In the developed world, spending on the care, maintenance and expansion required for the adequacy of our existing infrastructure has fallen woefully short of the mark, leaving our critical assets creaking and bursting at the seams. We can all relate to this in our daily lives. Infrastructure investment in the G6 members – US, Canada, UK, Germany, France and Japan – has been in a multi-decade decline and the current 3.5% of GDP is the lowest level since 1948 (see Figure 1). Today’s 70-year low is half the level it was at its peak in the 1960s – which also highlights the ageing nature of these assets. With government finances under pressure and limited expertise in the public sector, the private sector will play a significant role in the restoration and upgrade of our critical infrastructure.
Global spending on economic infrastructure, which covers transport, electricity, water and telecoms, was US$2.5 trillion in 2015. This contrasts sharply with the required amount of investment estimated at US$3.7 trillion per year (see Figure 2). The resulting US$1.2 trillion shortfall needs to be addressed to ensure that the world stays on its economic growth path.
Investing the annual requirement of US$3.7 trillion to the year 2035 – a typical infrastructure investment cycle – would result in aggregate spending of around US$69.4 trillion. Owing to rapid urbanisation and fast-growing populations, emerging markets account for more than 60% of the demand (see Figure 3). China alone makes up a third. From China and India to Latin America and Africa, building the infrastructure required to ensure higher living standards and support economic growth remains a work in progress. In the developed world, the US and Canada require the most investment, with 20% of the global target – double the amount required in Western Europe.
Make America great again
China may require the most investment as Asia’s leading economy pursues its ‘One Belt, One Road’ policy, but the nation’s ambitious plans are mainly state-sponsored and, importantly, within budget. China is not expecting a shortfall, given its long-term strategic vision and commitment. By contrast, the region where the difference between the investment required and the investment expected is most acute is the Americas (see Figure 4), where the underinvestment in the US has been well documented. Regardless of Donald Trump’s rhetoric and his infrastructure programme – which has yet to unfold – basic services in the US are not in good shape.
More than two out of every five miles of the US’s urban highways are congested. Most power transmission and distribution lines were constructed in the 1950s and 1960s, with a lifespan of 50 years. Almost six billion gallons of water are lost every day due to leaking pipes. (Source: American Society of Civil Engineers, The Infrastructure Report Card 2017). The list goes on.
Failure to act
The infrastructure gap is important, because it has a significant impact on the economy. It also has a direct influence on people: livelihoods and personal finances are at stake. Between now and 2025, it is estimated that a failure to close the infrastructure investment gap in the US would result in:
- US$7 trillion in lost business sales
- US$4 trillion reduction in gross domestic product (GDP)
- Loss of 2.5 million jobs
- US$3,400 loss in disposable household income each year
(Source: Failure to Act: Closing the Infrastructure Investment Gap for America’s Economic Future, American Society of Civil Engineers (ASCE), 2016)
Infrastructure for sustainable economic growth
Much of the discussion about infrastructure gaps in the past has centred around economic infrastructure and the traditional definitions of the asset class. However, governments and businesses are becoming increasingly aware that their approach to infrastructure investment needs to adapt. Their goals need to ensure sustainable economic growth, not economic growth in isolation. In this context, it is estimated that US$90 trillion of infrastructure investment is required between now and 2030 to deliver results beyond business as usual (Source: “Unlocking the inclusive growth story of the 21st century: accelerating climate action in urgent times”, The New Climate Economy (a project of the Global Commission on the Economy and Climate), September 2018).
“We are on the on the cusp of a new economic era: one where growth is driven by the interaction between rapid technological innovation, sustainable infrastructure investment, and increased resource productivity” – The New Climate Economy
The new agenda in a world of investing for sustainable growth includes:
- Clean and renewable energy systems
- Smarter urban development
- Sustainable water management
- Connectivity and access to information
The push for clean energy systems is already under way, to the extent that the world now adds more renewable power capacity annually than from all fossil fuels combined. That said, fossil fuels still generate the lion’s share of global power, with renewables accounting for only 24%. But with plummeting costs of renewable and storage technologies, coupled with the development of smart grids to optimise supply from wind and solar, the shift towards renewables is continuing apace.
Smarter urban development, however, is the long-term theme which requires the most investment. The world’s urban population of 3.9 billion is expected to take on another 2.5 billion by 2050, according to the United Nations’ “World Urbanization Prospects” report (2014). Cities are the engines of economic growth and they require investment of US$2-3 trillion per year, or between two-thirds and three-quarters of all infrastructure spending, to create an environment where urban dwellers can lead healthy and productive lives, according to The New Climate Economy report.
Sustainable water management is another important area of focus, given the obvious fact that water is a fundamental necessity in our daily lives. Yet 2.1 billion people around the world live without access to clean water at home and more than half the world’s population, roughly 4.3 billion people, live in areas where demand outstrips supply. Management of this precious resource requires annual investment of $0.9- 1.5 trillion, according to 2017 OECD figures, which is equivalent to about 20% of overall infrastructure investment.
Finally, we are all aware of the increasingly connected world we inhabit, with technology pervading our daily lives. But this isn’t true for everyone. Almost half of the world’s population lives without internet access, with the vast majority of these people living outside the online community residing in the developing economies (Source: Statista, January 2018). In today’s world, access to information and the learning that connectivity provides is a crucial requirement for economic growth.
How does this affect the M&G Global Listed Infrastructure Fund?
Infrastructure is of paramount importance to the global economy, but it is clear not enough is being spent to ensure that society’s essential services are adequate and efficient. A failure to act has direct consequences: lower productivity, fewer jobs and less disposable income, not to mention a lack of progress in addressing pollution or social inequalities.
We also live in an age when economic growth is not enough; the economic growth that we strive for now needs to be sustainable. The investment required to address these new demands is a burden on governments already under financial strain. The private sector will have a leading role in making a sustainable world a reality.
The M&G Global Listed Infrastructure Fund is well positioned to benefit from a variety of powerful long-term themes that are prevalent across the world today.
We strongly believe that these structural trends will outlast electoral cycles and the promises of politicians. The M&G Global Listed Infrastructure Fund is not reliant on Donald Trump’s infrastructure programme coming to fruition, or on the success of China’s ‘One Belt, One Road’ policy. We do not invest in infrastructure ‘concepts’; instead, we focus our attention on companies with existing physical infrastructure assets and growth opportunities. Why? Because physical assets provide significant barriers to entry and generate long-term cashflows that are stable and growing. We also believe that these companies will be at the forefront when the infrastructure gap is addressed, and best placed to earn a financial return on the required capital investments.
We have conviction that the growth provided by these tailwinds is enduring, and that the beneficiaries of these themes can reward investors with compelling returns in the stockmarket over the long term.
It is also clear that these themes are global. It is therefore critical that investors pursue a global approach to reap the benefits of the asset class to the full. The desire to achieve sustainable economic growth is paramount across the world, and we believe that now is an excellent time to seize this long-term opportunity in infrastructure.
As always, please be reminded that the value of investments and the income from them will fluctuate, which will cause fund prices and any income paid to fall as well as rise and you may not get back the original amount you invested.