Infrastructure investment key to post-pandemic economic recovery

The societal implications of the Covid-19 outbreak have been profound, and prompted unprecedented government intervention measures and mitigation strategies around the world. Health and social care provision has been stretched beyond breaking point, exposing an alarming lack of resilience in social infrastructure systems – most notably in the UK and USA. Inevitably, when the time is right to do so, systematic reviews of pandemic contingencies and response planning will be undertaken. These will likely have consequences for the funding and provision of essential social infrastructure that extend long beyond the pandemic itself.

In the here and now, the Covid-19 crisis has caused havoc with asset prices and transaction activity across the financial and investment markets. Infrastructure markets have not been immune but have experienced contrasting fortunes. The energy and telecommunications sectors have continued to perform strongly; the transportation sector, meanwhile, has been severely adversely impacted.

Airport owners have been forced to introduce wholesale cost cutting measures in response to international travel restrictions. Seaports may not have been impacted to the same extent – shipping remains integral to the movement of essential goods – but foot passenger numbers have been decimated. Restrictions on all but essential travel in many European countries has heightened the stress on toll-road operations.

Meanwhile, falling price of oil and gas has impinged upon asset pricing within the renewable energy sector. It is impossible in this moment to accurately assess the full scale of the impact and workout ramifications. Nonetheless, as with any restructuring situation, investors in the near-term will be actively reassessing risk profiles and reviewing the financial structuring of deals. Their primary aim will be to absorb acute declines in cash flow amidst the ongoing pandemic.

Longer-term, investors’ attention will turn to the implications of the marked contraction in the global economy. The World Bank has predicted a recession of greater magnitude than that witnessed in the aftermath of the Global Financial Crisis (GFC). At time of writing, the pandemic remains uncontained. It is therefore impossible to predict with any confidence how long a global recession might endure and the likely extent of the required intervention. The scale of financial relief required in the response to this crisis will nonetheless have long-term ramifications for capital budgets. The private sector is likely to assume even greater prominence in future infrastructure provision.

In terms of future development pipelines, existing project timelines and costs will be impacted by disruptions to the construction supply chain. Projects in the procurement phase, as well as those approved for funding, are likely to be subject to review. Initiation timelines are likely to be extended whilst market volatility complicates how deals are priced.

Nonetheless, any appetite for wholesale structural change within the infrastructure sector is likely to be limited. The sector demonstrated its resilience and counter-cyclical credentials in the aftermath of the GFC and will do so again. But the impasse created by Covid-19 does afford the industry an opportunity to reflect upon and reassess the scope and nature of future provision. If infrastructure investment is to occupy a central role in the longer-term rebuilding of the global economy, it must be aligned to key societal and environmental challenges. Opportunities for impactful change through investment in greenfield projects, as highlighted in our research, need to be harnessed much more effectively than in the wake of the GFC.

The global decarbonisation agenda has already posed a series of pertinent challenges for key infrastructure sub-sectors. It seems inconceivable that any government intervention over the course of the next 12 months would not be mapped out relative to the goals of the Paris Accord. As such, financial support for the new technologies and enabling infrastructures that will underpin the transition to a low-carbon economy will assume even greater importance. Investors will have ample opportunity to deploy “dry-powder” capital. Additionally, greater strategic oversight is required to map future infrastructure provision relative to population migration patterns and demographic profiling. The impact of technological innovation on societal and business demands for infrastructure must also be fully considered.

The extent to which this pandemic will serve as a catalyst for functional and operational change within the business community is open to debate. The majority of companies will invariably ‘revert to type’ once the pandemic has passed.

Demand for office space will surely be reviewed as organisations look to reduce operational overheads, but this not a new phenomenon. The ‘big-bang’ migration to home working has exposed capacity limitations and reinforced the need for enhanced investment in telecommunications infrastructure to support remote working and productive capacity.

The investment imbalance between economic and social infrastructure will need to be addressed to bolster resilience and reflect changing demographic patterns. Many developed nations have failed to adequately prepare and adapt to ageing population demographics and their associated health and social needs.

In conclusion, the Covid-19 pandemic has shown the capacity of countries to collaborate and work together to address challenges of national and international importance. The same levels of collaboration and joined up thinking will be needed to address challenges including climate change. Infrastructure will be integral to meeting national decarbonisation targets.

The Covid-19 response has also reaffirmed the capacity of the public and private sectors to work harmoniously and effectively. Perhaps most pertinently, the pandemic has emphasised the need for policy makers to take clear, decisive and impactful decisions, and to enlist and enable the support of the private sector. The leadership credentials gained during this crisis must be redeployed once the pandemic has rescinded. Infrastructure should be placed at the centre of global economic recovery efforts.

The scale of the global infrastructure investment need has not diminished in the wake of the pandemic; if anything, it has grown. Our research highlights the essential role of governments in creating investor confidence and facilitating investment through the creation and mobilisation of investable infrastructure development pipelines. The nature and implications of this crisis different from those of previous recessions. Even so, sustained investment in infrastructure is a tried and tested foundation upon which to base the global economic recovery.