Editor’s Note: The following is a refresh of a piece that we ran seven years ago. If anything, infrastructure has become even more of a focal point since then.
In the movie “Field of Dreams,” a call from the heavens urges Kevin Costner to unearth part of his cornfield and replace it with a baseball diamond. “If you build it, he will come,” the voice says. It takes Costner immense perseverance to fulfill his mission, but in the end, the field is completed and serves its purpose.
Today, it seems as if there is a mysterious voice speaking to politicians all over the world, urging them to build. But as Costner’s character learned, the costs of projects are all too apparent, while the benefits can sometimes seem ethereal. Finding the right balance between sowing and reaping is at the center of international debate over infrastructure.
Broadly stated, infrastructure encompasses systems and facilities that are essential to economic functioning. Projects follow a hierarchy of needs: at the bottom are public works that support basic subsistence (water treatment, electricity) and at the top are endeavors that expand horizons (data centers). The Global Infrastructure Hub has estimated that global spending in this space amounts to more than $3 trillion each year.
Some of this annual sum goes toward maintaining existing infrastructure, which is a substantial challenge. The most recent report card from the American Society of Civil Engineers gave the United States a “C-“ grade, and estimated a $2.7 trillion infrastructure investment gap over the coming decade. The Atlantic Council estimates the global gap will reach $40 trillion by 2040.
Infrastructure has taken on increased prominence in the post-pandemic world.
Beyond the cost of “keeping the lights on,” infrastructure is taking on increased strategic importance. The following factors are at play:
- Countries and companies are seeking to improve the resilience of their supply chains and to guard against interruptions that could arise from new trade restrictions. This requires the creation of production and logistic capability that is closer to home. Improvements to roads, rails and ports are essential to this effort.
- Efforts to diversify energy supplies and to use energy more efficiently require investments in alternative sources and power grids. The advancing application of artificial intelligence (AI) will require new facilities and a lot of electricity.
- The global technology sector operates on high-end microchips, production of which is concentrated in a handful of locations. A number of countries are constructing on-shore fabrication facilities, to ensure sufficient and secure chip supplies. “Fabs” require substantial amounts of water, which is in increasingly short supply in some areas.
- Protecting existing infrastructure from cyber crime and climate events requires additional investment.
Over the past three years, the United States government has committed $2.4 trillion to these areas, across three major pieces of legislation. Some see them as necessary to secure the country’s economic future, while others wonder if the country can afford such large commitments. There will be debate during the 2024 election campaign over whether to continue with these programs.
Companies whose businesses are linked with infrastructure have performed very well in recent years. Listed infrastructure funds have been popular with investors, but future performance will depend on whether the project pipeline can be financed.
The vast majority of infrastructure spending around the world is the responsibility of governments. This makes a certain amount of sense: infrastructure is a public good that matches best with public financing. Central coordination of investment can overcome suboptimal regional decisions. Infrastructure often involves networks (transportation, electric, energy, communications) where local weaknesses can hamper the broader system.
Unfortunately, budgetary pressure has limited the capacity for infrastructure investment. The pandemic added a layer to sovereign debt levels around the world, and the normalization of interest rates has made that debt more difficult to service. In some cases, currency and bond markets limit the amount of infrastructure spending that can be financed. In the case of the United Kingdom and the eurozone, budget caps leave little room for infrastructure investment.
Private financing can help support infrastructure, but governments still need to take the lead.
To break through frictions in public finance, private capital has been stepping forward. Infrastructure funds often engage in public-private partnerships (P3s), under which investor groups contract with the government to build and manage public works. Capital is provided up front, in exchange for a share of the revenue generated by the project.
A simple example of a P3 is a toll road. Private capital pays for construction and is rewarded with toll collections. Fees are paid directly by those who use the facilities, often in a painless way (in this case, through windshield transponders).
P3s have the favorable financial optics of keeping project costs off the public budget. But P3s can be controversial. Terms intended to protect residents from increases in fees diminish the attraction to investors. When stress occurs, Main Street is pitted against Wall Street.
Private infrastructure funds may not match well with projects that might be badly needed but which are not easily monetized. The acts of repairing roads, modernizing air traffic control systems or building schools don’t spin off the kinds of cash flows that investors are looking for. Further, some are concerned that public officials will be outmatched in negotiations and will end up giving away the store (or the highways).
The costs of failing to invest in infrastructure only become apparent when a failure occurs. A bridge collapse, or the closing of a supply chain, produce substantial consequences for societies. Unfortunately, there are no voices from above to direct us; we’re going to have to find the right road on our own.
Information is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Under no circumstances should you rely upon this information as a substitute for obtaining specific legal or tax advice from your own professional legal or tax advisors. Information is subject to change based on market or other conditions and is not intended to influence your investment decisions.
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