2023 Investment and M&A trends in Infrastructure

13 minute read  27.07.2023 Kate Koidl, Owen Cooper, Liam Plant

In our 2023 Infrastructure M&A report, we explore investment trends, challenges faced by infrastructure investors and impact on projects.

Key takeouts

  • Decarbonisation, digital transformation, and declining privatisations are impacting the infrastructure market as megatrends.
  • Infrastructure investors face challenges in capital sourcing, debt, M&A slowdown, and shifting investor sentiment due to the current economic climate.
  • There is a significant infrastructure project pipeline in Australia, with the 2023-24 Federal Budget and the 90-day independent review of the Infrastructure Investment Program likely to impact this pipeline.

Megatrends and their impact on infrastructure investment

Decarbonisation, digital transformation and declining privatisations are key megatrends that will continue to impact and influence infrastructure investments in FY24.

Decarbonisation and transition towards renewables

Decarbonisation and the transition towards renewables remains a key theme in the infrastructure space.

The Australian government has made a commitment to cut national carbon dioxide emissions by 43% by 2030 compared with 2005 levels. Further, the Australian parliament recently passed legislation that contains an explicit requirement for total emissions from major industrial facilities to be reduced, not just be offset. Despite this, there is still pressure on the Australian government and major carbon emitters to take further, and more drastic, action especially in light of a recent report by the Intergovernmental Panel on Climate Change that warned that the window is narrowing to meet the goal of the planet only warming by 1.5 degrees Celsius. This is supported by the government's 2023-24 budget, which invests a further $4 billion into Australia's plan to become a 'renewable energy superpower,' raising total investment to over $40 billion.

Unsurprisingly, climate change, decarbonisation and the journey to net zero emissions is now front and centre across most, if not all, industries. Over the past 18 months, the private and public sectors have increased their commitments to achieving net zero carbon targets by 2050.

Super funds, financiers, and governments are becoming increasingly powerful and are applying pressure around ESG practices, sustainability, decarbonisation and net zero planning. For example, infrastructure and superannuation funds have begun launching specialty net zero funds to meet high investor demand for assets that will help the transition to a net zero economy. This will see funds shift existing portfolios and alternative energy sources as key areas shaping the infrastructure sector and creating investment opportunities. The increasing number of investors gravitating towards renewables may result in the asset class becoming less attractive from a risk-return profile – which could deter certain high risk-reward investors.

Nevertheless, 74% of the respondents interviewed in the preparation of the MinterEllison Australian Renewables Report 2023 said that they will increase investments in Australian renewables through 2023, indicating a strong positive sentiment towards the renewable energy asset class.

Whilst there is not much yet to be found in the credit markets for asset classes such as storage, green hydrogen and carbon capture, there is potential for these to emerge and provide investment opportunities within blended finance structures or export credit insurance cover.

Further, as highlighted in the MinterEllison Australian Renewables Report 2023, 53% of respondents considered that financing challenges may create obstacles and 91% agreed that new financing and refinancing for renewables projects will become more difficult in the year ahead.

Separately, funds and other buyers are purchasing renewable energy for their assets or businesses through power purchase agreements. As one example of this, the IFM Investors and Queensland Investment Corporation (QIC) partnership entered into a A$500 million deal with Origin Energy to buy renewable power. The deal is aimed at reducing electricity costs and greenhouse gas emissions across critical infrastructure assets held by the IFM Investors and QIC partnership, such as Melbourne Airport and Ausgrid. The scheme is expected to facilitate the supply of more than 400GWh of renewable energy per year by 2025.

We expect to see the number of infrastructure investment opportunities arising out of the decarbonisation journey continue to steadily grow alongside the large demand for infrastructure finance.

Digital transformation

The digital transformation occurring in both the private and public sector provides a unique investment opportunity for infrastructure investors.

Gartner, the technology analyst firm, has forecast that spending on information technology across Australia in 2023 will increase to almost A$117.7 billion, a 5.8% increase from the 2022 expenditures of A$111.2 billion. A significant portion of this spending will go towards digital transformation projects. Further, the 2023-24 Australian government budget includes a further $2 billion in digital and ICT investment. Over the next four years, expenditure on modernising agencies' technology and systems is expected to almost double this year's $2 billion allocation.

The goal of digital transformation is to improve business processes, increase efficiency and competitiveness, and meet the evolving needs and expectations of customers. In the public sector, digitisation of government and government services will continue to improve productivity, customer experiences and delivery.

