Australian Infrastructure Investment Monitor 2024

About the 2024 Australian Infrastructure Investment Monitor

Infrastructure Partnerships Australia and Allens are pleased to jointly present the 2024 edition of the Australian Infrastructure Investment Monitor.

This year’s report is the ninth iteration of this research and provides a comprehensive view of investor appetite and sentiment for the Australian infrastructure market. The report reveals insights into the drivers and challenges for infrastructure investors, which include sovereign wealth funds, pension funds, fund managers, banks and other infrastructure professionals.

This report is informed by a survey which captures the views of international and Australian investors who together collectively own or manage over A$716 billion of infrastructure assets across the globe. The survey findings are furthered by insights from a series of interviews undertaken with 13 senior Australian investors.

Investment Intentions and Preferences

KEY FINDINGS

• 90 per cent of those surveyed are highly likely to invest or continue to invest over the next three years in the Australian infrastructure market
• 68 per cent believe Australia will likely provide sufficient infrastructure investment opportunities for their needs over the next three years, up 10 percentage points on last year
• Energy asset classes take out the top three spots for preferred infrastructure assets to invest in
• Grid storage and firming takes out the top spot (72 per cent), followed by transmission and distribution (69 per cent)
• Preference to invest in renewable energy generation has fallen 14 percentage points from last year, dropping from first to third place (62 per cent) • Investor preference for social infrastructure (excluding social and affordable housing) has fallen over the past three years, while interest in digital infrastructure remains steady
• The appetite for private sector investment in transport continues to stagnate, with interest in roads (45 per cent) almost halving since its peak in 2018 (85 per cent)
• Having an adequate transmission network, adequate policy and regulatory frameworks, and global demand are the leading challenges to delivering Australia’s energy transition

Investor appetite for the Australian infrastructure market remains robust, though views vary on the sufficiency of opportunities

The Australian infrastructure market continues to attract substantial interest from investors, with 90 per cent of survey participants highly likely to invest within the next three years, an additional seven per cent considering investing and three per cent unsure. Australia is consistently viewed as a secure long term investment destination, with 68 per cent of respondents confident that the country will offer sufficient opportunities in the next three years – a 10 percentage point rise from last year’s survey results. However, many of the investors interviewed flagged limited investment opportunities in Australia in the short term, spurring them to look at divestment and overseas opportunities. This highlights a growing gap between the theory and reality of investing in Australian infrastructure, with no shortage of interest in-principle and confidence in the long-term pipeline, but with some question marks and differing opinions about how long it will take for investable opportunities to come to mark.

Figure 1: Likelihood of investing in Australian infrastructure

Figure 2: Likelihood that Australia will provide sufficient investment opportunities over next three years

Energy continues to dominate investor interest, with firming and storage most in demand

After topping the Investment Monitor charts last year, investors’ interest in energy infrastructure continues to gain momentum. The top three asset classes being eyed by investors over the next three years are all in energy, topped by grid storage and firming (72 per cent), followed by energy transmission and distribution (69 per cent) and renewable energy generation assets (62 per cent) (see Figure 3). This high rate of interest in energy investment has been mirrored in the Australian infrastructure pipeline over recent years, with energy projects comprising 57 per cent of all additions to ANZIP by value since 2021.²

2. As of November 2024

Figure 3: Preferred Australian asset types to invest in

Figure 4: Preferred Australian asset types to invest in, compared to 2023

Drilling down further into investors’ appetite for energy, among renewable energy opportunities as shown in Figure 5, battery and short duration storage projects were identified as the most attractive asset class (75 per cent), beating out onshore wind (54 per cent) and solar generation (46 per cent). Interviewees agreed with this finding, pointing to swifter approval and delivery processes, lower planning risk, and the volatility of the grid as factors driving demand for these assets.

Figure 5: Which renewable energy infrastructure asset classes are attractive to investors

Larger energy storage and energy-from-waste projects have slipped down investors’ list of priorities

On the other hand, as shown in Figure 5, interest in pumped hydro and long duration storage projects has fallen this year, with only 25 per cent viewing the asset class as attractive, down from 52 per cent last year. Investors have flagged the duration risk associated with longer term projects as well as the cost and complexity of delivery as deterring their interest. Another renewable energy asset class to slip is energy-from-waste, falling 23 percentage points from last year to 21 per cent investor interest (see Figure 5).

