As we look to move past the acute phase of COVID-19, the global economy is grappling with understanding the enormity of the economic impact it leaves in its wake. A Cambridge study predicts that the global economy could face a loss of some US$26.8 trillion, or 5.3%, of global GDP in the coming five years1 and The World Economic forum points to prolonged economic recession, bankruptcies and sector consolidation, collapse of hardest hit sectors, high rates of unemployment, and restriction of movement of people and goods as the top five expected consequences of the crisis.2 Governments around the world are looking to create stimulus packages that will boost both immediate and sustainable economic growth and are increasingly looking to identify shovel-ready infrastructure projects as one solution to help them do this.
Infrastructure has a legacy of being linked to both immediate economic growth (in its ability to create jobs, generate earnings and boost spending), and longer-term growth (by increasing accessibility to employment, enhancing education opportunities through better connectivity and increasing equality through access to critical utilities). To quantify this, we can refer to a study by Business Roundtable which suggests that over a timeline of 20 years, there is an additional US$3.7 injected into the economy for every US$1 invested in infrastructure.3
The COVID-19 crisis has also highlighted our vulnerability and the need to strengthen our resilience to future threats to humanity – including that of climate change – and there are calls from governments and industries to create stimulus packages that will enable a green recovery. It is critical that infrastructure investments included in these packages be conditional on alignment with sustainability recommendations and climate targets. OECD estimates that 60% of current global emissions are from infrastructure4 so the infrastructure we build now will determine our ability to meet the 2050 Net Zero targets outlined by the Paris Agreement.5
Unlike the COVID-19 pandemic, there will never be a vaccine for climate change – it is only the actions we take today that will help to solve the problem.
In addition to the environmental and societal benefits of green infrastructure, there is also a strong economic case to be made for investing in green rather than fossil fuel intensive assets:
COVID-19 has hit emerging economies the hardest and many are in acute need of initiatives to boost economic growth. In March 2020 the IMF reported that emerging markets will require at least US$2.5 trillion in financial support9 and the World Bank estimates that between 40-60 million people will be pushed into poverty.10
The opportunity to invest in these markets is substantial. Emerging markets present the fastest growing demand for infrastructure in the world and the Global Infrastructure Hub predicts a US$15 trillion infrastructure investment gap globally, with emerging markets making up over half of this need. The fact that these demands largely point to greenfield projects presents an opportunity for investors to enhance their ESG investment portfolios, given the ability to leapfrog the fossil fuel intensive assets of the developed market and move straight to constructing smart and sustainable solutions.
The world has already been seeing a shift in supply chains to emerging markets, boosting economic growth. Governments in emerging markets need now, more than ever, to attract international and private sector capital to help fund the infrastructure requirements for their societies and to capture the opportunity of sustainable infrastructure.
We know that there is already a substantial pool of private capital in the market and a report by RICS suggests enough private capital to develop US$1 trillion of infrastructure is currently going unspent.11 Attracting investment into emerging markets has faced a long legacy of roadblocks including socio-political risk, issues around land ownership and legal frameworks, and weak project pipelines. How do we grow and direct this capital into a part of the world that is facing the most severe impacts of COVID-19 and also offers substantial opportunity to invest in sustainable infrastructure?
To help answer these questions we spoke to our global and regional infrastructure finance and investment leads. In the sections to follow, they help to identify the green infrastructure opportunities in their regions and the ways in which we can navigate barriers to investment.
Governments and industry should better prepare to leverage the sizeable pot of green and sustainable finance available in the region. Real estate companies and banks in the region have already tapped the capital markets with green bonds. The following key steps could help ensure the ability to capture the available green investment funds interest into suitable low carbon projects:
The economic cost of COVID-19 in LatAm is expected to cost between 1-2% of GDP per month. Such economic destruction, reduction in tax collections and surging corporate debt is expected to impair the already weak fiscal accounts leaving little to no investment allocation for infrastructure. Countries and jurisdictions in the region will need to actively promote FDI-attracting policies and can look to infrastructure as an opportunity to materialize large investments under the right conditions.
The World Bank predicts that due to the COVID-19 pandemic, Sub-Saharan Africa’s (SSA) economic growth is likely to contract from 2.4% in 2019 to between (2.1)% to (5.1)% in 2020, sparking the region’s first recession in 25 years.19 Key economies in the region have diverted their immediate priorities towards humanitarian support, debt and tax relief and stimulus packages in the wake of significant job loss and disruption of business. It is widely appreciated, however, that longer term economic recovery may be achieved through investments in infrastructure that mobilize public and private resources on a significant scale. Many governments such as Kenya have already started to re-prioritize infrastructure investments through budget announcements. Sectors presenting immediate opportunities are heavily focused around economic infrastructure such as transport, renewables, water and sanitation and affordable housing.
As with the rest of the world, COVID-19 in SSA has impacted not only public health but its containment measures have resulted in slow-downs in economies across the region which directly impacts tax collections. Government priorities have turned to public health interventions to address the disease and funding economic recovery plans. With budgets already stretched and expected reductions in tax collections, governments are turning to debt to fund these immediate interventions, worsening an already debt burdened region and leaving little resources available for infrastructure investments. Nonetheless, there is broad recognition that provision of and investment in infrastructure will be essential to supporting economic recovery.
