The 4 drivers of infrastructure investment

Since the 1970s governments have spent relatively less on vital infrastructure. With the aftermath of the global financial crisis constraining government finances, that underinvestment has continued.

The private sector is stepping up to meet a surge in demand for new infrastructure - across water, energy, transport and communications -- and that is creating opportunities for investors in global listed infrastructure.

Infrastructure is vital to economic growth. It creates a virtuous, never-ending cycle: investment in infrastructure helps stimulate sustainable long-term economic growth which then creates a further need for infrastructure.

The World Economic Forum estimates that every dollar spent on infrastructure generates an economic return of between 5 to 25 percent.

But since the 1970s, real public infrastructure investment in advanced economies has been falling as a percentage of Gross Domestic Product (GDP).

This has left many infrastructure projects deferred or even abandoned, ultimately magnifying an infrastructure gap that is only expected to widen going forward.

The need for infrastructure investment is dominated by the core industry sectors -

1. Water: Demand is expected to exceed supply;
2. Energy: Investments in energy efficiency will be important;
3. Transport: Many forms of transport are set to double or triple in demand; and
4. Communication: According to Cisco, global mobile data is expected to surge more than 6-fold from 2017 to 2022.

An infrastructure shortfall

Governments have traditionally funded a nation’s infrastructure investment, usually through a combination of tax revenues and tax revenue-backed debt.

But the ability of governments to maintain their role as the primary provider of infrastructure is weakening. Government finances have come under considerable stress since the global financial crisis because of lower tax revenues and rising spending, and many have turned to austerity measures to cut spending. Governments in developed countries face other structural pressures on finances including ageing populations.

The OECD estimates that governments need to invest some US$70 trillion in infrastructure. But with governments investing less, the Business20 Infrastructure and Investment Taskforce says only US$45 trillion will be spent, including a sizeable participation from the private sector, creating a US$25 million shortfall by 2030.

That shortfall means that further involvement of the private sector in the provision of infrastructure is inevitable.

Portfolio enhancement

The good news is the private sector’s greater involvement will create more opportunities for investors.

Investors have been increasingly recognising the benefits of global listed infrastructure and its stable, reliable and growing cash flows.

Global listed infrastructure also complements other asset classes in a balanced portfolio. It can play the role of a low-risk bedrock within a global equities allocation; or be an alternative to fixed income investments due to its attractive income component.

With such unique investment characteristics, built on the stable, reliable and growing cash flows, global listed infrastructure can play a number of roles in a balanced portfolio and we believe it should be a key consideration for every investor.

Ongoing opportunities

Infrastructure is the backbone for economies to develop and remain competitive. The future growth in infrastructure will not only be driven by the need for new infrastructure, particularly in developing economies, but also the replacement of existing ageing infrastructure, perhaps first constructed decades ago in developed economies.

With governments’ ability to fund infrastructure constrained, the private sector will increasingly need to step up and drive investment, which will continue to open up opportunities for investors in global listed infrastructure.