by Gershon Cohen, Global Head of Infrastructure Funds, Aberdeen Standard Investments
Not long prior to me writing this outlook for concession infrastructure[1], UK Prime Minister Boris Johnson and leading environmentalist Sir David Attenborough were launching the next COP26 United Nations (UN) climate summit. This is due to take place in Glasgow during November 2021. The world’s leading economies have pledged to cut greenhouse gas emissions over the next decade, with each country deciding how it will contribute to keeping global temperature rises well below 2⁰C. Infrastructure will play a part in the climate change goals.
The macroeconomic rationale for investing in new and existing national infrastructure has not changed. If anything, the need to accelerate investment is becoming more acute. Population growth, urbanisation, industrialisation, competitiveness, and a desire for sustaining and improving living standards, are the key drivers. The current demand for investment in infrastructure has been exacerbated by a lack of investment in the past and growth in mobility.
Infrastructure investment opportunities span multiple sectors that provide essential public services. Typically, these projects aim to generate sustainable, long-term income, while also seeking to safeguard the environment and/or deliver social benefits. They include energy projects, transport schemes, air and sea ports, waste management facilities, schools, and hospitals. These are basic physical systems that are considered essential for enabling productivity in the economy. The current fiscal pressures and the need for governments to adopt more commercial disciplines are highlighting the need for private-sector expertise and capital.
Fiscal pressures following the global financial crisis in 2008 and the current global coronavirus pandemic have affected infrastructure investment. Governments have become increasingly unable to fund infrastructure projects from traditional sources, such as taxation. This has led to a greater need for private capital. But it has also created a need for the public sector to prioritise key sectors in which to invest, such as energy and transportation. This brings us to an interesting but current inflection point. The infrastructure for energy generation and transportation that is needed over the next 30 years has historically been a key contributor to the now dangerous levels of greenhouse gasses.
In response, governments are now trying to avert further adverse climate change and safeguard natural resources. At the heart of fiscal ‘green’ agendas is investment in infrastructure projects. These include zero-carbon energy generators, waste recycling plants, battery storage, car charging networks, and water management systems. Encouragingly, falling technology costs and the advantages of scale are increasing returns, which are fuelling further investment flows into infrastructure assets.
The coronavirus crisis has driven interest rates even lower and fuelled unrelenting waves of volatility across financial markets. As investors digested the damage inflicted by lockdown measures on the world economy, global equities plummeted in what turned out to be the fastest bear market on record. Corporate bond prices also slumped.
By contrast, infrastructure assets were largely unaffected by these events as governments needed the facilities. This served to accentuate the value of infrastructure assets as diversifiers in an investment portfolio. Given the risks attached to climate change, dwindling natural resources and demographic changes, we expect the investible infrastructure universe will grow globally. For instance, a rapidly ageing population means there is an increasing need for assets that generate dependable retirement income. Infrastructure assets are well-positioned to deliver the desired long-term income streams. A current example is our investment in one of the most technologically advanced and energy-efficient seawater desalination plants in North America. This asset is managed on behalf of public sector pension schemes.
A strong investment pipeline is heavily dependent on governments choosing to procure infrastructure using private-sector capital and expertise. But this process can be lengthy and complex, which requires committed capital and patient investors. Delays are further exacerbated by political uncertainty and changes to regulations and laws, such as taxation. However, our concession infrastructure platform is well-positioned to capitalize on attractive opportunities. It is capable of playing a leading role in the clean energy transition and its sustainability, which will contribute to a greener future.
[1] Concession infrastructure is procured, constructed and managed for the long term under a public-private partnership framework, or similar long-term contractual arrangement.
About Aberdeen Standard Investments
Aberdeen Standard Investments (ASI) is a global asset manager dedicated to creating long-term value for our clients. With over 1,000 investment professionals, we manage £525.7 billion (US$669.6 billion) * of assets worldwide. We have clients in 80 countries supported by over 40 offices globally. This ensures we are close to our clients and the markets in which we invest.
We are high-conviction, long-term investors who believe teamwork and collaboration are the key to delivering repeatable, superior investment performance.
Standard Life Aberdeen plc is headquartered in Scotland. It has over 1 million shareholders and is listed on the London Stock Exchange.
ASI has been active in the Middle East region for over 20 years. In 2016, ASI opened an office in Abu Dhabi Global Market (ADGM), the international finance centre of Abu Dhabi. You can access the Aberdeen Standard Investments media centre here: www.aberdeenstandard.com/en/media-centre (*as of 30 June 2019)
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