Governments are already turning further towards PPP structures to supplement traditional public financing to bridge the wide infrastructure gap in the region. One of the key factors working against successful PPPs in the region is inadequate legal and regulatory frameworks for PPPs. On 11 June 2020, Kenya announced an overhaul to its 2013 PPP Act and regulations to hasten approval processes and streamline government guarantee packages to attract more investment into this space.21 This is expected to make a big boost to local renewables projects that have been stalled due to these inefficiencies.
Green transport: The Indian automobile sector has grown rapidly over the last two decades, boosted by domestic demand (21 million sales in FY2020)25 as well as its emergence as an export hub. However, India is trying to reduce its oil import dependence (~US$100 billion import bill in FY2020) and reduce rapidly rising levels of pollution in urban areas (21 of the world’s 30 most polluted cities are in India).26 In this context, a shift to clean energy technology like EVs, is imperative. Green transport specifically electric mobility and shared mobility platforms provide a range of investor opportunities in India where the government is prioritizing low carbon transport initiatives.
The government of India has tried to develop the EV sector and its ecosystem over the last few years. The total budgetary allocation for the Faster Adoption and Manufacturing of Electric and Hybrid Vehicles (FAME-II) scheme of government stands at US$ 1.5 billion.27 Several state governments have also taken steps towards drafting EV policies and are inducting EVs into their public bus transport fleet. Efforts are ongoing to create the required battery ecosystem and finalize the investment plan for domestic cell manufacturing. Since the sector is in nascent stages, early stage opportunities exist for investors, which include strategics, Auto OEMs etc.
Renewable energy: India’s power sector is mature and has evolved over the last several years with wide legislative and policy reforms aimed at meeting increasing electricity demand (CAGR 4.2% from FY2013 to FY2019), and investment requirements of the sector. As of 31 March 2020, India’s power generation installed capacity was 370 GW with 87 GW of renewable energy capacity.22 The dispute resolution system is also elaborate with presence of state and central regulators along with access to appellate tribunal and courts.
India committed, under the Paris Agreement, to increase its share of renewables capacity to 40% of overall generation capacity by 2030.23 In line with this, the government of India set a target to install 175 GW of renewable power projects by 2022 and mandated all electricity utilities to procure 21% of their total energy procurement from renewables. To achieve this ambitious target, government introduced a series of favorable policy measures such as shovel ready solar parks where land, transmission and other infrastructure was developed by the government. Further, renewable energy plants in India are given a Must Run status which enforces a ‘take or pay’- like provision with utilities.28
With reducing equipment (solar panels, wind turbines) prices globally and introduction of transparent competitive bidding to award projects, India saw gradual reduction of solar and wind tariffs from US$ 0.10 per kWh in 2016 to US$ 0.04 per kWh in 2020. This enabled the renewable energy sector to grow multifold in the last 5 – 7 years. The Government of India has also further enhanced its RE capacity addition targets to 275 GW by 2027 and 450 GW by 2030.29 Most leading international utilities, leading funds, domestic developers, and fund backed platforms have flourished in the Indian RE sector.
Despite COVID-19, the government has continued the bidding process to award new projects. An additional 140 GW is expected to be awarded over the next 7 years which may require fresh capital infusion of nearly US$ 100 billion (@ US$ 0.7 mn per MW). Typical INR returns of a solar or wind project range between 12-16%, and most contracts are signed for 25 years with federal government owned companies (rated AAA) resulting in cash flow certainty and low risk.30 This sector remains high in growth and is expected to be attractive for many years to come.
Waste to Energy: The total waste generated in India was 170,000 tonnes per day in 2016 which is likely to increase to ~450,000 TPD by 2030 (CAGR 7.8%) as per government sources.24 Of this, a meagre 25-30% gets treated and the rest finds way to landfills. Given that populous and dense cities (Mumbai, Delhi, Chennai and Kolkata) are running out of land fill areas, effective waste management has become a key agenda for municipal corporations. Several waste to energy (WTE) projects are proposed in various urban local bodies with potential PPP structuring. The government has created a separate ministry “Swachh Bharat or Clean India” with significant budgetary allocations (US$1 billion) to provide construction grants to waste management projects.31 Due to this, several WTE projects (25 projects with 330 MW cumulative size) were awarded in the last 2-3 years. Though the M&A activity in this sector has remained lukewarm, some leading funds have invested in industrial waste management platforms. With renewed focus on this sector, several Indian infrastructure players have developed capacities and continue to look for fresh funding for growth.
In summary, there is adequate capital available to finance infrastructure projects which will likely accelerate post COVID-19 and help kick start economies to come out of recession. Key however is for risks in the project to be adequately mitigated with the right party taking the appropriate risk. Correct unbundling of the infrastructure chain before private capital is deployed is key. Regulating the element of the infrastructure chain that is monopolistic in nature is paramount; for example the transmission sector in power needs to be regulated as the barriers to entry are high; the generation element of the power sector chain needs not be regulated as it’s not monopolistic and free markets should set tariff.
After deciding what to regulate, we should then decide how to regulate. The UK CPI- X linked method has shown promise for the infrastructure business and may provide a worthwhile starting point for regulators.
Once unbundling is done correctly, regulation implemented in a correct manner and risks mitigated correctly at the project level, private capital should flow into infrastructure.
The next decade will likely witness a surge in sustainable infrastructure financed by sustainable finance with the objective of meeting the infrastructure needs of the common individual, helping the environment and creating social benefits for communities around the world. The future in the infrastructure arena could not be brighter.
The world is awakening to the urgent actions needed to respond to the climate crisis, and the infrastructure sector has a fundamental role to play.
The world is awakening to the urgent actions needed to respond to the climate crisis.