Ashurst & Global Infrastructure Investor Association: Resilient Infrastructure – Rising to the challenge of a more sustainable future

Ben:
Welcome to the latest edition of the business agenda podcast. Today, we'll be discussing the latest report to be released by Ashurst's infrastructure group, Resilient Infrastructure, rising to the challenge of a more sustainable future, and what this means for the global infrastructure investor community.

Ben:
Joining me today is Mark Elsey and Michael Burns from Ashurst and Lawrence Slade from the Global Infrastructure Investor Association, where he is CEO. Lawrence works to promote private investment in infrastructure with governments and infra investors around the world. Lawrence was previously chief executive of Energy UK. At Ashurst, Mark Elsey is the co-head of infrastructure, while Michael Burns is the co-head of energy. Now, let's set the scene, shall we? Mark, I'm going to ask you in the first instance to talk a little bit about the report itself, how it came together and what the key findings were.

Mark Elsey:
Infrastructure's a key area of focus for us, and obviously it's critically important, both in terms of political agendas at the moment, but also as an asset clause for many of our clients. And we live in a world where historically it's been seen as quite a stable, long term, boring affair, relatively profitable area of investment. Now, in our view, that's changing. There's a lot of things happening out there in the world, which means that a lot of the assumptions of past perhaps don't hold good future. Now that the pandemic has been the example of something completely unexpected happening, which is just changed everyone's perception of risk from supply chains to travel patterns, to offices and city needs, et cetera. So look at this, we then thought, "Well, gosh, there's a lot of other changes out there as well and what are they."

Mark Elsey:
And actually, what do our clients think about this? What's their view of the world? Is it just the same and more of the usual or are things changing? So we commissioned a survey. We sent out to a wide range of our clients across the globe from a whole range of institutions, both public and private sector from investors to banks, to contractors, to governments. And the interesting thing, I think there was a wide range of views. I think most acknowledged that there was change happening and probably for the biggest impact of change was seen to be either the drive to net zero or the impact of technology. About 80% of our respondents saw difficult changes in both those areas.

Mark Elsey:
Perhaps more interesting was that the fact that that didn't necessarily translate through to them seeing a change in the risk profile or the resilient to their infrastructure. In response to those about 50% did see this change in risk profile and about 10%. So there's been significant changes, but at the same time, around 50% thought there'd be little change or well actually that the risk profile would improve. So that was quite surprising to us. Now, despite the changes that were seen out there certainly there's no reduction in appetite and nearly all of the respondents showed that their appetite for infrastructure was still very, very strong, but it would probably refle through to some changes in pricing.

Mark Elsey:
So approximately 70% of our respondents thought there'd be an increase in the pricing of infrastructure, in response to some of the impact of these changes, which again, slightly odd to given that 50% didn't think there'd be much of a change to things, but you know just shows you, I think there's a wide range of views out there. And 18% saw there being significant changing in pricing response to these. So again, some again, of course see... And you might well be, some just see opportunity rather than threat. And that feeds through to some other responses. The other I think key takeaway was importance of government really in this. Both it's seen as a critically important facilitator [inaudible 00:04:04] respondent saw government policy as being a really important facilitator to the evolution of the infrastructure market to meet these different changes and challenges.

Mark Elsey:
But at the same time, they saw it as a threat. They saw government and a lack of coordinated policy, lack of joined up thinking, lack of long term planning as being a real threat to the ability to deliver and to make sure that the infrastructure, the future was resilient and fit for the purposes of the future.

Ben:
Yeah. You've certainly hit some high notes with that overview. Thank you, Mark. I want to turn now to Michael and ask Michael, what are the key factors that you see when it comes to resilience and what's sort of resonating the most with clients of Ashurst at the moment when it comes to these factors?