Turning to the private sector, digital transformation is arguably the biggest change that is currently happening in financial services. In this regard, banks, insurers and wealth managers are all placing increasing emphasis in technology. By way of example, Brookfield Asset Management established Brookfield Growth Partners as its technology investing arm in 2017.

Relevantly, digitisation also has a key role to play in the infrastructure sector. For example, the infrastructure space will see automation, Internet of Things, digital twins and other technology being rolled out to enhance productivity and customer experiences across different asset classes. Data transmission requirements are ever-increasing, posing a strain on networks, storage and processing. As a result, digital infrastructure, especially data centres, will continue to be in high demand and constantly changing, offering a stable, long-term growth investment opportunity to infrastructure investors. We have already seen a rapid expansion in the number of data centres globally, evidenced by the total volume and value of data centre transactions reaching record highs in the 2022 calendar year according to data collected by Infralogic, with 103 transactions at a total value of US$68.2 billion.

A part of the digitisation journey, data management, privacy and cyber security will continue to be put under the microscope. In relation to this, the Australian Cyber Security Centre received over 76,000 cybercrime reports in the 2022 financial year. Further, we have recently seen two of the largest and most high profile data breaches in Australia's history, impacting Optus and Medibank, with millions of Australians affected. This resulted in, among other things, sweeping changes to the penalty regime for serious or repeated breaches of the Privacy Act 1988 (Cth).

The protection of critical infrastructure will continue to be of high importance to governments and private sector interests. With data, privacy and cyber threats becoming more mainstream, there will continue to be a push to eradicate vulnerabilities and ameliorate risk. Accordingly, pressure will be on governments to continue to improve the vital protection of critical infrastructure and data systems. The Australian government appears to be receptive to this pressure, including $58 million in the 2023-24 budget to build a National Anti-Scam Centre within the ACCC, and allocating $101.6 million to strengthening the nation's cyber security defence over the next five years. Hopefully, these steps will be effective in upholding trust in institutions, business and individuals.

Decline in privatisations

There has been a marked decline in privatisations of infrastructure assets, having not seen any traditional privatisation transactions in the Australian market since our 2022 Investment and M&A trends in infrastructure update.

In the recent NSW state election, privatisation of public assets was a key issue in the political discourse. In his acceptance speech for NSW Labor's election victory, Premier Chris Minns declared that the election was a "decisive vote against privatisation". Accordingly, on 1 June 2023, the NSW government passed the Constitutional Amendment (Sydney Water and Hunter Water) Bill 2023, making Sydney Water and Hunter Water statutory state-owned corporations, safeguarding them from privatisation. This aligns with other state Labor Party commitments to publicly owned assets, demonstrating a significant shift in the politics of privatisation at both state and federal levels.

In South Australia, Adelaide's train and tram services will return to public hands after the South Australian government entered into a deal to transition the services back to public ownership. Under the new deal, train operator Keolis Downer Adelaide and tram operator Torrens Connect will hand back train and tram operations to the State by 2025.

Accordingly, at least in NSW and South Australia, we do not expect to see any traditional privatisation transactions in the next 12 months.

Despite the developments in NSW and South Australia, it has recently been reported that the privatisation of the Perth Mint and its owner, Gold Corporation, will be an option considered by the Western Australian Government as part of a review into the refiner. This may be an indication that some State and Territory governments still have an appetite for privatisations.

Nevertheless, in light of the current public discourse regarding privatisations, we would not expect to see many, if any, traditional privatisation transactions in the next 12 months. However, we would not rule out the possibility of governments entering into collaborative arrangements with the private sector, such as joint ventures and outsourcings.
Examples of this include:

  • the Victorian government's plan to revive the Victorian State Electricity Commission (SEC), announced in October 2022 in the lead up to the 2022 Victorian State Election, in order to accelerate Victoria's transition to an affordable, reliable and zero-emissions electricity system in partnership with the private sector; and
  • the VicRoad Modernisation Project, being the 40-year joint venture between VicRoads and a consortium of Aware Super, Australian Retirement Trust and Macquarie Asset Management that commended in mid-August 2022.

Public private partnerships (PPP), such as the examples listed above, can play an important role in delivering infrastructure projects efficiently. In this regard, PPPs can ensure that infrastructure projects are beneficial to both parties during periods of high interest rates and inflation by aligning the capabilities of the public and private sectors.

On the opposite end of the spectrum, it is not out of the realm of possibility that we will start to see more transactions involving acquisitions by public bodies of privately held assets, with governments looking to re-acquire assets or partial stakes in assets from the private sector. A recent example of this is the Queensland government's purchase of the CopperString electricity transmission project in March 2023 for $5 billion, with the project set to expand the National Electricity Market from Townsville to Mount Isa.

