Infrastructure development, especially in emerging and middle-income economies, has become a prominent development issue, to the point where the current lack of infrastructure worldwide is a primary roadblock to further economic growth. Without sufficient power, water and transportation infrastructure, a host of interrelated issues arise.
China today serves as a clear example of how infrastructure influences further development. China suffers from significant transportation bottlenecks that raise production and shipping costs and impose significant inflationary pressures. Recent growth rates in China simply cannot be sustained on a sound non-inflationary basis without substantial investment in new transportation infrastructure.
By the same token, further improvements in China’s living standard will be compromised unless investment is made in the development of efficient power generation, water and waste-water systems. Finally, ecological sustainability also plays a central role in driving infrastructure development. Nor are these issues confined to China. They apply to nearly every country in the world that is experiencing above-average GDP growth rates, including the BRIC, MENA and LATAM countries.
The need for infrastructure is driven by a variety of factors, many of which constitute inflexible demand requirements. Chief among the drivers for new infrastructure are:
The total world population is expected to increase to 8.9 billion by 2030, assuming a constant fertility variable. This represents a 38% increase from 2005 (United Nations). Much of this growth is expected to concentrate in middle-income countries, where a combination of higher birth rates and longer life-spans coalesce to create an almost inelastic demand for more infrastructure.
The world’s urban population is expected to grow nearly 50% between 2005 and 2030. In 2005, the percentage of the world population living in urban centers surpassed 50% for the first time. By 2030, urban population is expected to make up 61% of the global population (United Nations). By 2030, 91% of Brazil’s population is expected to live in urban centers; 60% in China; 41% in India; and 78% in Russia. These estimates represent a substantial increase from current levels and will create further inelastic demands for new infrastructure, especially since urban environments are most heavily dependent on sound infrastructures.
Global trade has been growing at a rate of approximately 5.5% per annum over the last decade. This compares to global GDP growth of approximately 3.5%. Today, the countries of the world on average export 25% of their domestic production, the highest level in recorded history. Trends in global trade are expected to continue into the foreseeable future, creating additional demand for new infrastructure, especially infrastructure related to transportation.
A key outcome of economic development is the demand for more electricity. The IEA estimates that the world will need to generate approximately 130% more power by the year 2050 than it does today. This creates demand for power generation facilities, using both traditional and alternative sources, as well as power distribution systems. Even as countries cope with increased demand, the need to reduce emissions of CO2 become more pronounced, making clean, efficient and modern power systems all the more in demand.
Living standards are directly related to the quality of a country’s infrastructure and rising living standards create a pervasive need to improved infrastructure. Improved living standards are reflected in improved diets, which mean higher caloric intakes overall, as well as greater meat and vegetable consumption. Since, agriculture uses 70% of the world’s available fresh water supply, demand is created for non-urban water infrastructure. By the same token, increased car ownership creates a requirement for more and better roads; indoor plumbing creates the need for waste-water treatment.
Transitions to free market democratic systems increase the need for new infrastructure to help meet the demands of the government and industry. A transition to an open market system requires greater interaction with the modern world and a need for modern infrastructure.
All of these factors portend infrastructure spending on a massive level in the years ahead if current global economic trends are to be sustained. One country after another, whether China, India, the Emirates or Latin America has made a demonstrable commitment to improving their infrastructures to keep pace with a globally accelerated process of economic and social development.
Most observers suggest that investment in infrastructure is a global requirement. Many developed countries, including the United States and United Kingdom, have neglected infrastructure needs for decades and need to upgrade all facets of core infrastructure. It is in the major middle-income economies, however, where infrastructure investment takes on an urgency and scale that is unprecedented in human history. By 2020, the combined electrical consumption of China, India and Latin America is expected to exceed 12,000 terawatt hours, according to International Energy Agency projections. This reflects growth in electricy consumption ranging from 4-5% per annum, compared to a 2% annual growth rate in the United States and Canada. Similarly, the United Nations forecasts a 45% increase in BRIC (Brazil, Russia, India, China) country populations by mid-century. On the basis of these and other factors, US consultant Booz Allen Hamilton suggests that infrastructure investment of USD 41 trillion is required over the next 25 years. These estimates are supported by other independent estimates.
There are two sides to the financial equation that governs infrastructure development. On the one hand are the infrastructure providers, which include power and water utilities, ports and airport operators, and authorities responsible for roads and railroads. Infrastructure providers typically invest substantial amounts of capital up-front in various infrastructure projects and then receive a return on their investment over a protracted period of time. Government infrastructure operators typically make investment and recoup their investments by other means, including higher tax revenues generated by the economic growth that sound infrastructure supports.
On the other hand there are the builders. The builders represent various types of market participants that together constitute the entire chain of project development, starting with engineering companies and ending with producers of key raw materials. The builders are the beneficiaries of the “up-front” spend on an infrastructure project and have little ongoing financial participation in the project, except as it pertains to maintenance.
The S-Network Emerging Infrastructure Builders IndexSM isolates companies in six industrial sectors that are key participants in the construction of new infrastructure. Most of the companies contained in the index are domiciled in middle-income or emerging markets. Certain companies domiciled in developed markets are also included, but these companies generate at least 33% of their total revenues outside their home market, have extensive representation in the key middle-income markets and provide goods and/or services that tend to be essential to infrastructure development in middle-income markets. Companies contained in the index are screened for their participation in the infrastructure business and companies in the sector, that do not participate in infrastructure development, such as home builders, are excluded.
The sectors included in the index are: 1) Construction and Engineering, 2) Construction Machinery, 3) Construction Materials, 4) Diversified Metals & Mining, 5) Heavy Electrical Equipment , 6) Industrial Machinery, and 7) Steel.
Over the past decade, the pace of economic development in key emerging and middle-income countries has raced ahead of the antiquated infrastructure needed to support that development. As a result, certain countries need to invest billions of dollars in developing infrastructure related to water, power and transportation to support rapid population, urbanization and economic growth. This investment in infrastructure will flow through private and public lines, and a large percentage of the overall investment ultimately will end up in the passing through the financial accounts of companies that supply specialized products and services that are essential to the efficient execution of infrastructure projects.
Most of the world’s top engineering firms, for example, are currently dealing with backlogs of work stretching well into the future. And with demand for infrastructure increasing based on growing and inelastic needs, demands on the infrastructure builders industry are expected to increase in tandem. Supporting the need for infrastructure is broad-based global political sentiment. Not only are political leaders cognizant of the central role sound infrastructure plays in economic and social development, but many understand that infrastructure offers an unparalleled opportunity to create jobs and local prosperity in good times and bad. Money invested in infrastructure can be traced directly to growth in GDP through the immediate stimulus provided by the initial spend and then through the increased productivity that invariably flows from sound infrastructure.
Source: U.S. Global Investors, Infrastructure: A Global Opportunity for Investors, http://www.usfunds.com/docs/reports/Infrastructure_WP.pdf