Tackling the policy challenge…
These days, virtually every conversation with an infrastructure fund features questions about the energy transition and how they can deploy capital towards it. And whatever country is being discussed, they invariably point to the same barrier standing in the way: the lack of conducive policy and regulatory environments to encourage and enable that investment.
A case in point? Transmission networks. In pretty much all countries, there’s a chronic and increasingly urgent need to get the transmission networks built quickly enough to roll out and integrate renewables at pace. Clearly, the policy levers to do this are essentially under governments’ control. But they’re struggling to get their policies aligned so investors can deploy the necessary capital with confidence and certainty.
…and partnering to recycle capital
Alongside policy, there’s also a further factor to consider: governments’ depleted coffers. While COVID-19 may feel like history, its impact on public finances lingers on. As governments emerged cash-strapped from supporting their economies through the pandemic, there was an expectation that they would make concerted efforts to recycle capital and partner more closely with the private sector to bring in fresh capital.
In the event, this hasn’t yet happened to anything like the extent hoped. Looking across the world, there have been some isolated attempts to stimulate the flow of private investment, most notably through the US’s Inflation Reduction Act (IRA). But that aside, no other major governments have made a serious effort to ramp up privatisation or forge stronger private sector partnerships. Yet that is what’s needed to rise to the energy transition challenge.
Funds are moving up the risk curve – and widening their horizons
This – in a nutshell – is the macro environment facing infrastructure funds as they plan out their strategies for 2024 and beyond. And already, a number of themes are emerging that provide clear pointers to how things will play out.
One is that, with regard to investing towards the energy transition, funds are moving up the risk curve. In the past, they’ve focused mainly on “traditional” sustainable energy assets such as solar and wind farms. But now they’re increasingly expanding outside this comfort zone to target opportunities in adjacent areas supporting the transition, like electric vehicle (EV) charging networks.
A further theme? The ongoing broadening of the definition of infrastructure itself to include new asset classes with infrastructure-like characteristics. This is a shift that’s been underway for several years. But it’s now gaining momentum and critical mass, as funds increase their risk appetite and widen their horizons in search of the higher returns that investors are demanding.
As a result, funds are looking beyond their traditional hunting-ground of regulated utilities – water, electricity, gas, airports and so on – to target new and different assets with infrastructure-like attributes, such as mobile telecom towers, fibre networks and data centres. Much of this investment plays to the pervasive move towards digitisation, which often links in turn to the energy transition through impacts such as reduced need for physical transport.
The next big thing? Try healthcare
As these emerging themes continue to reshape their strategies, infrastructure funds are also looking forwards to spot the next big thing in terms of asset classes. One sector that’s increasingly being mentioned in this context is healthcare. There’s a growing recognition that businesses in areas like pathology or radiology businesses share a lot of characteristics with infrastructure.
What’s more, when investing in assets such as day hospitals, investors can get a lot of comfort both from the reliability of future demand, and also from the fact that – in many countries – they have the government on the other side of the deal as a customer. All of this bodes well for the future flow of private investment into healthcare – which in turn bodes well for service quality for patients.
Time to ride the rising tide
My overall message? While 2023 was hardly a vintage year for private investment in infrastructure, the upside is that it has created the conditions for a healthy rebound. With the opportunities for funds to deploy their capital and expertise expanding all the time, and investor-friendly structures like blended finance coming to the fore, there’s the clear scope for private capital to play an even more important role in public infrastructure.
All that’s needed is the will and commitment from governments to help make it happen through the right policy actions. Let’s hope 2024 is the breakthrough year when they step up to the plate!
Coming soon: the next article in PwC’s Infrastructure Leaders blog series will discuss why now is the time to integrate ESG into infrastructure valuations. Read the previous blog in our series by Jennifer Tay on COP28 takeaways for the global infrastructure sector.
Contact us
Clara Cutajar
Partner, Advisory, Global Capital Projects & Infrastructure Leader, PwC Australia
Tel: +61 409 223 037