However, given the level of debt that the Australian governments accrued during the COVID-19 pandemic, governments will likely be reluctant to commit public funds to acquisitions of privately held assets. Green energy investors have also warned state governments against acquiring energy assets, arguing that direct government ownership could disturb the market and discourage investors.

Economic headwinds

The persistent headwinds facing the global economy and the banking disruption of March 2023 has caused tremors in the global economic outlook. According to the World Economic Forum’s Chief Economists Outlook from May 2023, a global recession is seen as likely by 45% of chief economists. However, there are some signs of nascent optimism, as the same proportion of chief economists see a global recession as somewhat or extremely unlikely, and since January 2023, there has been notable strengthening for most economies.

Australian inflation rocketed to a 33 year high in the fourth quarter of 2022, as the cost of travel and electricity jumped. Annual inflation rose to 7.8%, more than twice the pace of wage growth. An upside for infrastructure investors is that infrastructure assets can help hedge against inflation either explicitly because cash flows are directly linked to CPI or implicitly because often monopoly positions allow a degree of pricing power. This is borne out by historical performance where infrastructure has outperformed equities during elevated inflation periods. As a result, superannuation funds are seeking to protect returns from inflation and boost long-term returns by diversifying investments into infrastructure. This sits part of a wider investment trend towards unlisted assets, including property and private companies.

Accordingly, the Reserve Bank Interest Rate has also risen to 4.1% as at the date of this article, the highest since mid-2012, creating a further challenge for investors looking to finance their investments with debt.

Further, price pressures in Australia's construction industry have intensified over the last year. In this regard, the Producer Price Index for building construction rose 11.4% in 2022. The table below sets out the increase on a jurisdiction basis.

Jurisdiction 2022 increase in Producer Price Index for building construction
New South Wales 10.77%
Victoria 12.79%
Queensland 11.50%
South Australia 11.57%
Western Australia 9.48%
Tasmania 12.70%
Northern Territory 9.05%
Australian Capital Territory 4.69%
Australia 11.43%


Similarly, the Producer Price Index for heavy and civil engineering construction rose 9.6% in 2022. These price rises are being driven by the increased costs of raw materials such as steel and concrete, high fuel prices that are adding to operating costs, high freight costs, and upward pressure on wages amid robust demand for skilled workers in the construction industry.

The uncertain economic outlook for 2023 is also likely to see sourcing of capital and debt become more challenging. The M&A market has slowed and enterprise value multiples have come down, with the impact that asset owners are hesitant to sell at the new lower prices. As a result, fewer acquisition financing opportunities are being provided by capital markets. Further, the sentiment by private sector businesses may shift towards retaining earnings and rewarding shareholders, rather than investing in future infrastructure.

Infrastructure pipeline

Despite the challenges and uncertainty faced by infrastructure investors in the current economic environment, there are still a number of opportunities available to infrastructure investors. In this regard, the below graphs from the Infrastructure Partners Australia (IPA) website show a breakdown of the A$602 billion worth of major infrastructure projects across Australia and New Zealand that were yet to be awarded as at the start of 2023.

It is worth noting that the A$602 billion worth of projects yet to be awarded include:

  • A$315.2 billion worth of energy projects;
  • A$123.2 billion worth of rail projects;
  • A$74.3 billion worth of road projects; and
  • A$37.3 billion worth of social infrastructure projects.

Accordingly, despite the current economic uncertainty, the abundance of capital being directed towards major infrastructure projects will create attractive opportunities for infrastructure investors in the future.

Federal Budget 2023-24

As part of its 2023-24 Federal Budget, the Albanese Government announced a series of major initiatives for infrastructure and communications, including the $410.4 million for investments in First Nations housing and infrastructure projects.

Further, the Albanese Government announced that it will keep the $120 billion rolling 10-year infrastructure projects pipeline.

However, a 90-day independent review of the Infrastructure Investment Program will be undertaken of the 738 projects which have not yet commenced, but have been approved. The rationale of the review, which will be undertaken by Reece Waldock AM, Clare Gardiner-Barnes and Mike Mrdak AO, is to allow levels of government to consider which projects are actual priorities and assess cost and deliverability. The review panel is expected to report on its findings in August 2023, but may result in several projects being cancelled, modified or postponed, as funding for social and energy infrastructure projects are expected to be prioritised ahead of economic and transport infrastructure.

We, like the rest of the industry, await the release of the findings the 90-day independent review with interest.

If you are interested in infrastructure investment in Australia, please reach out to our dedicated infrastructure specialists.