The nature of infrastructure has changed, and so has the nature of investing in it. Writing for the BVCA, Christian Doherty looks at the opportunities and challenges inherent in sectors such as energy, transportation, telecoms and other innovative technologies.
“If it doesn’t move, then it’s infrastructure.” It’s been a while since that old cliché has been applicable to the infrastructure space. And while investors continue to be attracted to traditional infrastructure projects — principally energy generation and transport — the sector as a whole has undergone a transformation in recent years as a number of ‘mega trends’ have taken hold.
“If you look at things like energy, transportation, certainly telecoms, and to a lesser extent water, things are changing extremely fast,” explains Simon Gray, comanaging partner at Arcus Infrastructure Partners. “In part, that’s driven by policy, in part it’s driven by the changing demands of the population. The infrastructure space is adapting pretty quickly… the rate of change within it is certainly right up there.”
That pace is set to continue. According to Oxford Economics, across the globe the need for infrastructure investment is forecast to reach US$94 trillion by 2040, with a further US$3.5 trillion required to meet the United Nations’ Sustainable Development Goals for electricity and water.
Governments across Europe remain dedicated to achieving their decarbonisation targets and continue to adhere to local and international climate change initiatives. For the UK alone, in order to achieve the 2050 target, additional investment of £4–5 billion per year is needed. That’s everything from roads and bridges to high-speed fibre broadband and data centres, not to mention further investment in renewable energy.
And that’s before you reach the outer frontier of what can be considered infrastructure: hard assets like satellites and cemeteries and the growing world of virtual infrastructure — programming languages and sensor networks driving the adoption of the Internet of Things (IoT).
Not surprisingly, the burgeoning infrastructure space is attracting interest from potential investors. “We have seen, over the last 10 years and beyond, an increasing pool of capital and more players in the market,” says David Hirst, Director of Infrastructure Investing at KPMG UK. “That’s forced some of the earlier entrants and others to think about diversification away from core infrastructure into newer types of assets.”
New players, new game
Underlying all this are some broad key trends: energy transition, decarbonisation and mobility (both electric and autonomous vehicles), as well as the centrality of data and its collection, storage, management and use.
“That’s coupled with a big move within the industry around ESG and grappling with that,” continues Hirst. “Infrastructure is at the core of all of this — the assets that are owned are often big and visible operations that have a lot of social, environmental and political interest.”
Simon Gray observes that investors nterested in the energy space 15 or 20 years ago would have focused primarily on projects around transmission networks, distribution networks, combined-cycle gas turbine power stations and so on.
“The reality is that’s not necessarily where the investment is required today,” he says. “It’s more in demand management systems, metering systems, renewable micro grids and decentralised energy.
“So the nature of the underlying assets that people are investing in has changed, because the investment requirement has changed within the space, driven by demographics, decarbonisation and the digital revolution.”
Corridors of power
But no conversation about infrastructure can take place without assessing how government policy is likely to develop. “I think right now, today, people are rather nervous of the regulatory impact,” Gray explains.
“You need to be aware of the political motivation for regulatory changes, whether that’s the Labour Party in the UK talking about nationalising assets, or whether it’s to do with affordability and energy price caps or water rebates. There’s a certain amount of nervousness around regulatory risk right now.”
And that uncertainty holds true not only in the UK, but beyond. In Europe, despite the EU’s well-developed strategies and targets aimed at reducing carbon emissions and driving the energy revolution (primarily through renewables and battery technology), the legislation remains patchwork, and the political will to underwrite investment in new infrastructure can vary wildly.
“It’s definitely not one size fits all,” says Gray. “You could say ‘Oh yes, it’s pretty stable’. But the intricacies and the details matter in this business and you’d be well advised to be very familiar with the markets you’re looking to invest in.”
The political winds are by no means the only disruption. Technology is driving not only policy decisions but also innovation among operators of infrastructure projects. And that innovation extends into how operators own, maintain and sweat their assets.
“If you own an electricity network, can you use technology like drones to help you do more efficient and preventative maintenance?” adds Hirst. “Can we use these sensors and IoT to get more efficient and avoid failing, or incurring costs, in future?”
Hirst echoes the growing sentiment in the space that investing in infrastructure represents a genuine opportunity to generate value and better outcomes for society by deploying new tech to enhance assets that are already owned. “So not all change and disruption is bad,” he says.
Ultimately, infrastructure as a sector will continue to provoke interest, not only for its reputation as a fixed income instrument with capital reservation in some sectors and territories, but also thanks to the widely held sentiment among governments that investing in roads, tunnels, airports and the rest is inherently a good thing.
“The great thing about infrastructure as an asset is that it’s one of the few policy areas where, right across the political spectrum, there is no competition for the biggest cuts to investment,” Hirst reflects.
“We need to remind ourselves that those in the sector are debating what we should be investing in, and how, rather than whether we should spend money on it at all. Sure, the details can be debated, but it’s a great position to be in where people are trying to outdo each other on how much they invest in new infrastructure.”