INSIGHT

Key findings from the Infrastructure Investment Monitor

Dealmakers & Investors Energy Environment, Social, Governance Infrastructure & Transport Renewable Energy

In conversation with Infrastructure Partnerships Australia

Transcript

Watch time: 25 min

Adrian Dwyer

It's about six months since we released the 2023 Infrastructure Investment Monitor, which Infrastructure Partnerships Australia do with Allens each year. We’ve been doing it for about eight years now, so we've got some really good data on trends in the industry.

Six months having passed since we released that report, we thought it was a really

good opportunity to sit down with David Donnelly and Kip Fitzsimon, Partners here at Allens, to have a chat about what's changed in the months since the report. So thank you very much for joining me, both of you.

David, I might come to you first. 2023 was characterised in many ways by all of the reviews underway at state and federal Government level. They were all doing strategic reviews of their infrastructure forward pipelines. How did that play out from an investment perspective?

David Donnelly

Yeah, well, it's interesting because per se there's nothing wrong with a review. It's good to go back and check, you know, if the fundamentals change should we still be investing here? What makes sense? What doesn't make sense? So that I guess, is a logical and reasonable thing to do.

The problem from a market perspective is it pulled all the projects essentially back from the market for a period of time. And while we've got probably better certainty going forward about what's in the pipeline, there's a period there where there was nothing in the pipeline or at least no certainty around the pipeline, and there was no opportunity. So it's caused people, I think, to look elsewhere for investment opportunities. But ultimately it's reduced the amount of investment in the pipeline.

Adrian Dwyer

So in practice, you saw pauses on projects? So work wasn't happening?

David Donnelly

Yeah. So most of those projects paused because there was no certainty that they would go forward or wouldn't go forward. And people then either have to redeploy capital somewhere else or they're sitting out of the market - and that has got a cost. So in terms of certainty, it has given us certainty going forward, but it created a lot of uncertainty at the time.

Adrian Dwyer

And Kip, so, there’s certainty in the forward pipeline now, as David has said. But governments’ fiscal capacity is pretty wrecked across all states, and particularly state governments, lesser extent the Federal Government. But there doesn't appear to be a huge amount of fiscal capacity available, debt’s high. Does that mean that, we know the forward pipeline, affordability is low, there's an opportunity for private capital to come through the middle?

Kip Fitzsimon

Yeah, absolutely. I mean, government has to get the money from somewhere to fund this $86 billion pipeline and I don't even think $86 billion is the real number. I think it's far greater than that. So there's sort of a bit of optimism, I think, around investors now that we've got the certainty and there is a bit of a settling in the market post the reviews. So, you know, lots of our clients are talking to us about feeling a lot better than they did sort of the same time last year. So yeah, it's really positive.

Adrian Dwyer

Glass half full.

Kip Fitzsimon

Yeah, always.

Adrian Dwyer

David, one of the other things that the Investment Monitor has shown, it's been a trend over the last couple of years, is a movement away from the more traditional asset classes that have characterised the last 15 years, things like road and rail. Investments more towards energy, digital, etc.

What's your sense of that being supply-driven versus demand-driven? Is it that investors are wanting that for their portfolios or is it that's just what's available?

David Donnelly

I think it's a combination of both. So it's certainly what's available. We're seeing a lot more opportunities in those spaces than we are in traditional road and rail. But also I think they’re some good asset classes.

So if you think about social infrastructure, it's largely availability-based payments. So it's a nice certainty of payment, something that people are looking for, difficult to find in a volatile market. So there's an attraction there. And I think you've got to divide energy assets up. But if you're looking at transmission assets, that's a regulated asset base. So again, you've got some certainty around payment over time.

For renewable generation, it's slightly different. You've got certainty in the short term, but ultimately there's a tail. So often you'll have an offtake that runs for, say, six, seven, eight, nine years, whatever that is. But there's a tail risk on that asset because you flip effectively to merge in once you get past that original.

So there's different profiles there. I think there's definitely on the supply side, there's more opportunity there. And on the demand side, I think there's some characteristics that are forcing people into that space.

Adrian Dwyer

Kip, how are you seeing that play out in the asset classes you're dealing with?

Kip Fitzsimon

Yeah, it's interesting. I mean, the most exciting asset class I'm seeing at the moment in my practice is the digital acceleration, because we all know that we need sort of a lot of digital transformation to support the energy transition. And we're seeing that play out in global markets more so than here at the moment, but it's certainly something that's talked about a lot. So opportunities for huge data centres and that transformative sort of tech and data.