Transport has fallen further behind energy in investors’ eyes

Transport asset classes continue to see a slide in interest, with a steady decline over the past six years. This trend commenced before the COVID pandemic, but has been exacerbated by a tailing off of stimulus funding, highlighted by the release of the Federal Government’s response to the Infrastructure Investment Program Strategic Review, which saw around 50 transport projects cancelled. While few of these were likely to see private investment, the broader trend has seen the transport PPP pipeline all-but shut off by state and territory governments, with a few notable exceptions. The Independent Toll Review interim report commissioned by the NSW Government further undermined investor confidence by thinking out loud about the possibility of overriding concessions and putting sovereign risk firmly back on the table.

As shown in Figure 3, the equal-most attractive transport infrastructure remains roads, with 45 per cent of investors attracted to the asset class over the next three years, but this is a far cry from the 85 per cent interest seen in 2018. Along with roads, ports and marine (45 per cent) was the top transport asset class, though both declining by three percentage points from last year. Tunnels and bridges (24 per cent) fell 12 percentage points from last year, while passenger rail (38 per cent) was down two percentage points. Precincts and intermodal terminals (31 per cent), introduced into the Investment Monitor last year, is also down 29 percentage points this year.

Opportunities for investment in social infrastructure are limited, though social and affordable housing is the bright spot

For the third consecutive year, interest in future investment in social infrastructure has dipped, falling from a peak of 75 per cent in 2021 to 52 per cent this year (see Figure 3). Interviewees noted that the current pipeline has few investable opportunities, and where there are opportunities, they are typically too small to attract institutional-scale capital. In particular, investors have pointed out that despite growth in the scale and number of hospitals being announced across the country, these proposals have provided little scope for private finance. The frameworks for private investment in the health sector need to be further developed to capitalise on existing interest.

Social and affordable housing has been flagged as a potential bright spot for future private investment opportunities (52 per cent, an 8 percentage point increase, as shown in Figure 4). With government initiatives being progressed under the National Housing Accord and Social Housing Accelerator to deliver additional affordable and social housing – including 20,000 new affordable homes by 2029 and 4,000 new social homes by mid-2028, respectively – there is ample opportunity to capitalise on private sector expertise and finance.

Following Victoria’s lead, the Ground Lease Model or similar innovations have the potential to gain traction in other Australian jurisdictions. With other jurisdictions also exploring initiatives aimed at promoting private investment in social and affordable housing, this could create a compelling opportunity for investors seeking scalable investments with stable revenue streams.

Digital infrastructure is a rising priority for investors, with data centres most in demand

This year’s Investment Monitor picks up on a global trend of rising demand for digital infrastructure, with participants prioritising data centres (59 per cent) and telecommunications infrastructure (55 per cent) in their future portfolios. While the digital infrastructure pipeline is still building, emerging investment opportunities are scalable, data sovereignty is a growing emphasis, and data centres present a compelling intersection of digital infrastructure, property and renewable energy inputs. Considering this confluence of factors, it is unsurprising that investor interest in data centres has ranked in fourth place for the second year running, trailing closely behind energy. This is an asset class to watch closely in the coming years.

Insight: Progressing the energy transition

The energy transition has gained significant momentum, but Australia faces challenges in moving projects through to delivery

Investor interest in Australia’s energy transition is clear. Over the last two years alone, Australian-located generation, storage and transmission projects have been responsible for the addition of 143 projects with a total estimated capital cost of A$320 billion to ANZIP. However, the pathway to delivering this energy pipeline is not without its challenges. Many energy projects have faced delays in progressing from announcement to delivery – pushing project timelines to the right. Investor sentiment is that Australia is at risk of failing to meet its 2030 renewable energy and emissions reduction targets, although respondents note we are not alone in facing this challenge.

Figure 6: Challenges to delivering Australia’s energy transition

Transmission is a key piece of the transition puzzle

Surveyed investors identified the adequacy of the transmission network (71 per cent) as the number one challenge as part of the energy transition for the second year running. Interviewees agreed with this sentiment, highlighting that transmission infrastructure needs to be prioritised over the medium term to reach national targets and facilitate an orderly transition as the grid’s generation capacity expands rapidly, and consumer demands for electricity grow and change.

