Unstable Foundations: The Risks In Relying On A Post-Pandemic ‘Snapback’ In Infrastructure

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The fact superfunds and other large asset managers are now scrambling to obtain ownership of listed, long-duration infrastructure assets does not prevent that society post-covid might remain different from pre-covid, with consequences for some of these assets.

-Super funds have lately been very hungry for infrastructure assets
-There is no doubt a post-pandemic era will see an increase in the patronage of these assets
-Yet it’s far from certain the levels of use will be anything like they were pre-pandemic anytime soon

By Ed Kennedy

It’s been a huge month for infrastructure in Australia.

September has seen Brookfield’s $9.6bn offer for AusNet Services ((AST)) quickly being trumped by APA Group ((APA)) with the unexpected bidding war for what is usually considered the boring end of the share market joining news of other big ticket moves like the $23.6bn bid for Sydney Airport ((SYD)) from the Sydney Aviation Alliance consortium, and Transurban’s ((TCL)) deal worth north of $10bn for the acquisition of a 49% stake in Sydney’s WestConnex.

This month follows what’s already been a very busy year surrounding fundraising and deal making in the sector.

The high level of activity being seen this year has many causes. The shifting priorities of super funds is a particularly notable factor in it, and is essential to unpack in order to give context to the frenzy. Yet it’s also clear the covid-19 pandemic continues to be a key driver in this area.

What’s much less clear is how post-pandemic dynamics will impact the use of numerous pieces of infrastructure in Australia – many of the very same assets which have recently attracted showstopping price tags.

Is Acquiring Infrastructure Really a Super Idea Right Now?

Australian super funds have been very busy this year. Although the initial outbreak and uncertainty caused by the pandemic generated some timidity in the sector, 2021 has seen them bolt out the gates with designs on a number of huge acquisitions.

The relatively limited supply of infrastructure either assets available or coming up for sale – with the NBN being a notable exception – means Australian super funds have also been looking offshore for assets.

The low returns bonds are currently generating has been a key contributor to this, pushing funds to look elsewhere in the market for alternative assets that nonetheless come with a (supposed) predictability surrounding their returns.

The takeover bid for Sydney Airport serves as a key example of the current keen interest in infrastructure by super funds. Members of the bidding Sydney Aviation Alliance include IFM Investors, QSuper, and AustralianSuper. It’s the third such bid the consortium has made for the airport, with prior bids rejected in August and July offering $22.8bn and $22.3bn respectively.

But for all the headlines activity by super funds in infrastructure is generating, considerable uncertainty also reigns surrounding the future. Even investors who have the luxury of (a long) time on their side have to reckon with the reality that old presumptions surrounding infrastructure use are now being undercut by a pandemic-driven change to daily life and work globally.

To really grasp the undercurrents of this environment it’s first necessary to look back.

The Trends Pre-Pandemic

In 2018 a United Nations (UN) report made a startling prediction surrounding the future of population movement. The UN said that by 2050 68% of the world’s population would live in an urban area.

Recent years and decades provided plenty of evidence to justify this claim. Western nations had been seeing a decline of traditional industries such as manufacturing, which was once the bedrock of countless rural communities. Similarly, the booming economic growth being seen across rapidly developing economies had drawn people to cities. 

Perhaps no city encapsulates this as well as Shenzhen. It’s estimated in 1985 the Chinese city had a population under 200,000, yet it took just 20 years from then for it to exceed 10 million.

Certainly there are particular factors – such as the establishment of its Special Economic Zone and location just over the mainland border to Hong Kong – which contributed to Shenzhen's startling growth. This said, the trend of rapidly rising populations in urban areas (so often accompanied by population decline in provincial areas) has been seen all across the world.

Offices to Remain Empty Post-Pandemic?

PWC has declared “The traditional workplace is behind us”. EY says “remote working is the way forward”. An abundance of other businesses now hold similar positions, and authoritative data into the impact of the pandemic supports this trend. 

According to the ABS survey done in February of this year, 41% of those employed were doing work from home (WFH) at least once a week. This is in contrast to a rate of 24% pre-March 2020.

Furthermore, 47% of those surveyed at that time expected their WFH arrangement to continue throughout the year, and this was before the upheavals of the current extended lockdowns in NSW and VIC. Not every worker can WFH now or will WFH in future, but many who have made the move to using their kitchen table or garage bench as a workplace won’t be returning, and this has huge implications for infrastructure use going forward. 

Of course there are shades of grey in the demographic trends we’ve seen borne out of the pandemic. While a huge group of Australians are now well and truly adjusted to the WFH lifestyle, many of those who work in construction, health care, and other sectors have more or less continued working their jobs in a similar way in 2021 as they were doing so pre-pandemic. 

But even so, it appears highly unlikely at present that even if all the stars align favourably in combatting the pandemic – such as a speedy completion of vaccination programs and a plummeting of covid cases accordingly – for a ‘snapback’ once it ends that’ll see a like-for-like return to life as it was before it. Too much has changed, and too much is set to change yet.

A Snapshot of Change: The Melbourne Experience

When Premier Daniel Andrews announced the Victorian Government’s huge suburban train loop in August 2018, undoubtedly his government’s greatest attention was on a short-term goal.

The state election of November 24 that year saw his government re-elected in a landslide. Many voters who backed Labor were enticed by a ‘spiritual sequel’ to the Andrews government’s popular Level-Crossing Removal Project brought to the 2014 Victorian election, and the Metro Tunnel Project commenced in 2015, which was set to create five new train stations (total) in and around the Melbourne CBD among other amenities, in a quest to address growing pressure on the existing five CBD stations.

