13/03/2020 by Francois BERGERE
Infrastructure in the time of coronavirus

ADP (Aeroports de Paris) privatization has been put  off to better times. Brookfield AM has just  shelved  its plan to sell a port terminal  in Australia. All  around the world, infra asset sales are delayed due to  travel ban preventing  prospective buyers to  view the asset on site, and to public markets free fall. At a time when people are explicitly  requested to  stay  at home, most transport infrastructure operators, including  in urban transport,  are severely  impacted.

It is traditionally  considered that  infrastructure offers investors a strong  diversification dimension, and a downside protection against economic downturns  in uncertain times. The assumption is  that infrastructure assets (Project-financed type as opposed to  listed utilities)  can be statistically expected to exhibit a certain risk/return profile over time: long-term stable returns, thanks to low elasticity  of demand  (infra assets provide key public services) and quasi-monopoly  linked to high entry  barriers, and  low correlation with other asset classes, offering  portfolio diversification. This view of infrastructure  as essentially  a boring”, recurrent and stable business was already being  challenged  by a number of recent disruptions, ranging  from climate-change to  new technologies and user behavioural and demographic changes. But these are unprecedented times, when a global pandemic is severely affecting  a globalized economy  already  weakening  after 10 years if uninterrupted expansion.  What could be the impact on Infrastructure investors?

Sure, as we haven’t yet reached peak stage, it’s still very early  to  assess the final damage and lasting consequences in terms of sectoral  trends and users’ behaviour, and infra like big ocean liners are slow to  adjust  their course . Let us still   make a few assumptions:

Though the coronavirus crisis is impacting negatively current infra spending – by impacting supply lines, slowing the availability of equipment and devices necessary to build the next generation of infrastructure – over the next few months & years it may be an altogether different story. In previous crises , extra public infra spending   had been consistently resorted to  to  stimulate  the economy: that was the case during  the GFC  in 2008-09  in the US  with a heavily Infra-tilted Recovery Act and in France with  the  economic stimulus plan decided by  the Sarkozy administration, prioritizing big infra projects such  as high speed rail lines, through  a government-pay PPP program. In China, with the coronavirus shutting down large parts of the country, plans for big infrastructure spending to stimulate the economy (whether or not this is still an appropriate medicine) are already  being prepared on a striking  scale. Combined with an ever-lower interest  rates environment  due to  more accommodating  monetary  policies, this should push institutional investors to look seriously  to  increase their real assets allocation to infrastructure

On a more qualitative approach, one can expect :

-further expansion of contactless Infra tech, combined with facial recognition, to limit physical or close proximity human interaction, whether  in ticketing, payment, gatekeeping or passport control…

-Same will  apply  to  5G-enabled, digital infra-based remote or tele-work (collaborative tools, electronic technology solutions, video conferencing ,…) as it not only  limits such human interaction risks, but presents the added benefit of   alleviating the pressure on physical  transport infra  and corresponding CO2 emissions. Tele-work, at least in services,  might  follow on the tracks of online selling in gradually relegating  “brick and mortar” offices to  second-best option…

-And of course, social infrastructure like health facilities dimensioning  and operating  mode (including  tele-consulting) will  have to  be thoroughly  reassessed in light  of this public health  emergency

-on a more sobering side, trees do not grow up to the sky: neither will airports or ports. Mobility infrastructure may be the first victim of a highly contagious disease. Airport concessionaires are directly impacted by difficulties of airlines (100b$ losses already  forecast  for 2020, jeopardizing  many  operators, big and small) as are maritime sea lines operators by the disruption and re- localization of global of supply chains.

Overall  this  unprecedented crisis may also be a good opportunity  to take a wider interpretation of the Environment dimension (the E in ESG benchmarks applied to  Infrastructure) : it’s not just about  the Climate, or bio-diversity , just  like Governance is not limited to  corruption or gender-diversity: sustainable infrastructure also has to  take into  account the pandemic or health-scare risks, when being designed, assessed, financially  structured and priced…