The second-most identified challenge is the adequacy of policy and regulatory frameworks (64 per cent), underscoring the essential role of policymakers and regulators in refining energy infrastructure planning and approval frameworks and processes. Competition for capital, skills and resources is also a rising concern, with the challenge of global demand for energy infrastructure rising by 25 percentage points (61 per cent) from fifth to third place from last year.

Investors are increasingly agnostic about investment regulation and the development stage of potential assets

With fewer and fewer opportunities being served up to the Australian market, it is little surprise that investors are becoming less picky about what they will consider. More than half of respondents expressed no preference for regulated or unregulated assets. Last year’s Investment Monitor saw a spike in interest for unregulated assets (46 per cent), potentially influenced by several transactions occurring around the time of the research. This year sees investors’ preferences for unregulated assets cool to 34 per cent, while a preference for regulated assets fell further to 14 per cent. A number of investors interviewed expressed strong caution towards regulated assets, given the perceived risks and returns associated with these investments.

Figure 7: Preferred regulatory model for investments

Similarly, the proportion of investors who expressed no clear preference for greenfield, brownfield or expansions to existing assets has grown to 41 per cent. Investors’ preference for greenfield assets continued to slide to 28 per cent, reflecting broader hesitancy around the capacity to effectively manage the risks of new builds, with construction schedules moving to the right and costs continuing to rise across the country. A preference for expansions or upgrades continues to grow, almost doubling over the past two years to 28 per cent. Only three per cent prefer to invest in brownfield assets, with value and availability anchoring these firmly at the bottom of investors’ shopping lists.

Figure 8: Do you prefer investing in in greenfield projects, brownfield projects, or major expansions to existing assets?

The Australian Infrastructure Market and Emerging Conditions

KEY FINDINGS

• A strong knowledge of market participants, economic stability, transparency, and a track record of infrastructure business are the top attractions for Australian infrastructure
• Australia has fallen behind Europe as a region with the most compelling infrastructure investment opportunities, and further behind North America
• Labour costs and a lack of skilled personnel were identified as the top challenges to investment in the Australian market
• Cost and complexity of bidding fell from the top two challenges to joint ninth place
• Preference for investment in the East Coast states has dipped this year
• 78 per cent of respondents would consider investing in regionally located projects
• More investors are choosing return-on-investment as a key factor in driving the shift to ESG investments over the past three years

Australia remains an attractive place to do business, but sentiment has softened on even the strongest performing factors

As with prior Investment Monitor editions, a strong knowledge of market participants and partners (90 per cent), economic stability (86 per cent), transparency (72 per cent), and a track record of infrastructure business (72 per cent) continue to make Australia an attractive destination for investors’ capital (see Figure 9). However, positive sentiment has softened this year, with each of these factors falling in absolute terms. The ease of doing business in Australia (48 per cent) and pipeline certainty (28 per cent) have each slipped one place down the rankings from last year, falling by 16 and 12 percentage points respectively. Investors seem most concerned with the lack of projects available for private investment, with only 14 per cent flagging the availability of stock as an attraction to the Australian market. This drought of opportunities was highlighted as a major concern among many of the investors interviewed.

Long-standing concerns of investors around supply chain resilience, taxation settings and value continue to limit confidence

Among the least attractive factors for investment in Australia, supply chain resilience stands out as a serious concern, with just three per cent of respondents viewing this favourably (see Figure 9). Interviewees flagged a wariness of Australia’s dependence on international trade, while geopolitical tensions and other factors have driven up costs and slowed resource delivery. With many of the major components and resources required to deliver the energy transition being produced offshore, this trend will need to be watched closely over the coming years.

Another common bugbear of investors, Australia’s taxation benefits have further decreased in attractiveness, with just one in ten seeing this as a positive of the domestic market. Interviewees pointed to recent changes to foreign investment reviews as one such example of changes in taxation settings which have caused a level of investor uncertainty. The generous incentives on offer in other regions such as North America and Europe have further diminished Australia’s relative standing, with initiatives such as the Federal Government’s Future Made in Australia doing little to generate interest.

