Infrastructure is more than motorways and skyscrapers – could new developments help us meet the challenges of today, including climate change?
Most of us rarely think about the infrastructure that supports our lives. The roads that we drive on, the electricity that powers our homes and workplaces, the telecoms networks that enable the internet on which we’re reading this article – they’re easy to take for granted.
Yet services such as these need vast levels of investment each year to function as smoothly as they do. Spending on core economic infrastructure – transport, power, water, communications – amounts to around $2.54trn (3.7% of global GDP) per year, according to consultants McKinsey. Using a wider definition of infrastructure that includes everything from social infrastructure (schools, hospitals and so on) to real estate, total spending is almost 14% of GDP.
The demand isn’t likely to ease up. The McKinsey analysts estimate that we will need to spend $3.7trn per year on core infrastructure alone between now and 2035 to keep pace with our needs. That’s partly because ageing infrastructure in many countries will need maintenance or replacement – the U.S. alone may need to spend $4.6trn by 2025 on this, according to estimates by the American Society of Civil Engineers. But much of the spending comes from the need to meet two big challenges facing the global economy.
A growing and ageing population means we need to spend more on infrastructure
The first of these challenges is population pressures. The most immediate sign of this is in emerging economies, where assimilating hundreds of millions – and ultimately billions – of people into modern industrial economies will require huge investments in infrastructure to support growth and deliver higher living standards.
Some emerging economies are already spending as much as they need to on this – for example, China’s vast levels of spending on facilities such as airports and high-speed trains means that, between now and 2035, it’s on track to spend 2.5% per year more than it needs to, according to McKinsey. But most other big emerging markets – such as Brazil, India, Indonesia and Mexico – are not yet spending enough.
A further key trend that will become increasingly evident in the years ahead – initially in developed economies but later in much of the emerging world – is the ageing of the population. This will mean greater demand for health facilities such as hospitals, but it will also require investment in areas such as transport and logistics to make them more suited to the needs of an older population.
Better infrastructure can create a more sustainable economy
The second challenge is that the way that the economy operates will need to change significantly if it is to continue growing sustainably while managing the consequences of population shifts. That means a focus on ways to mitigate climate change and to use scarce resources efficiently. It also means investing in automation technologies, to cope with the fact that the working-age population will be smaller, relative to the growing population of elderly people mentioned above, and in absolute terms.
Enhanced infrastructure will be crucial to helping us do this. For example, if fossil-fuel-powered cars are to be replaced with electric vehicles, there must be extensive investment in electric vehicle charging points. In the longer term, we may move towards the use of autonomous electric vehicles, which will be leased rather than owned – and consequently can be used more efficiently – although commercialization of this technology remains some way in the future.
While self-driving cars naturally seize the headlines, there are plenty of other ways in which new and existing technologies can be used to create a more sustainable economy. Improvements in lithium-ion battery technology have vastly reduced costs, from around $1,000/KWh in 2010 to under $200/KWh today. This will make it possible to incorporate large-scale batteries into power networks, allowing us to balance supply and demand more effectively – for example, by storing power generated from intermittent sources such as solar power during the day for use at night.
How digitalization can make cities smarter
As in many other fields, digitalization will play a key role in the future of infrastructure. While the digital economy creates more demand for infrastructure – the growth of internet traffic and data storage means more demand for everything from server farms to fibre-optic networks – it also provides ways to use resources more efficiently.
Installing and integrating networks of sensors will enable us to improve traffic management, electricity use, waste recycling, and much more. The falling cost of this technology – the price of sensors is on track to fall by two-thirds between 2004 and 2020 – together with the computing power that can be brought to bear on analysing the data could transform the efficiency of our infrastructure.
And indeed it will need to do so if our cities are to remain pleasant places to live. An estimated 68% of the world’s population will live in urban areas by 2045, up from 55% today. Urban areas mean greater pollution and higher infrastructure needs. The cities of the future will need to be ‘smart cities’ to overcome this.
Two ways that investors can participate in infrastructure trends
Unlike many other areas in which technology disrupts an industry, it will often be the existing companies that benefit in the case of infrastructure. New fields (such as electric vehicle charging) or ways to manage infrastructure better (such as digitalization) offer a way for incumbents to adjust their businesses, rather than a way for new arrivals to displace them.
The simplest way to invest in this asset class is through a fund comprised of large, liquid infrastructure conglomerates that have historically produced predictable cash flows and reliable dividends. It is also possible to invest in smaller listed companies or private infrastructure projects, which may offer more focused opportunities with higher levels of risk and opportunity. However, it’s important to be aware that most areas of infrastructure business are complex and require expertise to operate. Consequently, it takes a high degree of knowledge and experience in the sector to make the right infrastructure investment decisions.
McKinsey & Company, ‘Bridging infrastructure gaps: has the world made progress?’, October 2017, https://www.mckinsey.com/~/media/mckinsey/industries/capital%20projects%20and%20infrastructure/our%20insights/bridging%20infrastructure%20gaps%20has%20the%20world%20made%20progress/bridging%20infrastructure%20gaps%20how%20has%20the%20world%20made%20progress%20v2/mgi-bridging-infrastructure-gaps-discussion-paper.ashx