I think the challenge with technology is it's got a long lead time on a lot of things and there needs to be a really big coordination of lots of different parts of the market, which, you know, in traditional infrastructure you haven't had. So dealing with big tech companies is a very different thing to building a large WestConnex-type road or something like that.

So there are challenges, but there's a lot of optimism because like everyone else in the industry, we're all just pivoting to new asset classes. And I mean social infrastructure is very enticing if it's set up as a PPP, we're seeing not a huge amount of those hitting the market. So I think getting the model right around social, we know we need housing, for example. It's a big challenge in Australia and there's toying with ground lease models and other things. But I think we're yet to see those deals executed in a way that's very attractive for investors.

Adrian Dwyer

And they're not really at volume yet.

Kip Fitzsimon

No.

Adrian Dwyer

We've got the second one getting away in Victoria, but Queensland announced a surprise Ground Lease Model.

Kip Ftizsimon

Yeah, they have.

Adrian Dwyer

A few weeks back which sort of came out of nowhere. So maybe that will become the default.

Kip Fitzimon

I think there's still a little bit of pessimism around the execution of those deals given the government agencies you've got to deal with and sort of that it is a bit of a whole new world. So I mean, in a couple of years that will have all settled once we've got a few away and it will be attractive. But it's just again, shifting that mindset away from that very traditional availability model PPP into new hybrid models. Which we're seeing with the REZs as well, like they’re a hybrid.

Adrian Dwyer

And long lead times on particular things like the REZs aswell.

Kip Fitzsimon

Yeah.

Adrian Dwyer

On the social housing, I mean the demand is there, in fact housing more broadly. For things like ground lease model where you can have different composition of housing, there's no question that there's an opportunity there if governments grab it with the right models.

Kip Fitzsimon

And that's the thing in the market at the moment, that's where the optimism is coming from, the opportunities there. Similarly with the energy transition, it must happen. We must deliver these projects in the next 15 years. So I think that creates an optimism. It's not sort of an announceable project from government that's wishful. We need to execute on these promises now, so that creates appetite.

Adrian Dwyer

I'll come back to energy in a minute, I just want to dive down on the digital infrastructure piece. I’m reluctant to use the phrase, but AI, you hear about it a lot. Is it being driven by that, just the growth in requirement for data, David?

David Donnelly

Yeah, so in part. So, AI exists already and you know, large entities, Google, use AI as part of their search function. Where I think it's become interesting is that ChatGPT and other AI devices have meant that more people are accessing AI, which means there's more demand for that sort of high-end computing. It changes, fundamentally changes the way data centres are set up because at the end of the day, that requires much more energy and so energy becomes the logical constraint rather than land or capital for data and where you locate them becomes incredibly important because they need to be close to the source, because you’re looking for speed.

So it's quite interesting, I think that's playing out a lot in the US. It's playing out less here. There's a lot of interest here and I suspect that's probably the next wave of things that we'll see in this market.

Adrian Dwyer

Yeah, okay. So let's talk energy transition then. We've touched on it a little bit.

Kip, what's your sense of how the market is viewing the energy investment landscape right now? Has it changed since we did this survey in the middle of last year?

Kip Fitzsimon

I think, I mean, the results in the survey are very positive. You know, everyone's looking at these new asset classes very attractively, you know, grid storage, battery and short-term other storage solutions are really, really attractive. But we've still got this problem where it's a little bit sort of ‘stop-starty.’ And that's tricky because there is a lot of stuff out there being announced. There's a lot of investigations happening. Just look at offshore wind. You know, there's a whole lot of activity there, but no execution on that delivery and no certainty around when.

So if we're talking about the physical infrastructure, for example, you know, Dave and I wouldn't be able to predict when that stuff's actually going to be delivered. So I think there is still, there's a lot of excitement, but there's still a real need for clarity from government around this.

Adrian Dwyer

What's your sense of what's stopping it, why is it slowing? Why is reality not meeting aspiration?

Kip Fitzsimon

I think there's a whole lot of issues. I mean, the government intervention is one thing, and I think government intervenes in a way that obviously they think will produce positive outcomes, which is the intent of new policy. But what we saw in the survey in particular is when there's government intervention that actually makes people a little bit more timid around that investment because it's not as clear as perhaps they would have liked, there’s social licence issues.

I mean, a lot of these projects are vast and in the middle of Australia, across parcels of land that we've never, you know, built anything on before. So that comes with a whole lot of social licence issues.

