The rise of technology as a new infrastructure sub-sector began some time before the Covid-19 pandemic struck. Over the past five years in particular, the infrastructure industry has seen a flurry of deals and new projects in telecoms towers and data centres, and there has been much talk of rolling out 5G and fibre-optic networks across countries.
While raising eyebrows among the purists of the asset class – those for whom infrastructure should remain limited mainly to transport and energy – more and more investors have started to view these sectors no longer as merely technology, media and telecoms or real estate plays, but as reliable and steady assets that fit their infrastructure allocation.
The spread of Covid-19 meant that almost overnight vast portions of the working population went from commuting to an office every day to simply getting out of bed and sitting at their kitchen/spare room table to fulfil their professional duties.
The US Bureau of Labor Statistics reports an increase from 7% to 25–30% in the amount of people working from home on multiple days a week in the US in 2020.
While companies such as Apple reported a dramatic drop, to near to zero, in data usage on typical paths to work during the pandemic, having so many people working remotely meant that the so-called ‘fibre-to-home’ network experienced increasing use. It also meant that people working from suburban areas were relying upon their local broadband more than ever.
At the same time, the pandemic has impacted not only urban travel, but air travel too. In the early months of the virus’s spread, many infrastructure deals and projects in the aviation sector were suspended, and while a lack of traffic due to lockdown measures meant that some highway and rail projects could be completed more quickly, the transport sector was generally perceived as a risky space.
On the other hand, with network carriers reporting surges in their network traffic of 25% (AT&T) and 50% (Vodafone) versus their baseline, and companies such as Zoom increasing daily users (by 200 million in March 2020, versus ten million in December 2019 in Zoom’s case), digital infrastructure started to be seen not only as a resilient asset class, but as the asset class of the future.
How to finance digital infrastructure
Case studies back up the theory that digital infrastructure will only grow in the coming years. The International Energy Agency expects global internet traffic to double by 2022 to 4.2 zettabytes (4.2 trillion gigabytes) a year. Cisco reports that nearly two-thirds of the global population will have internet access by 2023, with 5.3 billion internet users in total, up from 3.9 billion (51% of the global population) in 2018.
This means that the already significant demands on digital infrastructure are only going to rise, and to match them a significant financing effort is required.
Even before the pandemic, some governments had started adding digital infrastructure to their budgets. In 2017, the UK government, for instance, launched the National Digital Infrastructure Fund, which it seeded with £400m, and invited private investors to match that through a tender that was won by Amber Infrastructure.
Such efforts alone will not meet this great demand, however, and while the industry expects digital infrastructure to be one of the tools that governments will use to reboot their economies in a post-pandemic landscape, many worry that there simply will not be sufficient funding to do so.
A recent PwC report on global infrastructure trends highlights such concerns while addressing the rise of digital infrastructure and technology.
“The emergence of Covid-19 introduces an altogether new set of challenges,” its says. “The full impact of the pandemic will take years to play out. Yet in the near term, we believe it will affect governments’ ability to finance large-scale projects. Most countries faced a gap between infrastructure needs and financial resources before the pandemic hit; that gap is now larger as a result of it.”
Normally, when government funds are not enough to cover a bill, the private sector intervenes and/or is called in to help.
However, within the infrastructure investor community – which is mainly made up of institutional investors with long-term liabilities to meet for their pension funds or insurance policies – some issues may prevent them from getting behind the digital cause in the next few years, at least in the volumes required.
The changing face of digital infrastructure
Digital infrastructure goes beyond 5G, fibre-optics and data centres and has come to cover, among other things, the outfitting of streetlights with sensors, wireless transmitters, electric vehicle charging stations, security cameras and, more generally, the so-called internet of things (IoT).
“Though these are positive developments, the growing role of technological innovation is also making asset life cycles less predictable (causing a ripple effect along supply chains affecting service providers),” notes the PwC report.
“And current contract structures, which last for decades and are highly rigid, are impeding the application of novel technology. The disparity between technology cycles and asset timelines will have significant consequences for contractors and financing organisations, which will need shorter-term contracts and a more flexible approach to financing,” it adds.
Alistair Higgins, managing director in the debt and advisory team at ING Bank, shares a similar view, given that typical infrastructure financings comprise equity and debt tranches, each having different return and risk appetites.
“Infrastructure debt investors are typically looking for stable, long-term cash flows, which aren’t always proven with new technologies,” he says. “Infrastructure is arguably seeing a renewed focus on new technologies not seen since the 19th-century railway boom.
“However, much of this focus is arguably as a result of a dearth of traditional infrastructure procurement by government rather than an increase in viable new infrastructure-related technologies.”
Covid-19 has given fresh impetus for investors to reinvent their investment models, although many remain naturally cautious given the need to take stock of the “new normal”, Higgins argues.