Investors view Australia’s costs of capital as relatively high

Continuing a trend over recent years, few investors see Australia’s cost of equity as a drawcard for the local market (see Figure 11). Only seven per cent of investors see this as an attracting factor – declining 22 percentage points from last year (see Figures 9 and 10). This is exacerbated by just 14 per cent of those surveyed seeing Australia as one of the better markets for interest rate competitiveness. With the U.S. Federal Reserve having commenced rate cuts and having greater runway to continue cutting compared to the Reserve Bank of Australia, this is likely to compound the effects of lower equity returns compared to international markets in the near term. One bright spot is investors’ views of Australian debt terms, which more than half of respondents view favourably and rose 16 percentage points since last year’s research.

Figure 11: How Australia compares to other infrastructure markets for capital costs

Labour costs and shortages ranked as the top challenges to investment

It will come as no surprise to close observers of the Australian infrastructure market that challenges abound, and that these challenges are impacting investors’ confidence and willingness to deploy their capital here. Chief among these issues are labour costs (55 per cent) and a lack of skilled personnel (52 per cent), which are becoming increasingly acute as the energy transition moves into the delivery phase. Heightened tensions within the industrial relations landscape have added to the uncertainty on the duration and scope of impact of ongoing supply constraints. Almost half (48 per cent) of survey respondents also identified red and green tape as a barrier to investing in Australian infrastructure.

These have overtaken the cost (down 39 percentage points) and complexity (down 27 percentage points) of bidding at the top of investors’ list of challenges, which have fallen from first and second place last year to equal ninth this year. Interviewees recognised that governments had made progress in reducing costs of participating in public procurement, but were not as convinced about reduced complexity, with reforms to procurement guidelines in a number of states and territories taking time to filter through to bid processes.

Figure 12: Most significant challenges to investing in Australian infrastructure

Figure 13: Most significant challenges to investing in Australian infrastructure, compared to 2023

Australia faces increasing competition on the global stage

These factors have undoubtedly impacted Australia’s global standing, especially with other regions forging ahead with clear decarbonisation and investment programs. For the first time since 2018, Australia (43 per cent) has fallen behind Europe (46 per cent) as a region with some of the most compelling opportunities, and for the third year in a row behind North America (68 per cent) (see Figure 14). Interviewees flagged the depth of opportunities available, particularly in the energy transition, as more compelling. The competitiveness of Australia’s investment policy settings also appear to not hold up on the global stage.

Figure 14: Regions with most compelling opportunities

Investors are cooling on NSW and Victoria, though increasingly signal no jurisdictional preference

The two powerhouses of the Australian infrastructure market over past decades have been NSW and Victoria, but investors’ preferences for these jurisdictions have slid over the past year. Victoria in particular has seen a sharp fall in interest – down 20 percentage points – while NSW dropped nine percentage points. Both jurisdictions remain head and shoulders above all other states and territories, however, with Queensland in third place attracting only 28 per cent of investors. Surveyed investors identified jurisdictions’ track record of infrastructure business, pipeline certainty, political stability and economic stability as the top four factors which drive their preference for particular jurisdictions (see Figure 30). The proportion of survey respondents expressing no preference for any jurisdiction has continued to grow, rising to 38 per cent (up 2 percentage points from last year). This reflects investors’ willingness to go where the opportunities are.

Figure 15: Which Australian jurisdictions do you have a preference for investing in?

Governments need to step up policy and investment reforms to enhance Australia’s competitiveness

Engagement through this year’s Investment Monitor has highlighted the growing significance of establishing clear and consistent policy signals to attract investment in a competitive global environment. Critically, these must be actionable and transparent in order to attract and retain interest of potential investors, with well-articulated, heavily-incentivised plans in place in other regions. The investors interviewed reacted cynically to the Federal Government’s initiatives under the Future Made In Australia agenda, with many noting the absence of clarity around what role investors can play.

With the number and severity of challenges facing the Australian infrastructure market, there is no shortage of potential reforms for governments to tackle. However, investors have increasingly emphasised the importance of bringing the private sector along on policy reform processes. The Independent Toll Review commissioned by the NSW Government was a case study in what not to do in this regard. The Interim Report’s reckless thought bubbles about potentially overriding existing concession contracts between the NSW Government and toll road operators raised serious concerns about sovereign risk. While the Final Report walked back those suggestions somewhat, threats of ripping up contracts live long in investors’ minds. Investors welcome sensible infrastructure reforms – and toll road reform remains an opportunity for governments to grasp that could benefit all parties. However, as this review shows, these processes must be guided by common sense and an absence of ideology if governments want to protect and enhance Australia’s reputation as a safe and sensible place to do business.