And then there's just what's happening in the world, globally, you know, around all these market forces, around supply chain demand and, you know, lack of labour in this particular market. And we're competing with the rest of the world for the same thing, which is a really unique situation. So all of that kind of comes together, creates a little bit of uncertainty. But like I said before, we know it needs to happen. So that's what keeps everyone coming back to the table.

Adrian Dwyer

David, how's that playing out in terms of preferences of investors? What are you hearing from the market?

David Donnelly

So I think, if you think about the energy transition, there's two things going on. One is transitioning a range of fuels into electricity and the other one is changing how we generate electricity. And the second one is largely an infrastructure play. So most of that is an infrastructure opportunity. It's building new generation sources and ultimately building storage and grid capacity.

I think the constraints are fairly obvious. There's a grid constraint at the moment, so you might be curtailed going onto the grid. There's social licence issues, particularly around transmission, when you're going through farmland and the like. And there's an issue where you've got a cost of capital to get the thing built and there's no shortage of capital.

You know, people talk about dry powder, there's plenty of money willing to invest for a return. The problem is with the current cost of living position, it's difficult to get that return from the people using the power. So, who pays is the question.

Adrian Dwyer

So do you think we’ve hit the limit there of what can be financed through bills.

David Donnelly

I think there's a limit on what people are willing to pay. So, when you ask people will they pay a premium for green. Yes. What's that premium look like? I don't think it's as much as the cost differential to produce.

And so, until we get alignment between what it cost to produce and what people are willing to pay, or there's more available cash in the system, if you like, to pay these things back, there's plenty of people willing to invest, not so many people willing to pay that investment off. So it's a, we're sort of trapped in a little bit of a catch-22 I think.

Adrian Dwyer

18 months ago, there was this optimism around the idea that you would have the energy transition work would grow as the road and rail pipeline fell off and there would be this, you know, transferability of skills and some symmetry between the way that those two moved. Not entirely transferable, of course. There's some specific skills and some degree of transfer.

With that energy pipeline pushing back the road and rail pipeline definitely in decline, like lots of money in budgets for road and rail, but it's tail funding for existing projects. There's this sort of air bubble emerging in the system, would be my perception of where actually it’s going to be a gap where those people can't transfer.

Are you seeing a reaction in the market to that? When you talk to people like contractors, are they saying, actually, we're not sure if people are going to be busy? And I guess in the type of world you're in as well? Is that true of your businesses? Kip?

Kip Fitzsimon

That's an interesting point because contractors are the ones where you feel that real tension because they're on the coalface. And so they've come out of a market where they couldn't find an engineer to work on a road project in regional New South Wales to save themselves. And now, those projects are coming to an end and they don't know how they're going to deploy people. I think the reviews that happened last year, stalling things like Sydney Metro West has been a really tricky thing for them to wrap their head around.

They're also in businesses where they've been really, really busy on traditional infrastructure. They haven't had a moment to pivot or think about how to change the skill set of people to roll into those projects. So I think they are worried that they're going into a bit of a dip and they're worried about how they retain people.

So lots of contractors will openly admit they're losing lots of people to the big energy operators. And so I think, back to the skilled labor shortage, it's just going to be compounded.

Adrian Dwyer

Yeah, it's going to ramp up again and then it's going to loss.

Professional services, David, we saw small-scale redundancies in some of the engineering firms, they are the kind of canary in the mine.

David Donnelly

Yeah, because they're at the front end, right? So what you saw was, we talked earlier about all those reviews going on. There was some uncertainty in the pipeline. What you saw is a lack, you know, less investment, less things being started, so more things continuing but less things starting, and that sort of plays through the system.

So as you say, there's a little bit of an air pocket there where people have come off a little bit. And obviously those skills and resources get redeployed elsewhere. And so we've got to compete internationally for that as well.

Adrian Dwyer

So talking of competing internationally, one of the areas that this survey and research looks at is Australia's relative competitiveness. This is the first time we've deployed the survey when the Inflation Reduction Act has been in play. I think it was sort of mooted previously, but it's in play this time.

Well firstly, what do you see? Are you seeing an impact of that on the Australian market? People talking about the Inflation Reduction Act as something that's drawing fire. Kip?

Kip Fitzsimon

Yeah, I mean we're seeing it play out in terms of our clients talking to us about wanting to see more sort of stimulus package within Australia. I mean when you look at the US, that is the biggest commitment to clean energy in the world ever. And so when it was announced, we all realised it was a big commitment.

