For infrastructure investors and those considering entering this vital sector, the aftermath of these natural disasters provides compelling evidence of why investment in roads, bridges, power grids, and telecommunications is beneficial and essential for any thriving economy. However, with public finances in many countries increasingly stretched, their ability to provide and upgrade infrastructure is limited. New challenges, such as climate change and technological progress, are also changing the type of infrastructure we need.

The American Society of Civil Engineers estimates that between now and 2033, nearly $7.4 trillion is needed across 11 infrastructure areas: highways, bridges, rail, transit, drinking water, stormwater, wastewater, electricity, airports, seaports, and inland waterways.¹ An infrastructure that, according to the World Economic Forum, is ranked 13th in overall infrastructure quality.²

So, how can cash-strapped governments fund and construct the infrastructure required for future economic growth?

Role of infrastructure in an economy

Infrastructure is crucial for economic activity because it provides critical energy production, transportation, and communication services. It is as much of an input into an economy as industrial metals and chemicals or information and know-how. For example, delivering adequate and reliable energy is essential for production processes and, depending on where you are, keeping people warm or helping people stay cool.

Infrastructure is also long-lasting, with some structures, such as roads and bridges, used for decades or even centuries. This longevity poses significant challenges for financing, as investors must consider returns and costs over long periods. Additionally, infrastructure is geographically specific, meaning that its location and the resources available in that area are critical factors.

Cost-benefit analysis in infrastructure

Cost-benefit analysis is a fundamental tool for evaluating projects. It involves comparing the costs of a project with the expected benefits. However, valuing long-term benefits can be difficult. For example, the value of a benefit some 30 years in the future is less certain than assessing the value of a benefit today.

Discount rates account for this uncertainty – with higher rates applied to assess shorter-term projects and lower rates for long-term ones. This quantitative approach helps ensure that infrastructure investments make economic and financial sense in the long run.

Changing nature of essential infrastructure

Technological and climate change are reshaping what counts as essential infrastructure. For example, amid the explosive growth of consumer-oriented artificial intelligence (AI), data centers are now critical national infrastructure.

These centers, crucial to storing and handling the data produced by modern AI applications, necessitate substantial power and cooling. Key planning factors include local energy grid capacity, proximity to a water source for cooling, and energy efficiency.

Climate change is also driving the need for new types of infrastructure, such as renewable energy sources and water management systems.

Furthermore, demographic changes, such as aging populations in many parts of the world, influence the infrastructure we need. The population density in fast-growing urban centers requires building new infrastructure and upgrading the existing stock.

Challenges in building infrastructure

Building infrastructure presents numerous challenges, including material constraints, labor shortages, and planning bottlenecks, all of which can impede progress.

The planning system is often seen as a major obstacle. While limiting unconstrained development is essential, the process can become slow and cumbersome. That’s why reforms to streamline the planning process can help. Unfortunately, excessive rules and approvals have since been added. We need to remove these restraints to restore timely delivery.

Public and private sector finance

Both public and private sector investment have roles to play in financing infrastructure.

Public funding can be more cost-effective, as governments can borrow at lower rates. Private sector involvement can bring efficiency, innovation, and a long-term view that is removed from election cycles. Much of this effect is through supporting productivity.

Hybrid models that combine public and private funding can leverage the strengths of both sectors. Although some big public-private initiatives have fallen short of their goals, this doesn't discredit the overall principle.

Consistency and strategic planning

Consistency of policy and regulatory certainty is crucial for attracting private sector investment in infrastructure. Frequent policy changes can create uncertainty and deter investment, so governments should aim to provide a stable and predictable environment for long-term projects.

Strategic planning is also essential, as it helps ensure infrastructure investments align with long-term economic goals.

This article is based on the recent Macro Bytes podcast episode, “How to fund our future infrastructure needs.”

¹ "Continued federal infrastructure investments will save jobs and grow the economy over the next decade: economic study." ASCE.org, May 2024. https://www.asce.org/publications-and-news/civil-engineering-source/society-news/article/2024/05/13/asce-releases-newest-economic-study.
² "Modernizing U.S. Infrastructure: the Bipartisan Infrastructure Law." The White House, November 2021. https://www.whitehouse.gov/cea/written-materials/2021/11/15/the-time-is-now-to-modernize-u-s-infrastructure/.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

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