Infrastructure for Growth
The Dawn of a New Multi-Trillion Dollar Asset Class
Throughout history, economic and social development have gone hand in hand with infrastructure development, be it the road networks and sanitation advances of the Romans (what did they do for us?), the Silk Road, or the maritime advances which led to the age of exploration and resulting global trade. Our modern era has been similarly transformed by the availability of energy, electronic communications, and modern travel which have made the world a much smaller place.
However, the amount which we spend on infrastructure has gradually been falling as a percentage of GDP, and, while there are justifications for this, the stock of infrastructure compared to global GDP has fallen.
At the same time, there is an enormous social need for infrastructure investment. Over 1.5 billion people have no access to electricity; just under 1 billion still live without safe drinking water, and over 2.5 billion are without access to basic sanitation. If the UN are right, and we need to accommodate an additional 1.5 billion people in the next 20 years, most of whom will be in emerging markets, and most of them in infrastructure-heavy urban centers, then there will be an ever more pressing need for infrastructure investment.
The global economy though seems mired in a period of sluggish growth. With interest rates close to zero, or in some cases negative in real terms, and the bazooka of QE already widely deployed, policymakers are running out of monetary levers to pull. This leaves us with the potential of fiscal stimulus, one aspect of which is infrastructure spending which can boost growth using both short-term demand effects, and longer-term supply effects, with the so-called multiplier effect implying that, if done correctly, the resulting GDP boost is larger than the initial investment.
However, developed market governments find themselves with debt at typically 100% of GDP, and hence limited capacity to spend, and, while emerging markets are less indebted at 40%, they are reluctant to boost debt and place sovereign ratings at risk. Traditional sources of infrastructure finance such as banks find themselves constrained by regulations such as Basel III, while insurance companies are constrained by Solvency II. Two factors, however, offer an enormous opportunity for the world. Firstly, governments can borrow at historically low rates (if not for free) for incredibly long durations. Perhaps most importantly, though, and the focus of this report, is the potential offered by private sector investment.
Returns on equities and bonds have in recent years been at historic lows, and Investors are crying out for yield, in particular for long-dated, stable cashflows and income streams. Infrastructure assets lend themselves perfectly to this need, with often predictable operating characteristics, and very long, multi-decade, useful lives.
Moreover, the scale of the opportunity is vast — we estimate a global need for infrastructure spending of $58.6 trillion over the next 15 years. In this report we examine why now could be the time for a global infrastructure push, and where the most exciting opportunities are by region and industry. Most importantly, though, with a need for infrastructure from a social and economic perspective and with funding keen to participate, we examine why it isn’t happening, and what stakeholders, both government and financial, need to do to make it happen.
We are faced with a rare opportunity to create and grow a new asset class, build a better world that is fit for the future, and create millions of jobs in the process; and who knows, we may just kick-start the global economy in the process.