There’s no debate: the world needs better infrastructure. And that represents a rare global growth opportunity in today’s polarized world.
If you are tired of debating whether the U.S. economy will grow at 2.25% or 2.50% and want to invest in a sustainably higher growth opportunity, infrastructure may be the answer — but understanding how to access the opportunity is essential.
Enhancing productivity could be the key
I have been writing since 2009 about structural impairments to economic growth, particularly in the developed world. Economic growth relies on growth in three areas: the labor force, productivity of the labor force or financial leverage.
Neither the birth rate nor immigration policy is conducive to significant near-term growth in the labor force. An increase in financial leverage is a potential avenue for growth, but that alone won’t meaningfully improve overall economic growth. So that leaves us heavily reliant on improvements in productivity to drive growth.
There are several ways to enhance productivity, including education, job training and health care. However, there is consensus that improving the infrastructure that supports the efficient transport of people, goods, information, communication, entertainment, energy and water is also critical.
Growth in infrastructure spending may exceed 6%
To grasp the enormity of the opportunity within infrastructure, consider that the infrastructure spending growth rate is expected to exceed 6.5% over the next decade.1 A report from the World Economic Forum estimates that every dollar spent on a capital project in utilities, energy, transport, waste management, flood defense or telecommunications generates an economic return between 5% and 25% — making the case for an additional $70 trillion to be spent on global infrastructure by 2030.2
According to Portfolio Manager Peter Santoro, “Infrastructure-related securities have similar valuations to the broad financial market, yet growth in infrastructure is expected to be two to three times that of developed economies’ GDP growth.” So rather than waiting to see whether the U.S. economy will grow at 2.25% or 2.50%, perhaps look to infrastructure’s projected growth to pursue a sustainably higher growth opportunity.
The need for better infrastructure exists across the globe
The pressing need to invest in infrastructure is apparent in both emerging and developed economies. In emerging economies the need for new infrastructure is obvious: more than half a billion people in these countries lack access to safe drinking water, never mind quality roads, rail or regional airports.
In developed countries there is an urgent demand for renewal of existing infrastructure, much of which was built more than 50 years ago. The U.S. is no exception: according to the Bureau of Economic Analysis, the age of America’s infrastructure is climbing rapidly as government investment in roadways, hospitals, power plants, schools, public transit, etc. has diminished over the past two decades.
Political consensus is driving opportunity
Despite an increasingly polarized political environment, there is reasonable consensus on the need for increased infrastructure as part of the solution to the global economic growth conundrum. This is one of the few issues that appears to unite mainstream and populist politicians. Leaders in many countries are proposing increased infrastructure spending.
- During his campaign President Trump talked about $1 trillion in additional infrastructure spending over the next 10 years.
- The European Commission’s investment plan for Europe aims to mobilize at least $330 billion in additional investment over the next three years.
- Brazil announced a R$200 billion infrastructure package.
- India’s finance minister stated the country needs over $1.5 trillion in infrastructure investment over 10 years.
- The Asian Development Bank’s (ADB) research suggests Asia’s overall national infrastructure needs have been estimated at around $8 trillion between 2010 and 2020 — approximately $730 billion per year — with key priorities in energy and transport.
It’s not only about roads and bridges
Increasing access to good infrastructure is critical to achieving broader opportunity for people. Improving education and health care is vital, but the effect is not fully realized if other parts of the infrastructure system do not exist or are not high enough in quality to take advantage of the opportunity.
“I was told by senior members of the banking community in the Philippines that 84% of the population has no access to banking. I naively assumed they would build more banks when the road infrastructure permitted.”
On my recent trip to the Philippines, I was impressed by the country’s plans to increase spending on roads, rails and regional airports in an effort to aid economic inclusiveness and reduce income inequality. When senior members of the banking community explained that 84% of the population has no access to banking, I naively assumed they would build more banks when the road infrastructure permitted. The better answer, I was informed, is to build out the wireless infrastructure and new banking security software, including facial recognition. By bringing banking to the people, broader economic participation will be realized more quickly and effectively.
Evolution of infrastructure spending
Source: PwC, Cities of Opportunity: Building the Future, November 2013
You can’t get there through passive investing
The opportunity in global infrastructure is significant across geographies and industries. But to take full advantage of the infrastructure opportunity, investments need to 1) be global, 2) include both debt and equity and 3) be diversified across sectors — the totality of which cannot be accessed through existing global indices.
Discussions with the ADB confirm that many infrastructure projects will be funded through debt. The ADB has raised over $820 million of clean energy bonds since 2010 to fund $2.5 billion invested in clean energy across Asia and the Pacific. Private investors may be called upon to help finance infrastructure projects more than they have been in the past. Government debt burdens in parts of the advanced world have risen above a comfortable point, meaning they will increasingly look to private investors to help fund infrastructure projects.
However, many individual investors can only access equity-based funds, which tend to represent a relatively narrow definition of infrastructure based on the equity of companies listed on major stock exchanges. As an example, the S&P Global Infrastructure Index is approximately 40% weighted to existing utilities. Utilities are important, but the infrastructure opportunity is much broader and will change as economies grow and mature.
The intersection of stable fundamental economic drivers, political will, growth in overall demand, and diverse, idiosyncratic local and regional issues — combined with a shift from purely government financing to more private funding — should widen infrastructure investment opportunity. This is one of relatively few persistent, long-term strong-growth themes investors can focus on in a generally low-growth world. And the opportunity cannot be realized through passive investment in existing global indices.
1 Cities of Opportunity: Building the Future, PriceWaterhouseCoopers
2 The Green Investment Report 2013, World Economic Forum
Article by Colin Moore, Columbia Threadneedle Investments