Few mainstream infrastructure investors feel comfortable venturing into emerging markets. For an asset class that prioritises stable and predictable long-term returns, the real and perceived political and macroeconomic risks of investing in assets in Africa, Asia and Latin America have sometimes been too much to bear.

However, the opportunities in emerging markets are becoming too big to ignore. These regions have huge unmet needs for transport, energy and telecommunications infrastructure. Almost 800 million people globally live without access to electricity, mainly in Africa and South Asia. Another 400 million are not covered by a mobile broadband network. Rail services are completely absent in many countries, while poor road links hinder regional trade.

17%

Proportion of the population in Sub-Saharan Africa that is not covered by a mobile broadband network

3%

The IEA’s annual projected growth in demand for power in Southeast Asia to 2030

Demographic and economic trends will support the investment case for infrastructure in emerging markets over the coming decades. Africa is forecast to contribute almost three-quarters of global population growth between now and 2050. And with GDP growth in emerging markets consistently outpacing developed economies, demand for new types of infrastructure will only grow. Countries such as Nigeria, Kenya, Malaysia and Indonesia are fast emerging as data centre hubs, for instance.

While the energy transition will see an accelerated roll-out of renewables, along with accompanying investments in storage, transmission and efficiency, investors are also thinking about more radical ways to respond to demands for a more sustainable world.

The idea of a ‘circular economy’, which addresses the wasteful use of the Earth’s natural resources, has gained traction in recent years. Undoubtedly, there will be greater need for recycling and waste management infrastructure going forward – along with other new technologies that may not even have been invented yet.

As the world changes more rapidly than ever, one thing is certain – infrastructure cannot afford to stand still.

8

Turning attention to Africa

Many of the world’s widest infrastructure gaps are found in Africa. This means long-term return potential to investors willing to accept the risk

Africa’s infrastructure deficit holds back the continent’s development – but provides investors with a range of opportunities to finance improvements.

The region’s dearth of basic infrastructure is perhaps best symbolised by the lack of bridges across the continent’s major rivers. Brazzaville and Kinshasa are the two closest capital cities in the world, sitting on opposite banks of the Congo River. But anyone trying to travel between the cities is forced to cross the river by ferry. The nearest – and only – road crossing of the Congo is over 200 kilometres downstream. The good news is that a road and rail bridge, financed in part by the African Development Bank, is set to open by the late 2020s, enabling freight movements to multiply sixfold.

The digital infrastructure story is similar. Some 190 million people in Sub-Saharan Africa, or 17 percent of the population, are not covered by a mobile broadband network, according to industry group GSMA. The coverage gap in Africa remains far higher than in any other region. However, impressive progress has been made in extending access: smartphone connections have grown at an average annual rate of 20 percent over the past five years.
Several major development finance institutions, which have been instrumental in financing the roll-out of telecom towers, are now turning their gaze to data centres and fibre-optic networks. The US International Development Finance Corporation, for example, announced a $300 million investment in an African data centre platform last year.

Energy is another challenge for the continent. Around 80 percent of people who lack access to electricity live in Africa, but policymakers are under pressure to avoid relying on fossil fuels to power industrialisation.

Progress in increasing electricity access over the past decade has been modest in most African countries. But there are signs that opportunities in solar and onshore wind are exciting investors, particularly in more sophisticated markets such as South Africa. A scheme established by the South African government to procure renewable power from independent producers has achieved considerable success since 2018. Successive bidding rounds have been highly competitive – the latest, held this year, was heavily oversubscribed.

African infrastructure projects seeking investment have to battle to overcome investors’ macroeconomic concerns, particularly around currency risk. But Vuyo Ntoi, co-managing director at African Infrastructure Investment Managers, insists that investing in the energy transition, digitalisation and urbanisation in Africa can position investors to reap long-term rewards.

“The recent crises have highlighted the attractions of infrastructure as an investment class,” he told Infrastructure Investor in October. “We believe that for any investor who is seeking an Africa exposure, infrastructure is a risk-mitigated entry into the African market.”

9

Powering up Southeast Asia

Net-zero commitments and population growth are opening the door to returns in the region

Southeast Asia is one of the fastest-growing regions of the world. The IMF estimates that the ‘ASEAN-5’ – Indonesia, Malaysia, the Philippines, Singapore and Thailand – will achieve almost 5 percent GDP growth in 2023, nearly double the global average.

This rapid development is opening up myriad opportunities for infrastructure investors. Demand for power in the region is set to grow by 3 percent a year to 2030, according to the International Energy Agency. And with most of the region’s governments committing to net zero by 2050, wind and solar projects are in high demand.

“The Southeast Asia region is compelling because of its additionality. There’s the need for power so the plants that we are financing or building essentially don’t replace existing plants,” Wymen Chan, managing director at SUSI Partners, told Infrastructure Investor earlier this year. “There’s an opportunity now for Southeast Asia, which is relatively less developed than markets like China, to make this leap towards renewables as the main conventional form of power.”

Similarly, demand for digital infrastructure – notably data centres – is proliferating. Singapore is already a global leader in data centres. However, authorities were forced to impose a moratorium on construction between 2019 and early 2022 over power supply fears. Data centres consume as much as 7 percent of the city state’s entire power capacity.

Singapore’s data centre struggles, however, present opportunities for the rest of the region, particularly for neighbouring Malaysia. DigitalBridge Group is among the fund managers that acquired Malaysian data centre assets in recent years.

10

Focusing on new thematics

The circular economy is one non-core sub-sector gaining momentum

There is no doubt that the world’s infrastructure needs will change markedly in the coming decades. Indeed, 30 years ago, who could have imagined that renewable energy and data centres would be regarded as core infrastructure?

It is easy to assume that the journey to net zero is essentially a matter of swapping carbon-intensive technologies for ‘greener’ alternatives. Generating more renewable energy is a critical part of the transition, but much more fundamental changes will also be needed to create a truly sustainable global economy.

As such, the concept of a ‘circular economy’ has begun to challenge the ‘take-make-waste’ model of production. The reality that the Earth’s finite resources cannot be consumed – and thrown away – indefinitely is gaining acceptance. For example, the accumulation of plastic waste in the oceans is beginning to spur investment in new recycling technologies.

“The number-one priority should be increased and effective sorting infrastructure… especially for films and flexibles,” Adam Herriott from WRAP, an environmental NGO, told us in November. “We also need to develop the ability and technology to remove plastics from the residual waste stream.”

Some investors are already looking to finance circular economy infrastructure. Palisade Investment Partners reached a A$400 million ($276 million; €277 million) first close on its maiden fund in August. Steve Gross, Palisade’s co-founder, told Infrastructure Investor that the circular economy – particularly the use of waste to create recycled goods and biogas – will be a key focus area for the fund.