While the aviation and transport sectors have taken a big hit, telecoms and energy transition are showing that Covid-19 provides a chance to innovate within the infrastructure world.
GlobalData forecasts a 2.2% drop in global construction output this year, with Europe and North America suffering the most with expected contractions of 5.2% and 6.6%, respectively.
But while this may not bode well for greenfield operations overall, empty roads and reduced traffic mean that projects in certain sectors have not only carried on according to schedule but have often progressed at a faster pace.
On top of that, with a large chunk of the working population operating from home, there has been greater demand for faster and more efficient broadband, as well as a drop in pollution, especially in urban areas.
Both factors are broadly expected to push digital infrastructure and energy transition higher up government agendas for investment plans in the sector once a degree of normality has been restored.
In the early stages of the Covid-19 outbreak, particularly after it had spread to western Europe, it became clear that travel restrictions would cause the aviation industry, and more generally the transport sector, serious problems.
In early March, British Airways’ regional airline, Flybe, ran out of cash and entered administration. In the US, Missouri-based Trans States Airlines shut down operations on 1 April, followed by its other regional carrier Compass Airlines. By the end of April, Virgin Australia entered ‘voluntary administration’ after suspending most of its operations and furloughing a large part of its employee base.
While regional companies were most affected, international companies including American Airlines, EasyJet, Air Canada and Air France-KLM have had to lay off or furlough staff, or significantly reduce their operations.
From an infrastructure perspective this is just the tip of the iceberg. Airlines shutting down and lockdown restrictions on travel and the circulation of people has had an impact on all the infrastructure connected to airports, including car parks, ground handlers and hotels.
“Both on the brownfield and greenfield side, a limited number of transport transactions have completed or are still active,” says head of energy economics at technical adviser Arup Filippo Gaddo. “In aviation in particular, I believe it will be very difficult for any new projects to come to market. However, highways and rail projects might provide some more opportunities; it will all depend on the type of society that emerges from this crisis and the behaviours around mobility.”
As governments begin to lift or ease restrictions, some activity is expected to restart in the sector.
“On the greenfield side, despite a few notable exceptions, there inevitably have been a number of capital expenditure plans that have been paused or delayed as a result of Covid-19’s impact on the aviation and airport industry,” says deputy CEO of the UK Infrastructure and Projects Authority Matthew Vickerstaff. “However, we find there is no single version of the truth in terms of forecasts at this stage. My expectation is that public transport will have to restart over the course of the year. Inevitably, it will have to be done in a phased manner.”
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Vickerstaff notes, for instance, that notice has been received for the UK’s High Speed 2 – more commonly known as HS2 – railway project to proceed, but agrees that phasing and unpredictability around passenger volumes mean that airport operators specifically will not start recovering before the end of the year, possibly into 2021, and that the industry will not go back to pre-Covid-19 levels until 2022.
However, it is not all doom and gloom. Greenfield fund manager Meridiam has seen many projects speeding up because of Covid-19.
“Our I-66 road construction in Virginia has picked up pace during lockdown quite simply because roads were empty,” says CEO Thierry Déau. “A geothermal project in Ethiopia and a road project in Kenya have also accelerated the timeline to finalise contracts from the government. Many public clients quickly realised that it is preferable to sign shovel-ready to prepare for an economic crisis.”
The fact that large numbers of people have been working from home during lockdown – and will probably continue doing so for longer into the Covid-19 emergency – has had implications for the digital infrastructure and energy sectors.
Unlike aviation and large parts of the transport sector, many energy projects offer fixed and regulated revenues that are less, if at all, exposed to GDP and economic risks. As well as regulated asset utilities and solar and wind projects, which are now largely seen as sound and proven technologies, gas peakers and battery storage projects have come on the market in the UK and the rest of Europe during the lockdown.
“A decrease in electricity demand, as well as a change in the demand profile due to different working patterns, have put more emphasis on the need for power system flexibility; this effectively translates into a number of gas peakers and battery storage projects to be launched,” explains Arup’s Gaddo. “With industrial and commercial activity on pause, there has been a shift in peak demand – whether this will continue after lockdown is over is the big question.
“Flexible, decentralised projects will still be carrying premium though, as they may provide more options for investors.”
Electricity demand being more spread out during the day as people spend most of their time at home has made many investors focus on energy flexibility projects, as they expect demand to remain flexible over the coming months.
Market analysis by GlobalData highlights delays in renewables projects globally as they are exposed to legal issues, logistics risks, personnel shortages, project development hurdles, and most importantly, shortfalls in financing. However, market players sound positive on the prospects for the sector.
“With our construction projects, we are paying close attention to potential supply chain and labour disruptions, which thankfully have not been major,” says BlackRock global head of renewable power David Giordano. “To date, over a diversified portfolio, we are seeing only modest impacts to schedule. […] On the financial front, the capital markets have maintained their support of the renewable power sector, and we have been able to complete several transactions in recent weeks.”
Danish renewables developer Ørsted, which had some of its projects paused because of the outbreak, also sees this as a minimal impact and is positive overall on the prospects for the rest of the year.
“At this point in time, we have no indication that the Covid-19 situation will significantly impact our earnings for the year,” said CEO and president Henrik Poulsen in the company’s first-quarter 2020 conference call on 29 April.
“Our construction projects all remain on track; however, […] we see an increased risk of component and service delays from suppliers impacted by Covid-19,” he explained to shareholders. “We collaborate closely with our partners to mitigate these situations as best as possible and without compromising health and safety standards. Based on our current outlook, we believe the Covid-19-related impact on our construction projects will be limited both in terms of timing and economics.”
On the other positive side of the Covid-19 infrastructure world, Macquarie Capital’s managing director for digital infrastructure investing, Oliver Bradley, says the opportunities are plentiful.
“We are seeing many opportunities, especially in the fibre space,” he says. “Not long ago, digital infrastructure was regarded as core-plus, but the current circumstances are accelerating its transition to core infrastructure.”
“I believe resilient is the correct word for digital infrastructure at the moment. It provides a service that people need and are going to need more than they did before the Covid-19 outbreak. The sector still has its challenges. For instance, not all local authorities have allowed fibre network works to continue on the roads, but when they have, the process has actually been easier and faster. Unlike in the UK, for instance, Spain did not allow engineers to enter people’s homes for network installations.”
However, as governments start to ease these types of measures, such challenges will soon no longer exist, and Bradley remains confident that digital infrastructure will stay at the top of the agenda for many investors.
Mott MacDonald’s group strategic development director, Simon Harrison, is less bullish about the digital landscape.
“Digital transformation is affecting construction and infrastructure in a profound way, but will this mean the lockdown pushes 5G roll-out harder?”, he says. “I believe we need to be cautious to distinguish between the lockdown period and what comes after. Digital infrastructure has certainly demonstrated its power to put people together and it will remain on investors’ agendas, and over time pervasive use of the internet of things will certainly drive 5G infrastructure.
“However, I believe it is a little early to assess on the basis of what has happened in lockdown, regarding what shape it will take in the future.”
While the industry agrees that much will depend on governments’ financial situations after the crisis is resolved, energy transition and digital infrastructure are broadly expected to emerge as the top tools they will use to reboot the economy in the UK and the rest of Europe.