Michael Burns:
I think when you look at the key factors that are set down in the report, the one thing that stands out to me actually and unifies across the piece, is there the presence of technology risk and that's both technology risk in the sense of is the technology that underpins the relevant piece of infrastructure going to actually fail or not. That's one aspect doing the diligence on that. But it's also, and in some ways, even more importantly and more tricky to judge is how future proof is that technology. So whether that's in the context of say green hydrogen and the development of ever more efficient electrolyses, whether that's developments in battery storage technology, for example, digital systematization of processes, allowing businesses and therefore infrastructure assets within them to reduce costs. All of those things are technology risk. And I'm saying 20 years of doing this job, I've never seen such an emphasis placed by clients on the due diligence and the analysis of the technology they're doing when they're looking at new investments.

Ben:
Lawrence, did you have some thoughts on that?

Lawrence Slade:
So I completely agree with what Michael was saying in terms of the technology risks there. I was just going to throw in there that I think there's also the need in terms of challenges to really manage some of the environmental issues we're facing. And I was particularly going to raise water in disrespect in the environment that water operator utility companies are looking at now will be radically different in 5, 10, 15, 20 years plus further forward. So there's a real issue here in terms of how we address those changing circumstances, supply population growth and weather changes, and then how that transmits itself into the long term investment requirements. And ultimately of course, is how we all, whether we're businesses or individuals actually pay for those services.

Ben:
So it's very interesting out of the top five factors that are influencing or impacting the infrastructure sector, we see three are actually related to the environment, and I know Lawrence, you specifically spoke about water there, but we've also got transition internet zero, climate change impacts, ESG issues. So obviously the environment as a factor is quite large as is technology. I thought it was quite interesting where the skill shortage is actually at the bottom of the list. Does this surprise you Lawrence?

Lawrence Slade:
I think, yeah. In many respects it does because it's clear right the way across the board, that actually there's a massive re-skilling needed across the economy. But I think it's one of those areas where we as the investor community and the actual asset operators and government for that matter need to be working much closer together to understand the true impacts of what's happening as we address the issues related to climate change. And as we head towards net zero targets around the world, so we really can get to grips and start peeling back the layers of the different types of investment that are needed. And of course, those areas where government should be working particularly, and you might cross reskilling and retraining in education as something more for governments and those areas where private investors like those that the GIA represent should be investing as well.

Mark Elsey:
I'd agree with that in some ways that feeds through really to how does the globe respond to things which are of global impact? Does every country do its own thing? Or to what extent do we try and share solutions, technologies, capabilities and scale up responses in a more coordinated fashion. Which sounds like an obvious thing to do but in fact, nearly every infrastructure agenda from energy to road is almost driven almost by uniquely by national boundaries. Even in the EU, there are different policies in different countries clearly. So how one really scales and shares the response to some of these challenges, I think is an interesting, which obviously feeds food of skills as well and how you can cross sell. And the challenge course where you're not only looking at governments, you looking at a world of competitive private sector interests, who again are looking to do better than their competitors. So trying to get those people to work together, to share solutions, technologies and answers again, it's not without its challenges.

Ben:
So no doubting, a host of stakeholders that are all impacted by these factors I'm really interested now to explore or find out what the key considerations for a major stakeholder within the industry and that is investors. Lawrence, what should investors be considering in light of these issues that we've just touched on?

Lawrence Slade:
I think there's a lot of issues actually. And we've touched on some of the government focused issues and the development of policies, but I think it's really key for investors to be undertaking a sort of future horizon scanning operation in terms of trying to understand where the trends are going, but also how quickly those trends will be delivered. And for the first time probably we are almost starting to look at the potential risk for stranded assets. So risk across the infrastructure community is changing very, very much in terms of how investors need to be looking at the risk in different sectors. But also as Michael touched on earlier in the conversation, the whole issue around the impact of technology is changing super quickly. So there's a lot of change in the sector as highlighted in the report.

Lawrence Slade:
And it's on the investors to look at how they're managing that change, that risk, how they're interpreting that in terms of the long term outlook for their returns, but then which sectors are going to be the real players, the core players, if you like as the sector develops over the next 10 or 20 years. And considering that a lot of our investors, the big pension funds are looking at an investment horizon of 20 to 30 years. It is that long term investment. So these are really challenging discussions. And I think it's incumbent on all of us to be entering into conversations with regulators, with policy makers, be it in Brussels or Washington, or here in London to really get to grip to that and understand that actually to really achieve this we can't let perfection be the enemy of progress here. And we've got to get this whole program moving if we're going to hit national targets.

