Infrastructure investment has historically been one of the best ways for governments the world over to drive employment and, ultimately, economic growth in their countries.
Often, however, infrastructure projects are complicated and end up taking much longer and costing much more money than expected. Large transport projects, for instance, cost hundreds of millions of dollars (sometimes even billions) and can take up to 20 years to finalise.
Governments change during such a long timespan and their finances often fall short to cover the costs. Their priorities change too. For this reason, private companies and investors play a significant role in the funding and development of infrastructure and energy projects globally. Unsurprisingly, cross-border investment, or rather foreign direct investment (FDI), into the sector has been healthy since 2019, our FDI Projects Database shows.
FDI snapshot of infrastructure in the 2020s
During the Covid-19 pandemic, infrastructure emerged as one of the sectors at the top of governments’ agendas to drive their economies out of the slump caused by the pandemic.
Our FDI Projects Database reflects this trend and shows that the number of greenfield FDI projects in infrastructure and energy-related sectors spiked at 5,052 globally in 2021, up from 3,401 in 2019 to 3,558 in 2020.
Construction emerged as the largest driver of greenfield infrastructure FDI globally, followed by logistics and warehousing. Once again, the Covid-19 pandemic skewed the trend as investment in the technology infrastructure space nearly trebled year on year in 2021, going from 518 to 1,378.
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New projects in logistics and warehousing plateaued between 2020 and 2021, likely as a result of the significant pressure that Covid-19 first and the war in Ukraine more recently have put on global supply chains.
Within the energy generation sector, new FDI projects in renewable and alternative power have been growing steadily since 2019, going from 373 that year, to 468 in 2020, to 680 in 2021. The growing focus of both governments and businesses on investing in the energy transition in order to reach net zero targets is a very likely reason of this.
Infrastructure investors seek stable and reliable markets to invest in. The presence of good governance is important, as is a favourable tax structure. Ease of registering companies and low corruption indices scores are also very positive markers for long-term investors.
It is perhaps unsurprisingly that the UK, the US and Germany are on the podium when it comes to the top destinations for FDI into the infrastructure sector at global level, with 1,067, 1,027, and 872 projects, respectively, in the period between 2019 and October 2022.
The list is partly reflected in the source countries for FDI into infrastructure, with the US coming out strongly on top having financed 4,474 projects since 2019. The UK and Germany follow with 1,236 and 1,226, respectively, in the same period.
Investing in the energy transition is the way forward
Over the past two decades, the private sector has played an increasingly important role in supporting governments to bridge the infrastructure gap in their countries.
Among them, fund managers have played a pivotal part. Their mode of entry in a new market has varied from opening a local office, establishing a joint venture with a local entity, acquiring local assets or contributing to the financing of local projects.
Emerging market-focused manager Actis is one of them, having mobilised more than $24bn of equity across markets globally.
“We are a fund investor with offices all over the world," says Neil Brown, partner and head of the investor development group at the firm. "Over the years we have expanded our global footprint both organically through opening new offices, most recently in Tokyo, and through merger and acquisition activity.
“For instance, we acquired a team and a portfolio of real estate assets from Standard Chartered Bank which significantly increased our presence in key markets such as South Korea. We have also recently expanded our investment portfolio into new markets in central and eastern Europe, including backing what will be Europe’s largest solar PV site.”
The growing importance of environment, social and governance considerations and the presence of a list of sustainable and resilient initiatives in a country’s infrastructure pipeline is rising as an investment decision driver.
“We see huge opportunities to invest behind a whole economy transition," says Brown. "It is the single greatest challenge the world faces and we hope that Actis’ experience in delivering critical infrastructure sustainably is a model.
“Expect to see more from Actis in Asia. In particular an exciting pipeline of opportunities focused on the transition in places such as Vietnam and Japan.”
The focus on energy transition as an investment theme, coupled with a large domestic market, political stability and more recently an advantageous tax regime, make the US the perfect market to focus upon, according to industry players.
“We continue to see strong activity in the US clean energy market. This is in part due to the recent infrastructure bill, which is expected to accelerate the deployment of solar, wind and storage capacity over the next decade,” says Jack Paris, head of Americas at InfraRed Capital Partners, a UK-based infrastructure manager that has been present in the US for 15 years.
“The Inflation Reduction Act is the single largest investment in climate and energy in US history and will extend and expand tax credits available to zero-carbon technologies including solar, wind, and storage assets," he adds. "Wood Mackenzie estimates that solar and wind capacity deployment could increase by more than 65% and 40%, respectively, over pre-bill estimates in the next ten years and that close to 60 gigawatts of energy storage will be added through 2026 alone, making the US a market that is both massive in scale and poised for further growth.”
Paris’ words are echoed by Brian Chase, managing director and head of capital formation and investor engagement at Quinbrook Infrastructure Partners. “The US is the largest energy transition opportunity globally,” he says.
Quinbrook is originally an Australia company that has established a commercial presence in both the US and the UK, where it is investing through funds.
Chase explains how, despite the US not being the easiest markets to enter, interest in energy transition-linked assets is growing, especially among European investors.
“The US is a fairly decentralised market and often has a complex incentive system for renewables across the board," he adds. "However, the recently approved Inflation Reduction Act offers favourable tax breaks and European investors are keen to expand their portfolios when it comes to the energy transition.”
Infrastructure investing is a cross-border business by nature. Going forward, the urgency of realising the energy transition to a green and sustainable economy will continue to drive investors in the sector to seek out the best opportunities globally.