I mean the interesting thing is just looking at geopolitical stuff, we're now potentially looking at a Trump government again in the US. And so query what that means for the US reduction, Inflation Reduction Act, sorry, I don't know how it will play out, but you can see just on paper if you're an international investor and you're looking to invest, that is a very attractive option compared to Australia. And similarly in the EU, sort of, I think that's quite attractive.

So you know, I guess in Australia we still have a lot of local investment that aren’t, you know, with super funds and others that aren't necessarily swayed by that, but it's definitely a competition for us for sure.

Adrian Dwyer

David, do you think it's realistic that there could be an Australian version of that?

David Donnelly

I think they’ve said there'll be something in the budget, whether it's enough to make a difference is another question. I think most of the focus has been on the Inflation

Reduction Act because there's differences between the parties on that. And so I think if there's Administration change, you might see some things, you know, wound back a little bit around EVs and other things.

But there’s also the bipartisan infrastructure bill sitting behind it, and that's got obviously bipartisan, as it suggests, support. And that's over a trillion dollars sitting there to invest in infrastructure in the US. So whichever way we look at this, they've got a lot of sort of stimulus being injected into their market. And I think Biden said to Macron, this is designed to skew the market. We are pulling resources into the US. There's no secret about what this is doing.

Can Australia compete? I think we have a scale problem. You know, if even if we had an equivalent incentive, we just don't have the size of market to be as attractive as they are across the board. So that will be a challenge.

Adrian Dwyer

Have you seen circumstances where there was a thing that could have happened in Australia or America or elsewhere that's now happening in America and not here or elsewhere, is that actually, practically, happened on the ground?

Kip Fitzsimon

I think the interesting thing about what's happening in the US is Biden is talking a lot about domestic manufacturing and bringing it back into the US. We know we competed with Asian markets, you know, China many, many years ago where we forfeited all our manufacturing within Australia, or a lot of it. And so that's a challenge for us. I mean, they’re now bringing that back in because they've got the billions of dollars to be able to do that. You know, that's the commitment.

Scale is a thing that Dave talked about. If we were to do that, that's, you know, a ten-year play and it would involve billions of dollars of investment. So I don't know whether we can compete on that scale.

That said, there is one thing I think that Australia has going for it that certainly we know the US doesn't, particularly going into an election. It's just a safe place to do business and I think that comes out in the survey, it comes out when we talk to our clients. There is always that sort of feeling around Australia that it is a safe and easy place to do business. We don't have that threat of conflict that other parts of the world and parts of Europe and the US do, and I think that's got to be balanced against the attractiveness of the other markets.

Adrian Dwyer

Yeah, I think I agree that came through strongly, this kind of idea of risk-adjusted returns that Australia is a safe, dependable, high quality market with good participants and good partners. And it's come through in every year we've done this survey, and even as the other jurisdictions have waxed and waned in their attractiveness, that's been a consistent theme for the Australian market.

One of the things that does get raised is the challenges capacity constraints, be that, people, supply chain, resources. David, have you seen that play out with investors, like talking to you on deals about that?

David Donnelly

I think it's just a volume thing. You know, as we're saying, because at the end of the day, if you're going to sit a team somewhere and look to do a range of deals, you're going to get a lot more opportunities sitting in other places than Australia.

The quality of the Australian deals will be very good. Once you get one away, you're very confident that it will play out as expected. You know, the rule of law is excellent, people are reliable. You know, it's a good market in that sense.

Adrian Dwyer

Good lawyers.

David Donnelly

Good lawyers, excellent lawyers.

But you do have the, you know, you do have the scale problem. So if you've got a team of 30 investment professionals, where do you want to sit them? You might not want them all in Australia. And we've seen that with some of our investors and we're seeing it increasingly with the large pots of capital, so super funds, etc., they need to look overseas in order to find the volume. So we'll play a part in that.

The main thing I think is that we get our share of that investment, not that we try and monopolise it, but that we get out our fair share and that we get good quality investment.

Adrian Dwyer

I wanted to quickly touch on productivity. You know, I don’t know if maybe you need to rebrand it not as productivity anymore because it maybe doesn't work as well. Maybe it's efficiency or less waste, but in a world where you can, you've got less money, so you can do less or you can do more with less. It's obvious doing more with less is the best choice.

But what do you see Kip? Do you see any governments really trying to tackle this productivity issue or is it just a tomorrow problem?

