Follow the money

“There is a greater opportunity for investors to deploy capital in Australia than in the whole of Europe put together at the moment. You can’t afford to not be here competing for these assets.”

The words above are those of James Riddell, a partner in infrastructure M&A at advisory firm Deloitte Touche Tohmatsu in Sydney, and they sum up perfectly why Australia has been selected as Infrastructure Investor’s number one “hot market” for infrastructure investment in 2014.

In selecting our “hot markets” we were not looking for negative traits – rather, simply to identify the global locations that are today proving the most attractive (or at least potentially attractive) for investors. “Hot” may imply excessive behaviour, and clearly there is the danger that an attractive market will become highly competitive and lead to bubble-type characteristics – but our focus is on the popularity of markets first and foremost.

Indeed, to take the case of Australia, there have been murmurs about the level of competition and the hefty multiples being paid in auction processes. Some speculate about whether this could eventually lead to an exodus of capital given the ability of global money to swiftly migrate somewhere else. Riddell, however, believes that there will be plenty more deal flow to keep bidders interested:

“There has been a lot of privatisation already but in my view it will accelerate. There are many more ports, electricity distribution and electricity generation assets set to come to market,” he says.

He also points out that privatisation is not the only game in town in Australia. The sale of non-core corporate assets is also an appetising prospect and is a trend that has a long way to run. “We’re at the end of the construction boom and the energy companies realise they have a lot of capital tied up in the infrastructure they have built that can be released by selling to global investors and re-deploying into their core businesses,” he says.

Above all, perhaps more than any other market, the Australian governments – at both the federal and state level – have made a great public relations case for the involvement of private capital in infrastructure. At the heart of this case is “asset recycling”, i.e., the ability to take proceeds from the sales of existing infrastructure assets and reinvest them in new infrastructure.

“Asset recycling is the reason we are expecting privatisations and government asset sales to continue,” adds Riddell. “A very compelling case for this process has been made as it involves using the proceeds to fund new roads, rail, schools and hospitals etc. rather than paying down debt or funding expenditure.”

Underneath Australia in our ranking comes Mexico thanks to the liberalisation of its economy and determination to attract private capital to a host of industries. Prominent among these is energy, where a state-owned monopoly has been in operation for many years as oil production has slowed. Private operators, expected to drive greater efficiencies, are queuing on the sidelines.

Mexico is at the head of no fewer than five Latin American nations in our top ten. While the Philippines’ highly effective PPP Center has propelled that country to the number three position, it is nonetheless the case that Latin America is way ahead of other emerging market regions when it comes to embracing the role of private capital in infrastructure.

In drawing up the top ten, we were of course aware that certain omissions would be debatable. One of the most striking observations to be made is that not a single one of our top ten is a European country. While many European governments have spoken of infrastructure as something of a panacea for depressed economic performance, the reality is that activity levels are way down on what they used to be.

Brownfield infrastructure in the UK remains attractive and it has well-respected legal and regulatory frameworks as well as a welcoming attitude towards foreign capital. However, despite having a very sizeable National Infrastructure Plan, the UK government has been accused of too much talk and too little action. Investors are still waiting for the deal flow that would justify the hype.

Another market that was in our thoughts was India, where the prioritisation of infrastructure by the new Modi government has revived hopes that the country might finally deliver on its enormous potential. But history teaches us that India’s potential should be treated with caution and that Modi will have his work cut out to free up the bureaucracy and red tape that has done so much to hinder investors in recent years.

Straddling Europe and Asia, Turkey is another market with undoubted potential but which has struggled to offer sufficient comfort to international investors. Reports that the government’s is preparing to offer guarantees on certain projects could help change perceptions.

Not everyone will agree with our choices, but we hope this article will stimulate discussion. On the following pages, you will find summaries of each of our top ten markets.