Mark Elsey:
I think that that's absolutely right, Lawrence, I guess another thing to think about of the report is the differentials of views. And I guess some of the investors are going to see these things very much as threats to their opportunities and the risk of stranded assets that are no longer fit for purpose. They simply aren't resilient for the changes. On the other hand, I guess some will see these as real opportunities in a various of competitive market, where there is change and new risks coming in to play. Those that understand those better can get their mind around them, can price them effectively and also have the solutions to try and manage and mitigate those risks will be better placed than those that are perhaps more passive. So I think there's this threat, but there's also opportunity out there for the people with the right mindsets and the right approaches.

Lawrence Slade:
I think that that's very true Mark. And I think that another way of explaining that for example, is perhaps how we've seen over the last decade, maybe the rise of ESG. It is now front and center in terms of every conversation we have with the investors as to sort of how they're handling the ESG element. And particularly within that broader conversation, the whole sustainability. And we are seeing that perhaps particularly focused in terms of the funds that are being raised now, as opposed to the funds that were being raised maybe 15, 20 years ago, where a focus is very much on clean tech and sustainability. And of course, you're seeing some of those arguments played out of the EU level with the taxonomy debate as to what's in what's out. And I think coming up with the SCC and the FCA in the UK and Europe, so as through UK and US. So big changes, but I think it's clear where the direction of travel is, and those companies that can take advantage of that are going to be very well placed.

Ben:
So it's very clear that from the investor side of things, the appetite is there, to what extent the report sort of goes into that a little bit where it's quite divided. But Michael, on the flip side or the other side of the table, are the infrastructure funds prepared for this type of investment?

Michael Burns:
The thing about being an investor is that you have to move with the times as the market changes. And so I think they are prepared, but what they're doing is deploying strategies and a number of different strategies to get into the right place for what is effectively, always driven by whatever the mandate of that investor is, okay? So the strategies that we are seeing people coming up with are either the full buyout of a business, they might buy into a management team and then effectively give them a smaller pot of capital that might normally be the case if they were investing in a more proven technology. The idea that people are buying established businesses, something like BlackRock's acquisition of Callison, taking that business, using the established management team and the great business that they got there, and then using pots of capital through that business to take different types of investment than you might see if they deployed an independent, direct investment.

Michael Burns:
I think the other thing that we've seen recently and Lawrence's has mentioned it as well is actually creating funds with a broader mandate accepting that there is going to be an element of technology risk within the investments that are being made. And I think that really to me is the most important point. Is that going back to what I said at the beginning of this section about we need to make sure that at all times people are actually investing in line with their mandate and that really is the thing that's going to be the most important person as the person going to the investment committee is, does this fit with what we're supposed to be doing?

Lawrence Slade:
I'd agree with that. Michael. I just maybe add in, perhaps if I use the example of VV charging, that there's also sort of that timing issue in that more nascent markets it's when do the Infra funds actually step in. So when is there a sort of a really sustainable business opportunity there in terms of being able to see the utilization levels that will actually start paying the returns and over which period of time do you actually look at those arriving? And there's an element here of when you transition from more venture capital type investments into that long term stable in for investment. And actually we need to understand almost the sort of the investment life cycle of how the different types of capital drawn into different technology maturities.

Mark Elsey:
I guess from my speculation to the question as to whether how many of these investors are already tooled up to respond to a world that is changing probably more rapidly than it has done in the last 50 years, 20 years, however long the old industry is. There's more change and that requires you to deploy more capital plus more capital intelligence to assess risks and to evaluate, and also to manage assets. And a lot of the infrastructure investors are relatively lightly resourced. Obviously some are very large. Do you think that they are asset clause they're resource to adapt to a more changing perhaps more challenging world?