Kip Fitzsimon

Oh, I think that they’re definitely trying to tackle it. I mean, they refer to productivity dips all the time. And I think one of the biggest challenges for us in Australia now is going into the energy transition and the infrastructure we need to build that. Productivity is going to really wane. It'll have a really negative impact on productivity in the short term. And so there are challenges, I think we need to look at skilled migration, we need to figure out the labor shortages and address that problem.

There's also just been a really big concentration in Australia like, talking about contractors, for example, that all of the major infrastructure has been delivered by our tier one contractors and there are so few of them. So we've tried to do things where we've, you know, wanted to introduce some global contractors from the US and EU. But again, if they don't have scale or certainty of pipeline, it's really hard to encourage them.

So I think there's things we can do around really encouraging our tier two, tier three, builders to deliver a lot of the stuff for the pipeline and then just enable our tier ones to focus on that really huge infrastructure. I mean, it's a challenge for government though, they know that feeds directly into their fiscal policy and there's no just one fix solution for it.

Adrian Dwyer

One of the other quirks of the energy pipeline is that it will be largely in regional areas, whereas, the last, you know, the last boom or the boom we’re currently delivering the tail of was, largely tunnels in cities, and two cities in particular.

What’s your sense of how we get people out to the regions to do this stuff, David?

David Donnelly

Yeah, it's difficult, right? And there's a cost to that. It costs more to deploy the same crew out into the regions as it does in the city because people are looking for a premium to relocate. So I think that's going to be an interesting feature going forward, you know, productivity and competition seem to go together. So if we can manage to get a little bit more competition into the market, I think that would be a good start in terms of increasing productivity.

We also need to be more productive with our assets. It always amazes me that you have schools sit there vacant over the weekend. We have a lot of public assets that we don't utilise to their full potential. So I think there's opportunities there and you know, we probably need to move away from cutting a lot of ribbons to actually making small incremental improvements in the way things work. That's hard, that's politically difficult, but I think that's probably where we'll find some advantage.

Adrian Dwyer

It's probably that the sort of fiscal constraint does lend itself more towards some more innovative solutions to these problems. But one could argue that, you know, the last ten years or so, stuff was easy because money was free. So you just built the next one rather than working out if you could use the existing one better.

I’m one to always finish these things on an optimistic note, so I might for my final question, ask you each what's your hopes for the coming year? What do you think the positive parts of the next 12 months will look like? And then we can test them in the next piece of research.

Kip Fitzsimon

Yeah, well, I personally feel a lot more optimistic than I did at this same time last year, and I think that's based on what our clients are telling us and what we're seeing moving in the market.

So I sort of would like to see a bit more clarity from government around, like even just talking about the regional piece, that social licensing, bringing the regions on a journey with them so we don't have all the challenges we've had on the REZs and opposition to onshore wind and other things. I think that, you know, I'd just like to see a bit more clarity around that and yeah, I'd like to see investment continue and Australia, continue to be seen as a safe and good, exciting place to deliver major infrastructure.

Adrian Dwyer

David?

David Donnelly

Yeah, overall I'm optimistic as well and certainly more optimistic than I was a year ago. I think, the pipeline is looking relatively good. How we deliver it, there’s a little bit of work to do in sort of sorting through that I think.

It’d be nice to see a bit more coordination in the pipeline, particularly amongst states and particularly around energy, just because, you know, it's a national coordinated issue, we should coordinate around that. So I think that'd be good.

Doing more for less, more with less is always good. So I could see a bit of that.

But capital essentially is a coward. So if we can create more certainty, we will get more interest from capital and I think there's big opportunities.

Adrian Dwyer

Well, thank you very much, both of you. I look forward to doing the research next year and testing some of those hypotheses.

Kip Fitzsimon / David Donnelly

Thanks Adrian.

A lot can change in a short time, particularly in infrastructure, and staying on top of those changes can be challenging.

Each year, Allens and Infrastructure Partnerships Australia co-author the Infrastructure Investment Monitor—a review of the investment trends in the infrastructure landscape—and in this video, we take a look at the major industry shifts since its most recent publication.

Join Infrastructure Partnerships Australia Chief Executive Adrian Dwyer, along with Allens Partners David Donnelly and Kip Fitzsimon, as they consider:

  • The impact that multiple reviews in 2023 had on investment in the forward infrastructure pipeline - 0:27.
  • The growing optimism and opportunities in the market for private investment to support the energy transition and social housing development - 1:45.  
  • The current market perceptions of the energy landscape, and which asset classes are attracting the most attention from investors - 8:06.
  • The concept of an emerging air bubble in the infrastructure pipeline and what this means for the nation’s capacity to achieve its renewable energy targets - 12:23.