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June 2016
Australia in Transition:
Disruption breeds new infrastructure
investment opportunities
Tom Butcher, Managing Director, Transport, Infrastructure, Power and Utilites, and Linda Blore,
Director, Corporate Banking, explain the risks and opportunities that disruptive technologies present
to investors in Australian infrastructure assets.
From roads to power stations, Australia’s infrastructure
sector has proven a reliable safe haven in recent decades,
offering steady returns for investors and attractive capital
recycling opportunities for state governments. But the
environment is changing. Over the next few years,
traditional infrastructure investments in Australia – and
elsewhere for that matter – will continue to confront
the reality of technological disruption.
Economy-wide spending attributable to infrastructure
services in Australia was estimated to be 13% of GDP
in 2011. This spending is expected to grow proportionate
with the economy through to 2031. The transport, ports,
telecommunications, gas pipeline and airport sectors are
all projected to grow faster than GDP in coming years.
In contrast, the water, petroleum, electricity, non-urban
road and non-urban rail sectors are all projected to grow
at a slower rate than GDP.
Governments and communities continue to work on
identifying what infrastructure should be developed and
where, but predicting the impact of technology on these
requirements is not straightforward. What is the changed
nature of the infrastructure that Australia needs and will
technology ultimately reshape the country’s requirements?
Future demand for Australia’s infrastructure will be directly
affected by growth in population, developments in global
economies, technological change, the need for environmental
sustainability, and changing consumer preferences.
Australia’s population will grow by five million in the next
ten years and is expected to reach 39.7 million by 2055*.
This growth will see additional demands placed on urban
infrastructure, which in many cases is already subject to
high levels of demand. Significant investment to increase
Australia’s agricultural productive capacity is also expected.
* Source: Australian Bureau of Statistics
The rise of disruptive technology is by now a well-worn topic
for savvy investors around the world. Yet, despite the phrase’s
ubiquity in the global business lexicon, only a few technological
developments turn out to be truly transformational. For
infrastructure investors, driverless vehicles, 3D printing,
energy storage, renewable electricity, the internet of things (IoT)
and maintenance drones are all examples of disruptive
technologies that will meaningfully impact demand and
supply dynamics for Australian infrastructure.
These disruptive technologies have become a source of
innovation and growth for the industry. Infrastructure exists
to provide services and the quality and cost of these services
is in constant focus. Technological disruption can provide
many benefits, such as improved asset utilization, lower
operating costs, reduced environmental impacts and
increased employee safety rates.
Most Recent Private Sector Investments into Australian Infrastructure
Date
Infrastructure Asset
Buyer
EV (A$m)
EV/EBITDA
June 16
Cullerin Range Wind Farm*
Energy Developments Pty Ltd.
72
11.6x
May 16
Mortlake Pipeline*
SEA Gas
245
14.4x
Feb 16
Mortlake Terminal Station*
AusNet Services
110
12.9x
Dec 15
Pacific Hydro*
China State Power Investment Corp.
/
/
Nov 15
TransGrid
Hasting, CDPQ, Tawreed,
Wren House, Spark
10,258
14.5x
Source: Bank of America Merrill Lynch
* BofAML acted as sell-side financial advisor
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Translate: English | Simplified Chinese
June 2016
As well as the potential for improved service and lower cost,
disruptive technology is expected to result in new emerging
patterns of demand. Examples include changing traffic
patterns resulting from driverless vehicles; changing demand
from centrally generated electricity to distributed generation
and energy storage; and changes in labor requirements as
technological mechanisms are employed for activities like
check and maintenance.
Competition for infrastructure investments is increasingly
global, from superannuation and pension funds, as well as
international corporates who are looking for geographical
diversification within the sector. The majority of
infrastructure investors prefer to make their investments
directly, typically as part of a consortium, as it gives them
greater flexibility and enhanced control. This adds complexity
to investment processes.
Given these inevitable supply and demand side changes,
disruptive technologies have the potential to challenge
existing regulatory frameworks, finding ways to supply
consumers with infrastructure that is easier to duplicate
and open to competition.
Investors identify Australia’s long track record in
infrastructure, stable economic, fiscal and legal frameworks
as key features driving interest in the market. Demonstrating
that Australia can navigate technological disruption
effectively by global standards, in terms of policy, planning
and regulation, will be critical to maintaining this interest.
The Australian infrastructure sector has historically required
significant funding, being highly capital intensive. The current
level of public sector expenditure, especially in sectors that
remain largely funded by government rather than employing
user pays models, may be unsustainable in the face of
increasing budget pressure to fund welfare and health
services. Given this, ensuring strong conditions to facilitate
private sector investment in Australian infrastructure is
fundamentally important.
Even in this era of technological disruption, there will be
an ongoing requirement for significant capital investment
in Australian infrastructure over the coming decades. This
provides an opportunity for the financial sector to play a role
in creating innovative solutions to meet the changing
market needs.
Australian population growth
Estimated Resident
Population (million)
35
30
25
20
15
10
5
0
‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15
‘25 ‘36
Source: Australian Bureau of Statistics
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