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Bridging the one trillion-dollar infrastructure funding gap

Article - April 9, 2014
The World Economic Forum estimates that $100 trillion dollars will be required in global infrastructure investment between 2010 and 2030
Developing sufficient infrastructure for a growing population will be one of the greatest challenges the world faces in the first half of this century. It’s not only a matter of economic importance, but a question of survival. With the world population forecast to swell from the current 7 billion to 9 billion by 2050, there will be a huge demand for water, food, new homes, new schools, and new hospitals.

This is not is not just a grave challenge for developing countries trying to grow their economies and improve the lives of their rapidly-expanding populations. Developed nations drastically need to refurbish or upgrade aging and deteriorating infrastructure, as anyone waiting for the tube during rush hour in London or stuck in a morning traffic jam in Los Angeles will attest. KPMG analyst Stephen Beatty reports that: “the US hasn't invested in 50 years in any substantial way, and they’ve now turned their mind to investing in infrastructure.”

The World Economic Forum (WEF) estimates that a staggering $100 trillion in global infrastructure investment will be required through 2030, in everything from ports, airports, pipelines, hospitals, highways, and railways to power plants and water, sewage and phone systems – all which form the solid backbone of any functioning modern society and economy. Water will require the largest investment ($1.32 trillion of the $5 trillion needed per year), followed by transport infrastructure ($805 billion), energy ($619 billion) and telecommunications ($600bn).

The WEF estimates that already there is a one trillion-dollar gap between the amount of annual global investment currently needed in infrastructure ($3.7 trillion) and the amount actually being invested ($2.7 trillion).

This naturally leads to the question: where is all this money going to come from? Governments alone cannot fund all of the requisite large-scale projects in transport, energy and water. Currently, private financing only accounts for less than 15 percent of the total infrastructure financing needs, according to a recent article by Justin Lin, a former chief economist at the World Bank. The private sector is being asked to bear more responsibility in addressing one of the world’s greatest – if not the greatest – challenge by investing more in global infrastructure projects.

Yearly projected investment requirements per sector (at $5trillion/year) Source: WEF

The focus has turned to institutional investors such as large pension funds and insurance companies as the new primary source for private funding in infrastructure. Together, they are estimated to hold around $50 trillion in investment funds of the type that normally seek out longer term projects. “These investors are desperately looking for yields from assets that are long-dated and inflation-linked,” reports economist Justin Lin. Infrastructure could be just the new asset class they have been searching for.

Growing interest in this new asset class is evident by the increasing number of companies providing infrastructure funds. “Now is a brilliant time to invest in infrastructure, both from the public sector and the private sector perspectives. It's important however, to make sure that we're spending money on the best possible strategic assets. Now is the time where we should be investing for our children and grandchildren, and doing so in a manner that makes them proud,” says KPMG’s Stephen Beatty.

The Global Infrastructure Investors Summit

Investors looking for opportunities in infrastructure – and a chance to help address one of the globe’s greatest challenges – will be able to find them at the Global Infrastructure Investors Summit (GIIS), which will take place at the London Stock Exchange on the 2nd of June. Now in its second year, the event is designed to bring together leading infrastructure investors to discuss topics such as how to develop investment solutions to create value; infrastructure debt opportunities and the role of project bonds; developed versus emerging markets; as well as global infrastructure trends and industry updates.

“Infrastructure assets are becoming an important part of the institutional investors’ portfolios,” says Nawshad Noorkhan, Managing Director of GIIS. “The complexity of the asset class, coupled with factors such as location, market pressures, political, cultural and social influences, as well as the specific economic environment determine how and where we invest. With an estimated £36 trillion needed in infrastructure development by 2020, global investors are viewing the infrastructure asset class as an important element of their investment strategy.

“Everything about GIIS has been engineered with the attendees in mind, and shaped by research into not only which topics should be addressed, but also ways to help them get the very best out of their time on the day. Access to our online attendee profiles for example, allows our participants to assess and identify those delegates who are the most relevant to hold private discussions with and the opportunity to book meetings with them.”