Just as the level-crossing removal project meant Melburnians would experience temporary disruption surrounding stations where works were going on, the closure of parts of the Melbourne CBD to pursue the Metro Tunnel Project – with completion due around the middle of this decade – was done with the promise that it’d be in the long-term benefit of a city that in recent years has been Australia’s fastest-growing, and for a CBD which had also been seeing a soaring growth in density in nearby surrounds like South Yarra and Southbank.

Then the pandemic hit, and with it all the old certainties about a CBD’s role in the future of daily life and business went out the window. 

Many Melburnians who once relished living in the CBD for its proximity to work and cosmopolitan attractions – even if it came with a trade-off of having less space in their residence in comparison to a suburban home – found the closure of commercial offices freed them to WFH instead of face-to-face. In turn, restrictions which limited their ability to leave the home each day whenever a lockdown was on saw a significant number ready to trade a CBD pad for a suburban domicile with a backyard in tow. 

Some went further, eyeing in provincial Victoria the chance to get their foot on the property ladder for the first time, and prepared to spend the remaining years of their career as (predominantly) remote workers if need be, feeling the rise of WFH-ready roles across the economy offers new bargaining power in seeking to end their Monday to Friday commute of old. 

In future these people may indeed pop back into their – previously daily – CBD workplaces for face-to-face meetings sometimes, but they’ve now put down roots far beyond skyscraper-laden streets, and represent a group of (in many cases now permanently former) Melburnians who will strongly resist returning to a job and lifestyle where the CBD is their focal point. 

The experience of Melbourne and wider Victoria is certainly not unique in this regard. But it does provide an illustration of just how profoundly the outbreak of covid has altered the landscape when it comes to assessing the future need and use of infrastructure. 

Missing the ‘Public’ in Public Transport

Trains and planes serve as a key example of the new challenge for infrastructure use.  In the pre-pandemic era, an Australian worker catching a peak hour train into their CBD office or an international flight for an overseas conference was second nature. Numerous indicators suggest many years of the 2020s (at least) will be dominated by factors that inhibit the use of such transport. 

With great concerns surrounding the enhanced threat the delta variant (alongside other mutations) can pose even to those who are fully vaccinated, there’s the anticipation it will be a long while before train passengers may cram in shoulder to shoulder once more. International travel is a similar equation in a larger context. Even if lots of borders open there’s the expectation it’ll be many, many years – if at all – before airlines across the world are running at full capacity in a way that resembles pre-pandemic activity. 

Ultimately the greatest hindrance to a return to business as usual in future may simply be the lack of desire among the masses for it to occur. Doubtless corporate junkets toasting their way through entertainment epicentres like Las Vegas will have a comeback in some fashion. Yet justifying the expense – especially when an array of businesses are needing to trim their operating budgets – for a worker’s business class round trip ticket and hotel accommodation for a quick face-to-face meeting with a colleague overseas seems unimaginable now, especially given the ease and universality of videoconference meetings has been proven.

This means accordingly the underlying presumptions that justified an abundance of infrastructure projects require a rethink. In turn, the presumptions around demand for them in future. Yet ultimately, it’s not just infrastructure projects already progressing today that must factor in this new dynamic. The pandemic redefining the use of infrastructure means future projects must now cater to changes in behaviour.

The Anticipated Demand for Different Types of Infrastructure Amidst Decentralisation

Just as the pandemic forever changed how we live and work, and this is anticipated to result in a decline in the use of certain transport infrastructure in future, greater demand for other types of infrastructure can be expected to arise.

Owing to their importance to the WFH revolution, communication networks have taken on a new value. Toll roads are also looked at in a new light, given the growing population in provincial areas of former CBD workers, who’ll nonetheless still commute into the CBD occasionally. Renewable energy assets also hold much promise in the minds of many, given their increasing use and the corresponding decline in fossil fuel sources, especially given the former is in numerous locales now cheaper to source power from than the later. 

There’s little doubt that major infrastructure projects will continue to occur in some form, albeit their design could be examined through a different lens. One that factors in the decentralisation that is occurring as a result of the pandemic. 

In certain locales history may come to show the pandemic’s silver lining was that it helped deliver a ‘circuit breaker’ needed to depressurise reliance on a CBD, and open up a new chapter where decentralisation could bring many benefits to various groups in the community, such as increased housing affordability and reduced congestion in their day-to-day driving.

But even so, a new challenge in this era could be posed by the reality that major infrastructure in Australia will essentially always take years to build. The sweeping trend of decentralisation means nobody could envy urban planners in this regard in the work they’ve before them planning projects throughout the remainder of the 2020s amidst such uncertainty. 

Watching Out for the Next Wrecking Ball

At present investors presuming a ‘snapback’ from the pandemic do so when it’s far from certain it will occur. What’s more, there’s substantial evidence to suggest it will not. Some stakeholders in this dynamic have the ability to play the long game, but this approach can still be very questionable when alternative assets that are anticipated to see a spike in demand due to the pandemic exist.

Although some may see light at the end of the tunnel – and it coming soon – in a best-case scenario, such a view should fairly take into account a worst-case scenario ahead.

While it was a century that separated the 1918 H1N1 pandemic with 2020’s covid outbreak, there is the rueful expectation that the next pandemic could be along far sooner given the interdependent nature of the global economy in the 21st century in comparison to 1918, not only in terms of exchanging goods and services, but also the necessary movement of people additionally to drive and sustain new growth. 

Undoubtedly many jurisdictions will pursue more sophisticated and successful measures in years ahead to resist any new outbreak making its way into their territories.

But the ongoing challenge of containing covid and its variants – in addition to the different approaches taken to squashing it from Sweden to the UK to Australia’s various states and territories – means the unfortunate reality is it’s not a question of if, but when the next pandemic occurs. And when it does, we can anticipate another huge blow to the patronage of trains, planes, and similar transport.

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