Today, there is an undisputed infrastructure investment gap right around the world – as evidenced by the American Society of Civil Engineers (ASCE) regular reporting on the state of US infrastructure which has averaged grade D (meaning Poor, At Risk) since 1998.
In developing countries, however, the ability to deliver these types of projects is even more pronounced: severely curtailed by a combination of financing shortfalls, and a lack of relevant skills.
For most sub-Saharan and central Asian countries, there has been a dearth of any infrastructure building since their independence. At the same time, western donors have been steadily retreating from the financing of ‘hard’ infrastructure such as roads and bridges, in favour of ‘soft’ infrastructure, such as the promotion of governance, education, healthcare and water treatment. Partly, this is due to an escalating concern of the potential environmental, social and governance (ESG) liability risks.
The investment team at Martin Currie, a leading investment manager, has published a white paper to provide a comprehensive overview of the state of play, aiming to help investors parse through what can be a relatively opaque area for the public markets.
Why now?
The hit to the global economy from COVID-19 has been unprecedented with historic increases in unemployment, falling industrial production and weakened confidence. In response, governments around the world have focused initially on providing income support. However, going forward, we expect infrastructure spend will be increasingly utilised as a policy tool for further stimulus.
This is supported by three key observations:
- Higher infrastructure spend has helped economies recover from previous crises
- Given rising urbanisation and aging infrastructure, infrastructure spend is essential not just for the short-term economic boost, but also for lasting productivity benefits
- Rising private sector involvement in funding infrastructure will be likely given stretched government finances
Conclusion
In the developed world, infrastructure has taken a back seat to alternative approaches to stimulus, but we expect this will not be the case going forward as economies reopen and people return to work.
Given rates are already close to zero in many countries, governments will increasingly look to focus on infrastructure to stimulate economies given the lasting impact of this spend and the boost in productivity this spend provides. Ongoing population growth and the age of infrastructure around the world provides a compelling rationale for increased spending.
Infrastructure spend has saved us before and will no doubt be used again.
