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Megatrends Reshaping the Infrastructure Sector
Historically, infrastructure has been viewed as one of the safest harbors in the universe of alternative investments. The regulation of the various sectors, high barriers to entry, rigid demand, and hedges against inflation were factors that allowed investors to benefit from stable and inflation-linked cash flows for extended periods of time. However, investors and asset managers are becoming increasingly worried about the long-term changes that the sector will experience in the next few years.
Changes in demographics, technological advancements, and a growing awareness of the importance of the Earth’s preservation are a few of what I call “megatrends.” These megatrends will affect the established business model of infrastructure.
The first megatrend has to do with population dynamics. The structural change in the world’s demographics has a direct effect on infrastructure for two reasons. On the one hand, the percentage of the population that is relatively young (i.e., the millennials) is growing. On the other hand, we are seeing a progressive increase in the proportion of the population that is older (known as the silver society in sociology).
On the millennials’ side, 50% of the world’s population is currently less than 30 years old. On the silver-society side, fertility rates are continually decreasing. In fact, estimates indicate that the number of people who are at least 60 years old will increase from 900 million in 2015 to 2.1 billion by 2050. At the same time, 80% of those in the silver society suffer from at least one chronic disease.
These numbers have an obvious impact on the infrastructure business.
The increase in the percentage of millennials implies that the values and needs of this part of the population will become pivotal in the years to come. Millennials are much more attentive than past generations to environmental, social, and governance (ESG) issues. Distrust of the status quo, a focus on clean energy, and an interest in electric vehicles that have a lower impact on the atmosphere are already evident among this part of the population. A number of surveys and market analyses indicate that these sectors will grow in importance in the near future.
Furthermore, millennials are digital natives. In other words, they have a sharp inclination to search for information, and they spend a significant amount of time connected to information and social networks.
This lifestyle influences consumption patterns. Millennials prefer to use—rather than own—durable goods, in line with a shared economy logic. The shared economy, in turn, is supported by connectivity. Speed and the availability of connections open new opportunities for support infrastructure, such as fiber networks and telecom towers. Data treatment, data storage, and protection against cyberattacks are additional areas of business that create new opportunities for infrastructure investors.
Equally relevant are the effects on the infrastructure industry arising from the aging of the population. The increased spending on health care and assistance cannot be borne by cash-strapped public budgets, especially in developed economies. This is giving rise to new investment ideas in the hospital/health-care sector in the form of public-private-partnership models and in the real-estate business in the form of housing solutions suitable for an older population, such as assisted living, dementia-care centers, and full-time-care homes.
An older population also influences urban development. More specifically, there is a need to develop urban areas that are served by better, more widespread public transportation. Moreover, more support services are needed for this part of the population, such as remote monitoring for older people living alone.
INFRASTRUCTURE AND THE ENVIRONMENT
As we have already discussed, millennials are particularly attentive to environmental issues. Consequently, investors, bankers, insurers, and policymakers are becoming more cautious when it comes to environmental issues. Moreover, advances in technology are making clean energy a valid, economic substitute for fossil fuels.
In the past, the transition to renewable energy has been driven by policy actions. However, renewable energy is showing clear signs of increased competitiveness with traditional fossil fuels for purely economic reasons.
Some data points speak for themselves in this regard:
- In 2016, new solar photovoltaic capacity worldwide grew by 50%, to more than 74 GW. For the first time in history, solar PV additions rose faster than growth in any other fuel, surpassing the net growth in coal.
- For the period 2017 to 2022, the International Energy Agency expects a further reduction in global average energy-generation costs due to technological advancements. More specifically, the Agency expects costs for utility-scale solar PV to fall by 25%, while a 15% reduction in costs is expected for onshore wind. The corresponding figure for offshore wind is 33%.
Furthermore, many countries are abandoning government-set tariffs in favor of competitive auctions based on long-term purchase agreements. The dynamics of auction prices indicate a steep reduction in the costs of solar, onshore wind, and offshore wind.
The intermittency of clean energy opens up new business opportunities for traditional players in the sector. The development of smart grids and energy-storage solutions, and the disintermediation of traditional grids made possible by home-installed energy-storage batteries have resulted in the redesigning of utility companies’ strategies. Utilities are becoming less asset intensive and more service intensive, and they have started expanding in downstream businesses, like the charging and renting of electric vehicles.
An understanding of these changes is key to an infrastructure investor wishing to avoid the trap of investing in stranded assets. The second sector with strong environmental implications is water and sanitation. Global warming and climate change are now recognized realities, and their effects in this regard are clearly visible. The McKinsey Institute estimates that from 2013 to 2030, infrastructure spending to cover the current gap will total about 57 trillion USD worldwide. Of this figure, 11.6 trillion USD is represented by water and sanitation facilities. This gap is particularly relevant in developing countries. The percentage of the population in sub-Saharan Africa with access to clean water is less than 30%, while it is slightly less than 40% in South Asia.
The OECD estimates that 4 billion people will live in areas seriously affected by water-supply shortages by 2050. This implies a need for sustainable water projects, as well as water-sanitation, sewage-treatment, and desalinization plants.
URBANIZATION, THE CHANGING ROLE OF TRANSPORTATION, AND SMART CITIES
Today, 54% of the global population lives in urban areas. The United Nations estimates that this percentage will grow to 60% by 2030. In China alone, over 600 million people are expected to move from the countryside to mega-cities in the next ten years. In Africa, the population is expected to double from 1 billion to 2 billion people by 2050. By 2030, with the exception of Cairo, Mexico City and Lagos, the 10 largest cities in the world in terms of population will be located in Asia.
The consequences of progressive urbanization are hard to capture but this trend has important implications for the infrastructure sector. Cities will re-design themselves, and they will become more efficient, affordable, and ecologically friendly, thereby helping reduce the impact of climate change. All of these effects are determined by economic rather than political factors. They are simply indispensable for ensuring that the population can live in a safe environment.
The fight against climate change will lead to the emergence of green cities with houses connected to smart utilities with efficient networks. Such cities will be highly dependent on renewable energy to power electric vehicles. New consumption styles will pave the way for companies providing transport as a service (TaaS).
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About the author:
Stefano Gatti is the Antin Infrastructure Partners Chair Professor of Infrastructure Finance and Professor of Practice in Finance. He is the Director of the Full Time MBA and former Director of the International Teachers’ Programme at SDA Bocconi School of Management. His main area of research is corporate finance and investment banking. He has published in these areas including publications in the Journal of Money, credit and banking, Financial Management, the Journal of Applied Corporate Finance and the European Journal of Operational Research. Professor Gatti has published a variety of texts on banking and finance areas and has acted as a consultant to several financial and non-financial institutions and for the Italian Ministry of the Economy, the Financial Stability Board, The InterAmerican Development Bank, the Asian Development Bank and the OECD/Group of G20. He is financial advisor of the Pension Fund of Health care professions, member of the compliance risk committee of Deutsche Bank and member of the Board of Directors and board of auditors of Italian industrial and financial corporations.
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