Infrastructure investing: Limitless opportunities over the long term

Infrastructure is the foundation of the global economy. However, basic resources such as drinking water, electricity, sanitation and transportation are still not accessible for a significant proportion of the world's population. Improvements in infrastructure can provide a solid foundation from which countries can transform their economies, and the need to accelerate this investment is becoming ever more acute.

Demand for the necessary investment in infrastructure continues to increase, driven in large part by a lack of historic investment and increasing mobility. McKinsey Global Institute projects that, from 2016 to 2030, countries will have to spend about 3.8% of gross domestic product (GDP) or $3.3 trillion just to keep pace with the current growth of infrastructure. Sixty percent of the total demand is expected to come from emerging markets.

However, despite the great need for these types of projects, many countries remain underinvested in infrastructure, resulting in a lack of investable opportunities. Economic growth could be severely impacted if governments aren't able to keep pace with necessary repairs in aging infrastructure, not to mention beginning new projects that can improve the lives of their citizens.

From a government procurement perspective, infrastructure projects can take decades to complete, resulting in some of the longest investment time horizons for public funds. It can be difficult to ask people to pay for something that they may not see completed in their lifetime but would benefit their children or grandchildren. These long-term infrastructure plans may therefore conflict with many of the short-term objectives prioritized by politicians focusing on reelection.

Time horizon and whole life risk profile of an infrastructure asset

Source: Aberdeen Asset Management, 2014. For illustrative purposes only, and not intended to represent any Aberdeen investment.

Governments also do not have the necessary funds for infrastructure improvement, and citizens are often not willing to trade a tax increase for these enhancements. Therefore, the public sector has begun looking for other ways to pay for these projects, including public-private partnerships (PPPs), which can often help projects be completed on time and within budgetary constraints.

While PPPs typically deliver only a small portion of the capital needed to fund a project, with government agencies contributing the rest, the resulting efficiencies can save time and money, helping reduce the overall costs of the project. But in order for PPPs to be successful, nations must have political stability, sound regulation, robust legal frameworks and minimal corruption. For many nations, these are significant hurdles, but they aren't insurmountable by any means.

One area where governments financing a large number of infrastructure projects through the use of PPPs is the Andean region of Latin America, which includes the nations of Colombia, Peru and Chile. This area of the globe is experiencing significant demand for constructing roads, hospitals, schools and public buildings. Opportunities look compelling from our perspective, because countries in the Andean region typically have stable governments that are able to commit to projects over the long term. And because there has been little development thus far, it is estimated that there is currently the potential for an additional $40 billion to $50 billion in future opportunities in social infrastructure.

This is an exciting time for investing in infrastructure, as a variety of opportunities exist and the demand for these types of projects is great. In our view, the possibilities are endless.

Regional Snapshot

Source: IMF 2016, Doing Business Report 2015, World Bank

Infrastructure investments are relatively illiquid and the ability of an investment to vary its makeup in response to changes in economic and other conditions is limited. Infrastructure values can be affected by a number of factors, including, inter alia, economic climate, property market conditions, interest rates, and regulation.

Among the risks presented by PPP investing are substantial commitment requirements, credit risk, lack of liquidity, fees associated with investing, lack of control over investments and or governance, investment risks and tax considerations. PPPs also include political / governmental, operational, environmental, currency fluctuations, differences in accounting methods and project risks. These risks are generally heightened for emerging market investments. Additionally, development, bidding and ongoing costs in PPP projects may be greater than for traditional government procurement processes.