Lawrence Slade:
Yeah, I think I go back to my earlier point, actually, that I think it's how you're actually adapting your staff team and using that future scanning role, I think is absolutely critical in really understanding where those technology trends are going to be going. And if I'm sitting on an investor panel, I really want to be able to understand with confidence exactly what the speed of transition is. And of course, that will vary quite substantially between different geographical and political markets, but often within the European union. One of the issues that has come up in a recent conversation with one of the directorates there is actually ensuring that there's interoperability across member states and that's something which isn't always the case. So there are some big challenges here for investors that we really need to start getting our heads around very quickly.

Michael Burns:
Yeah, I think that's right, Lawrence. And also, what's interesting is that just in terms of when you get into the transactions themselves, we are seeing techniques that have historically been more seen in private equity to bridge those gaps. We're seeing more of the sort of downside protection that you might have seen historically in private equity transactions, or even venture capital to look after the interests of the investors, where they are stepping in and taking some of more of those nascent risks. And I think the other point by the way is that we spend quite a lot of time talking about technology risk in this discussion, but there are other threats and fundamentals that are going on in the world that are big issues, right?

Michael Burns:
So the pandemic, for example, we all know what that has done to the airport sector in the sort of near term. There is still a very good case that the long term prospects for airports are still hold up with the same business plan that there was pre pandemic. The idea of more emerging markets getting richer and more travel because people want to go on an airplane to go on holiday. That thesis actually still stands up.

Ben:
The other player in all of this. And it's one that you've mentioned already, and that is the role of government. So there's a bit of a paradox in the report and the reports findings where government policy represents the biggest obstacle to change. But then is the second, I think it's listed as the second biggest influence to opportunity facing the industry. So there is a bit of a paradox there. Lawrence, based on your experience of working for both the public and private sectors, what are your views on the main challenges facing government in mobilizing the private sector and its capital to meet the future infrastructure needs?

Lawrence Slade:
Yeah, I think in many respects, challenges for government are very similar to the challenges that we've just been discussing for investors. It's trying to understand the speed of technology development and we know that governments are often quite afraid about picking winners and sort of making investments of public money that then go wrong. So, I mean, there's a real challenge at the sort of the senior government level in really working and understanding where things are moving, how quickly transitions are going to happen, when those tipping points are going to be reached. And I think actually there's an interesting role here for infrastructure banks. So in the UK, we've seen the launch of the UK infrastructure bank and in Canada, they have their own, we've seen the role of the EIV in Europe.

Lawrence Slade:
So actually it's how we can all work with those infrastructure, banks in terms of bringing forward the more nascent technologies, how they can crowd in private finance, into those areas, how they can help de-risk some of those elements, but then there's also the role of government and regulators themselves and how they can then build on creating this solid policy environment that doesn't just say, Hey, this is where our policies are going to be going over the next couple of years, that's useless from an investor point of view.

Lawrence Slade:
What we want to hear is this is the long term commitment we are making, and you guys can come in and invest with confidence out to the next 20, 30 years. And then within that, there's the speed of policy development. And this is a real focus for investors is we see the high level rhetoric in Washington, in Brussels, in London, in right the way across the world in terms of where you are going on this. But you need to speed up the decision making. You need to be prepared that some things aren't going to to work there are going to be some failures. But let's learn from those, but let's speed up the permitting process so we can get projects underway. Let's make sure we're not blocking new capital coming in. So it's that speed of delivery from the government's point of view. And as someone said to me the other day, we've only got 10,000 days to 2050. That's really not very long. When you think how fast the last couple of years have gone. So focus, focus, focus from all constituencies here.

Mark Elsey:
I think that's absolutely right, Lawrence. Clearly government has a critical role in creating the framework that sustains change. But also as you say, in terms of policy directions of what it looks for like, well let's say we need to reduce emissions and be green, but how are we going to do that? What are you going to promote as a government, by a way of means of transport or means of energy production or means of house building and insulation is actually going to allow us to do it. They are the drivers, sadly, whilst with the private sector, undoubtedly can help in finance and in technology evolution and in delivering change, it needs a framework within it's going to operate. And as you said, that's both policy, but also it's got to be the economic side. Governments have to, I think, create frameworks that facilitate that change as well through regulation and other mechanisms.

