Excess investor demand for infrastructure assets will ease in the medium term as countries are forced to adapt to rising populations, more extreme weather, resource scarcity and digital disruption, believes QIC.
And investors will play an increasingly proactive role in this pipeline of projects, often providing governments with ideas on how and what to build.
Research undertaken by Ross Israel, head of global infrastructure at QIC, has highlighted the ways in which the economic megatrends of digital disruption, a scarcity of resources – in part due to climate change, the new Silk Road, high public debt and megacities will increase the need for new infrastructure.
“Despite the perception of where you think value is at the moment, if you extrapolate these themes on a medium to long term basis, infrastructure as an asset class looks very prospective,” said Israel. “There is a clear need for capital in order to meet the challenge embedded in these five key trends.”
The identification of risks and opportunities in the five megatrends has also made QIC bolder in how it approaches governments with proposals for new infrastructure.
“We are increasingly feeling confident that if the idea is robust, put it to government.” He adds that such approaches always carry the risk that if the idea is generic then it will be put out to a public tender, which would not reward QIC for having suggested it, but that if it can be proposed with enough differentiation then this need not happen.
Israel feels that the five economic megatrends are particularly relevant for Australian infrastructure.
“Australia is directly linked into Asia and we are a highly urbanised environment; it has deep resources and is highly capable of inputting the technological elements because of our workforce capability. So we think Australia is very prospective on a medium to long term view for those bigger, wider thematics.”
The five economic megatrends and their impact for infrastructure
High public debt – “Significant debt positions are not going to be fixed in the near term,” says Israel. “The public purse is not going to recover to help pay for infrastructure renewal.”
The new Silk Road – By 2030, two-thirds of the world’s middle class will be in Asia and they will want greater infrastructure.
Megacities – More power, water and transport will be needed for ever more congested cities.
Scarcity of resources – There is a need for innovative financing, design and delivery of infrastructure to meet a growing demand for water and energy. There will be a need for new infrastructure with a higher resilience to more extreme weather events.
Digital disruption – Israel sees renewable energy as more feasible owing to improvements in energy storage technology. Data analytics will lead to ways of measuring peak demand and for investors to gain a greater return from their assets; it will also allow better calculation of wear and tear on assets and how an asset’s life can be extended.