offer is fifteen years of occupation, and the twenty-five is a detail about somebody else's history. Pricing fifteen years of trade and calling it twenty-five is not a small error; it overstates the contracted period by two thirds.

On asset 3 the split is exactly that. Twenty-five years signed. Ten years gone. Fifteen years still to run at the record date. In shares of the signed term, 40.0 per cent of it has been used up and 60.0 per cent remains, both measured against the twenty-five. A buyer today acquires the fifteen, and quoting the twenty-five to describe what was bought makes the contracted period sound two thirds longer than it is.

The ten years already gone are as interesting as the fifteen remaining, and almost nobody looks at them, so turn the picture round. A decade of operation is a decade of evidence. A decade of operation means somebody has a record of what this asset produced in a wet year and a dry one, whether the payments arrived on time, what broke and what it cost to fix. Evidence is why a running asset can be diligenced at all and a drawing cannot.

And here is the discipline that goes with it. Nilgiri Real Assets Fund I's own record does not say what asset 3 produced in those ten years, does not say who held it, and does not say what was paid. Rs 9,90,00,000 is a figure at the record date, on this fund's watch. Multiplying it by ten and calling it a history would be inventing a decade. The ten elapsed years matter because they are where the evidence lives. This record does not contain that evidence, and the absence is a fact about the record rather than a fact about the asset.

There is one more consequence of the fifteen, and it is arithmetic rather than judgement. Nilgiri Real Assets Fund I's own term is ten years from its final close, with two extensions of one year each available under its documents, so at the very most twelve years of its life can remain at any moment after that close. Fifteen years of contract remain at the record date. Fifteen is larger than twelve, whichever year of its own life the record date happens to fall in.

What does the contract say about year twenty-six?

Nothing. Not a hint, not a formula, not a fallback. A contract describes the years it covers and is silent about every year after them, and that silence is a property of the document rather than a gap in anybody's teaching.

The name for what sits in that silence is residual valueWhatever the asset is worth once the contract behind its income has run out., meaning whatever the asset turns out to be worth once the contract behind its income has run out. Think about a taxi bought specifically to ferry the staff of one company under a five-year arrangement. For five years the arithmetic is easy and the invoices are predictable. In year six there is a taxi, a road, and no arrangement. The taxi might be re-contracted with the same company on different terms. The taxi might carry other passengers at whatever the going rate is. The taxi might be worth its scrap. Three different futures, and the five-year arrangement chose none of them.

Asset 3 is in exactly that position, fifteen years out. On the day the contract ends there will be a generating asset of some condition, in some market, under whatever arrangements exist then, and nobody has that number today. The honest treatment is to draw the contracted years and then draw nothing at all, because the alternative is to draw a line the document does not support and let a reader mistake it for information.

What did Nilgiri Real Assets Fund I get for its Rs 90,00,00,000?

Here is the whole line, restated so it does not depend on anything earlier. Nilgiri Real Assets Fund I, invented, holds asset 3, an operating solar generation asset that was already running when the fund bought it. Cost Rs 90,00,00,000. The asset sells its output under a twenty-five year contract with fifteen years still to run at the record date. Its net operating incomeA property or asset's income less the cost of running it, before financing and tax., meaning the income the asset produced less the cost of running it and before any financing or tax, is Rs 9,90,00,000 a year. The second figure divided by the first is 11.0 per cent, and that is this one invented fund's own figure on its own cost, not a statement about what an asset of this kind earns anywhere.

The clause about this fund's own cost is not throat-clearing. A yield on costA year's income divided by what was paid, and nothing more than that. is one year's income divided by one price paid by one buyer. Change the price and the figure changes without a single thing changing at the asset. Rs 9,90,00,000 on Rs 90,00,00,000 is 11.0 per cent; the same income on a price of Rs 1,10,00,00,000 would have been 9.0 per cent, and the sunlight would not have noticed.

A share with no denominator has said almost nothing, so name the denominators. The Rs 90,00,00,000 paid for asset 3 is 24.0 per cent of the Rs 3,75,00,00,000 this fund deployed across all five of its assets. The same Rs 90,00,00,000 is 27.27 per cent of the Rs 3,30,00,00,000 of that deployment which is actually producing income. And it is 22.5 per cent of the Rs 4,00,00,00,000 this fund's investors committed to it. Three true sentences, three different figures, and anybody quoting one of them without saying which denominator they used has left the reader to guess.

Set asset 3 beside asset 2 of the same fund. Asset 2 is a warehousing park bought for Rs 80,00,00,000 and producing Rs 7,20,00,000 a year, or 9.0 per cent on that asset's own cost. Both are producing. Both are held by the same manager under the same documents.

The two points between 11.0 and 9.0 are the consequence of two prices paid for two different sets of documents, and they are not a ranking of two assets. If the fund had paid Rs 1,10,00,00,000 for the solar asset the figures would have crossed over, and nothing about either asset would have moved. A figure that flips when only the price changes cannot be a judgement about the thing bought.

Why does something already running usually cost more than something unfinished?

Because the buyer of the running thing is not buying the asset alone. The buyer is also buying the fact that a question has already been answered, and whoever answered it expects to be paid for having done so.

Go back to the two tea stalls. The man selling the open stall is selling a counter, a kettle and a queue. The man selling the drawing is selling a counter, a kettle and a hope. Nobody pays the same for both, and the difference is not a judgement about kettles. The difference is the price of not having to find out.

The trade fits in one sentence, and it cuts both ways. Paying more for the running asset means the buyer starts from a higher price with fewer questions left, so whatever comes back has to come back on a bigger number. Buying certainty about construction is a purchase like any other: it has a price, the price is in the number paid, and it removes a question rather than adding an income.

The other case, where an asset has to be built before it produces anything at all, is covered separately under greenfield infrastructure.

What goes wrong when fifteen contracted years are read as fifteen certain ones?

What would somebody actually check first on a line like this one?

The practical end of the matter belongs to the people who read a line like asset 3's, and they are not all doing the same job with it. Three of them in turn.

A lender asked to advance money against the asset reads the years remaining before anything else, then reads them against how long its own money is out. Fifteen years of contract behind a loan repayable over eight is a different picture from fifteen years of contract behind a loan repayable over eighteen, and the second one is asking the contract to cover years it does not reach. An obligation is only as good as whoever carries it, so the lender then goes looking for the name at the bottom of the contract, and that name is the item this record leaves blank.

An analyst reading the fund's asset schedule does something narrower and more useful: they check what each figure is divided by. Rs 9,90,00,000 over Rs 90,00,00,000 is 11.0 per cent on this fund's own cost, and it is not a return, not a yield to any buyer today, and not comparable to a figure computed on a valuation instead of a price. Across the whole vehicle the same discipline bites twice: this fund's five assets produce 9.3 per cent measured on all Rs 3,75,00,00,000 deployed and 10.6 per cent measured on the Rs 3,30,00,00,000 that is actually producing income, and quoting either of those without saying which one it is has stated something false.

An investor in the vehicle wants the third thing, and it is the one nobody puts at the top of a report: how much of what they are being shown has a document behind it and how much is somebody's estimate. On this asset, fifteen years of contracted income have a document. The years after them do not. A reader who can say which rows of a total are contracted and which are assumed can argue with the total, and a reader who cannot is simply agreeing with somebody else's spreadsheet.

The habit matters more than the fund, and it has a household version. When a shop with a tenant in it is offered for sale, three questions do the work: the years left on the lease, the tenant's identity and credit, and the shop's value empty. The third one is the one people skip, and it is the one that decides what happens after the lease.