Mark Elsey:
So example in thinking when a renewable sector in the UK, I mean the evolution of contract for differences is a mechanism to allow people with confidence to plan and fund future developments is absolutely critical to the success and the evolution of those industries. So government needs are only to set the policy and the clarity, but also then set out, okay, what is the way in which people can have confidence that they're going to be able to make a return by chasing these new technologies and investing in new things and going through all those different of costs and risks.

Lawrence Slade:
Just to add to that Mark and something, we perhaps should touch on more in these kind of conversations. And perhaps playing back to the ESG element is I think there's a role for government in addressing the societal change that's needed. As we talk about targets like 2050 and how much we all will have to change, but also sort of the who pays elements and ensuring that we are achieving intergenerational fairness as we start investing in new Greenfield infrastructure or upgrading and improving the resilience of our current infrastructure. These are massive questions. And from an ESG societal point of view, we really need to make sure we are bringing different pop with us to understand the journey that we're all on now.

Mark Elsey:
There's a challenge also as every country has its different set of challenges as well. And it's great for us in the UK to talk about achieving net zero by 2050, and which is very challenging for us, but if you're in India or in China with a population and an infrastructure economy that is just radical different than how that's going to play out in terms of delivering on those things. There's a cost of today and there's a cost of tomorrow, but people need to be able to live today. And so again, this comes back to, can we be joined up, should the richer countries be paying more to those with less? If we're really concerned about global solutions, can we join those things up and where do investors pay?

Mark Elsey:
For example, now there's [inaudible 00:25:17] that about the amount of green financer to come out of the banks and what they should be aiming to achieve, which came as, I think quite a surprise. But again, it's a very positive, tangible thought, but actually where's that money going to go? Is it just going to go into the nice safe environments and safe projects where there's [inaudible 00:25:38] or is it actually going to go out there and take some risk to do some of things that really need, probably are going to have as bigger impact on the future. So, as Lawrence says, there's a great commercial thing, but there's a very big society point at play here. And some very big questions between taxpayer versus user versus rich country versus poor country. And that needs some pretty smart joined up thinking to make that all work.

Ben:
So, Mark, I've got to say that that presents bit of a depressing picture really. I'm just wondering how, as an industry, we can do things a little bit differently and perhaps at a more holistic level to solve some of these problems that you've just mentioned.

Mark Elsey:
Well, Ben clearly important that we do find those collective solutions as we've already discussed. The prime role has to sit with governments who have the most control, the most influence. And there obviously there are initiatives such as COP that do see the governments coming together to try and motivate and promote change. From the private sector side, I was wondering whether institutions such as a GIA should change or evolve from being sort of advocates for Institute to creating platforms, to promote change amongst their members through a range of things. For example, co-investing in new technology, sharing learnings, committing to collective outcomes, or even having differential pricing for between sort the developed and the undeveloped world to allow more investments to go to those areas that probably need it most.

Lawrence Slade:
Yeah, look, Mark. I think that's a really great point. And I think there's definitely a role for trade bodies, such as GIA to play in this. We have a fairly unique convening power, not just amongst our own membership, but to bring different bodies together, whether it's governments or the wider stakeholder community and get them around the table. And we've seen time and time again in our more established markets, just what can happen when you bring those groups together, you have these challenging conversations, but ultimately you drive people towards getting behind a unified agenda. Doesn't do a wave of competition, competition still very much there, and that's still very much driving returns and getting the best deal for the consumers.

Lawrence Slade:
So let's take that model and see how we can use it in other areas of the world and really get these conversations moving around what we've got to do to adapt our current infrastructure to build resilience and frankly, to deliver the infrastructure that we know we are going to need over the coming years and really find solutions that are going to make a difference to tens of millions, hundreds of millions of people's lives over the next decade.

Lawrence Slade:
It's not an easy agenda, but it's absolutely one that we should all be getting behind. And we've got our roles to play. And ultimately, that's incredibly positive that we're able to have these conversations and recognize that whilst there are challenges, there are also tremendous opportunities for us all to play a part in getting the right solutions for people.

Ben:
All right, guys, I'm going to ask you to get out your crystal balls. It's crystal ball time. I'm going to ask each of you what will be the next asset type, which will offer a secure pipeline of investment opportunities and positive returns for the infra investor community. We'll go around, we'll start with Mark.

