The shape of the infrastructure market continues to change. The 2019 Infrastructure Index uncovering four key areas that present exciting opportunities for investors tussling with the limited deal flow in traditional markets: PPP in new markets, 5G, subsidy-free renewables and floating technologies.
2019 possesses the hallmarks of a turning point in the global transition into greener, smarter and more sustainable assets. The clean energy sector has now arguably achieved maturity – and crucially cost parity with fossil fuels in a number of markets – and climate action has risen up the agenda. It has encouraged investors to demand sustainable destinations for their capital, breathing life into new technologies and social responsibility in the infrastructure space.
Across Europe the race towards green leadership will gather pace, with proactive government policies providing the necessary incentives for investors and developers alike to reach their respective targets.
Germany, the top-ranking country in the 2019 Index, is aiming to make climate action a part of its national identity. To this end, investors can expect opportunities in electric vehicle (EV) charging infrastructure, the country’s expanding offshore wind market, and energy storage assets that will help manage existing and future renewables capacity.
The Brexit-effect on UK performance may cause concerns for some, however despite the limited political attention to new greenfield developments, the UK government maintains a strong political will for transforming its energy networks with both England and Scotland establishing net-zero emission targets for 2050 and 2045, respectively. Similarly, broadband targets have been reinforced, promising full fibre rollouts and 5G capabilities within the next five years.
PPP demand in new markets
Flourishing PPP models and increasing openness towards the private sector across Latin America (LatAm), Asia Pacific, the Middle East and Africa provides ample opportunities for investors to leverage their expertise, as well as their capital, in structuring large projects.
Gulf Cooperation Council (GCC) governments will continue a trend of extensive reforms. Oman’s new PPP law, approved in July 2019, will allow for 100% international ownership of assets. This factor improved its 2019 private participation score to 77.65% in our analysis of key parameters, a 15.15% increase from 2017. A similar boost in attractiveness is expected in Saudi Arabia as investors anticipate the approval of the country’s Private Sector Participation Law.
Oman’s new PPP law improved its 2019 private participation score to 77.65%, a 15.15% increase from 2017
Jurisdictions with significant infrastructure deficits, such as LatAm and Africa will drive demand for PPPs to support their economic transformations, a factor that is already attracting capital from leading investors. According to inspiratia, activities in Brazil have contributed heavily to LatAm’s total 2019 deal flow of over USD 22.9bn across infrastructure and energy assets – particularly due to the USD 8.6bn Transportadora Associada de Gas sale where Canadian pension fund CDPQ and Engie acquired stakes in the transmission pipeline in June 2019.
Brazil’s President Jair Bolsonaro has promised a flurry of activity, including the privatisation of state assets. Meanwhile Chile, Colombia, and Peru have bolstered their infrastructure strategies and procurement frameworks for projects, exemplified by Chile’s USD 1.2bn Americo Vespucio Oriente toll road concession awarded to Spanish group Sacyr.
In the case of Africa, several countries are restructuring regulatory frameworks to better attract foreign investment or to improve current PPP programmes. For example, Ghana has launched several PPP tenders, including a 27-year concession awarded to a 16-strong consortium of Ghanaian and European developers for the USD 2.2bn Eastern Railway Line PPP in April 2019. Meanwhile Kenya awarded the USD 1.5bn Nakuru-Mau Summit Highway PPP to a Vinci Concessions-led consortium in February 2019
India’s first private train developed under a PPP, the Lucknow-Delhi Tejas Express, became operational on 5 October 2019. Investors are now preparing for another wave of privatisations in the country fuelled by the recent success story and the increased efficiency associated with private sector involvement in infrastructure projects.
Growing digital appetite
Globally, investors are strategically positioning themselves for opportunities in this sector. Some are involved in the 2019 broadband PPP tenders held in Peru, whose government is aiming to take advantage of LatAm’s strong internet growth prospects. Meanwhile, France and Greece, among others, are channelling strong political will into plugging rural broadband connectivity gaps. Others are following the lead of Antin Infrastructure Partners and Goldman Sachs with their acquisition of UK altnet CityFibre in 2018, using dedicated funds or private equity to establish positions in growing digital businesses.
The Marguerite-backed EllaLink subsea cable project, connecting Brazil and Portugal, challenged the traditional dominance of complex consortia and tech giants in financing fibre interconnectors. In the Middle East, a number of countries are developing smart cities as they strive to become global economic hubs.
APAC countries are in pole position in the race to implement 5G. South Korea boasts the world’s first nationwide 5G network, which reached one million subscribers in 2019. Elsewhere, July 2019 saw Equinix and Singapore’s GIC form a USD 1bn joint venture to develop hyper-scale data centres across Europe.
Number of advance orders for 5G plan made between 1 September 2019 and 10 October 2019
China is quickly establishing itself as a global 5G hub. Between September 2019 and 10 October 2019, over 10 million advance orders for 5G data plans were submitted to China’s three mobile operators, namely China Mobile, China Telecom and China Unicom. The three companies will deploy a total of 130,000 standalone 5G base stations across the country by the end of 2019.
Subsidy-free future for renewables
Confidence in subsidy-free renewables assets has increased significantly over the past year, especially in markets such as Spain, Germany and Italy, with each presenting unique conditions for different technologies. As the value of subsidies declines and ultimately disappears, fully-merchant projects are beginning to surface in European countries with increasing appetite from lenders to provide debt. In August 2019 Banco Sabadell financed a 73MW portfolio of merchant solar PV plants for USD 33m in Ciudad Real, Spain. However, most subsidy-free projects are currently backed or are planned to be backed by PPAs which provide not only an element of revenue visibility for lenders but also premium pricing from corporates.
Corporate PPAs are quickly becoming the preferred choice of backstop for projects as demand for clean energy grows. While the US has led such deployment over past years, Europe is rapidly catching up with regions such as the Nordics and the UK making substantial contributions. In February 2019 Ørsted struck a 10-year corporate PPA with utility Northumbrian Water to supply power from its 573MW Race Bank project, considered the UK's first offshore wind corporate PPA, and more have followed.
Floating wind emerges
As nearshore project sites begin to become scarce, discussions are underway in several jurisdictions for floating wind projects to sate the demand for new developments. In July 2019, Equinor entered a joint venture with Korea National Oil Corporation to build a 200MW floating offshore wind project in South Korea. Meanwhile in the UK the Norwegian energy group also secured a PPA with Danske Commodities for its 30MW Hywind project in Scotland.