“There is a reluctance to take on unproven technology risk on the debt side, where the potential upside is for the benefit of equity, and debt may potentially still take disproportionate downside risk,” he adds.
Higgins agrees, however, that the appetite for digital infrastructure is much greater on the equity side of the industry, while the role of government in establishing viable longer-term investment frameworks will be an important factor to bridge any financing gap.
An opportunity for sustainability
The equity side of the industry is definitely showing interest in this space and some are making it part of their environmental, social and governance agenda.
A recent survey of infrastructure investors conducted by the IJGlobal journal and M&E Global revealed that 32.4% thought government support was key to unblocking digital infrastructure investment.
The survey also showed, however, that despite the costs, investors are keen to get involved. More than half believe that digital infrastructure is key to rebooting economies post-Covid and 63.6% say that the benefits of this sector outweigh the risks.
“After all, these are long-life assets providing essential services, with strong cash flows (customers who enter into recurring contracts) with the ability to potentially deliver long-term growth in a down or flat market, as is the case now. This is key for institutional and other investors,” say Benjamin Kelly and Antonio Botija, respectively senior analyst global research and head of origination and investments within the infrastructure team at Columbia Threadneedle Investments, in a recent comment piece.
The Global Infrastructure Hub – formed by the G20 – has made digital infrastructure its priority theme for 2020. The initiative was led by Saudi Arabia, which chaired the G20 this year.
Private-public partnership (PPP) consultant and expert David Baxter sees “tremendous interest” from investors. “There is interest specifically in digital infrastructure that is sustainable and resilient,” he says.
“I am currently working on a PPP pilot project that is focused on providing broadband connectivity to peri-urban businesses that have been impacted by the pandemic and there is considerable interest in improving digital infrastructure in peri-urban areas in emerging economies so that they can be competitive.”
Baxter points out that emerging markets are best positioned to provide opportunities in this space, as they are not encumbered with dated information and communications technology infrastructure and do not have to compete with existing monopolistic enterprises.
“There are emerging economies such as Rwanda that have better access to broadband than the rural US, for example,” he states. “I firmly believe that Africa and Latin America will be the biggest growth geographies in the next decade and will offer the most opportunities to investors.”
Improving digital infrastructures to meet SDGs
Many companies have also incorporated digital infrastructure into their efforts to help meet the UN’s Sustainable Development Goals (SDGs).
For Infogrid, a UK-based company using IoT and AI to provide end-to-end connected sensor solutions that make buildings more energy efficient, Covid-19 has been a real catalyst.
“The service we provide helps users to check remotely that the temperature is right in their office or restaurant, or whether the water is flowing or not,” explains chief operating officer Khiloni Westphely. “It also not only tells them whether something is wrong but pre-warns them about malfunctions.”
When Covid-19 hit, Westphely says there was a rush from owners of commercial buildings to get Infogrid’s services in order to keep an eye on their properties remotely. As they were forced to shut, many restaurants started requiring systems that could reassure them, for instance, that their freezers would keep functioning.
Based in the UK and with a large presence in the US and a smaller one in Estonia, Westphely says Infogrid is looking to Asia as the next market to set up shop in.
While more related to prop-tech than infrastructure, companies such as Infogrid fall within investors’ green and SDG portfolios, as its role to make buildings more energy efficient is seen as vital to the achievement of carbon-cutting goals.
Energy and automation digital solutions provider Schneider Electric also has energy efficiency high on its agenda and says that Covid-19 has propelled the company’s investment plans in 5G.
“We believe that edge computing will be a key enabler of 5G and as those demands increase, infrastructure investment throughout the UK and other countries will also grow,” says Marc Garner, vice-president of Schneider’s secure power division in the UK and Ireland.
Schneider has worked with the World Economic Forum as part of an expert group investigating the applications and business cases driving 5G adoption on a global scale.
“We estimate that in stand-alone 5G clusters (without 3G or 4G) there will be a three to one ratio of telecoms towers with base stations, including mobile edge cloud data centres, for every existing 4G tower today,” says Garner.
Another conversation revolves around the sustainability impact of 5G and increased digital demand.
“Due to the significant volume of infrastructure needed to support the 5G buildout, these new micro data centre and edge computing systems must be built with energy efficiency, security and cost in mind,” says Garner.
“This means the architectures need to be standardised, pre-tested and pre-integrated to ensure each one consumes lower volumes of energy, mitigates its impact on the environment and reduces the total carbon emissions,” he adds.
Digital infrastructure is set to play a key role in the agendas of both governments and investors in the wake of Covid-19. Whether or not the financing support will be sufficient to meet the demand remains to be seen.
Viola Caon is a senior editor at Investment Monitor and joined New Statesman Media Group from Euromoney’s IJGlobal.
Viola Caon is a senior editor at Investment Monitor and joined New Statesman Media Group from Euromoney’s IJGlobal.