Mark Elsey:
If I had my crystal ball and my water 10 pound notes, where would I be putting it? Well, I go back to the area that Lawrence, I think, flagged of water, where if you had to say, there's one asset clause that is undoubtedly right at the sharp end of 30 climate change and the impact there, then water whether it's too much of it or too little of it, both present challenges from flooding risks through to droughts and fires. Providing a sustainable and reliable source of water for the population is a critically important resilient factor for the future of our society. And one which really to so many ways it's been seen as free issue in the past in lots of countries. And there does need to be a significant amount of investment into that area because without that then all the other bits of parts of our life, whether it's agriculture, whether it's living, whether it's air conditioning, for example, all these different things, everything relies on having a reliable source of water.

Mark Elsey:
So I'd have thought that that must be an area where there is significant potential, the right people with the right approach backed up by the right policies to make some probably can't make hay, but you can probably make some rain drops.

Ben:
Lawrence to you.

Lawrence Slade:
I think seeing as Mark said taking water, I'm going to stick with what I know and go with energy. I think there's a huge way to play out here within this, whether it's seeing the developments in offshore wind and the massive investment that China's reported to have made, for example, over the last year, the huge opportunities in offshore for north America as well as the continue build out in Europe. So I think there's a way to go there, but I think I'd also touch on within transportation. I think there are massive opportunities there, whether it's the EV charging market, which we've touched on, or ultimately what's going to happen with sustainable fields and aviation. So I think that there are certainly risks there, but I think there is also some very good opportunities as well.

Ben:
And Michael, your thoughts.

Michael Burns:
So I guess Lawrence has stolen my one, which was renewables and particularly with so much capital to deploy offshore, wind does look like a really sensible place to look because it is tried and tested, but we need lots more of it. And I think that's the interesting piece about wind, is that the technology is there floating. We'll see more floating as well. We're working on a project that's if its gets going, will be the largest floating wind farm in the world. It's those kind of developments that you see growing from existing technology, which I think those are the ones that are more capital ready.

Mark Elsey:
Yeah, it's interesting to hear those response. I think because the reality is in my view, there's opportunities everywhere. The change really is affecting every as aspect of our lives. And those changes are said can be opportunities so they can be threats, but for the smart people, they will make money whichever way that trend might take you. It's by understanding those and by adapting your investment analysis tools and understanding where your own investors want you to go and focus on and making sure that you are understanding those asset clauses and those technologies. There is just a world of opportunity out there and as our report showed I think, while some of these people see these a threat, there are those out there that really see this as an opportunity, even though there might be more change and there are going to be features that are going to make structure potentially less resilient in the longer term. Actually in many ways, that means there'll be new types of infrastructure that required we'll give new opportunities to invest.

Mark Elsey:
So, the reality is there is a world of opportunity and the world of challenge and those variables out there are greater. So what we might see, [inaudible 00:33:19] whether you see actually sort of an asset clause of investors with much greater range of returns and outcomes, because actually the assets they're investing in and having manage are actually very different from the rather of might call it almost boring, but quite predictable returns. And whether we're actually to see an increasing diversity, but much more along the historics of private equity versus more of consolidated institutional markets in the wider corporate sector in the future.

Lawrence Slade:
I think Mark's spot on there actually. And we're going to see a convergence across different financial clauses. And as Mark says, a sort of a bigger range of returns from the sort of the more established, quite boring and quite infrastructure assets into the sort of the more slightly developing technologies as they start rolling out and increase their levels of immaturity and progress along the product life cycle. So I think it's going to be a very different world in five to 10 years, time to that which we're all familiar with in core plus, et cetera today. So definitely a market to be involved in and to be interested in.

Ben:
Well, gentlemen, short of everyone shopping at the same crystal ball shop, I want to thank you all for your time, your thoughts and insight. Thank you for joining. Thanks for listening. To read the full report, Resilient Infrastructure rise into the challenge of a more sustainable future, as well as more insights on Resilient Infrastructure, please visit ashurst.com/resilient infrastructure.