Wherever you look around the world, it seems that infrastructure is in demand. PricewaterhouseCoopers (PwC) estimates that, from 2016 to 2020, global spending on capital projects and infrastructure will total between $27 trillion and $29 trillion.1 Due to changing demographics in both emerging and developed markets, social infrastructure will comprise a significant portion of this investment.
Social infrastructure can be broadly defined as the construction and maintenance of facilities that support social services. Types of social infrastructure include healthcare (hospitals), education (schools and universities), public facilities (community housing and prisons) and transportation (railways and roads). All of these structures serve as the backbone for communities and societies.
Drivers of demand
The need for increased social infrastructure investment stems from a variety of developments. First, consider these statistics from 2016:2
- Over 2.4 billion people lacked access to improved sanitation
- At least 663 million people lacked access to safe drinking water
- Over one billion people lived without access to electricity
- At least one-third of the world’s rural population was not served by an all-weather road
In developed markets, infrastructure is often aging and in need of renewal so that citizens can depend on it for years to come, while for many emerging nations, there isn’t much infrastructure in place to begin with, and governments are recognizing that putting these buildings and systems in place will help support their pace of economic growth. Changing demographics can also have an effect; growing numbers of young and old people need different types of infrastructure (such as schools and hospitals, respectively) in order to thrive.
The public sector is typically responsible for prioritizing and paying for social infrastructure. But this can get tricky. After all, not many governments have a surplus of cash, and citizens are often unwilling to support infrastructure goals through higher taxes or other charges. Therefore, many public-sector entities are enlisting help from the private sector through the use of public-private partnerships (PPPs or P3s).
The power of PPPs
PPPs allow private-sector companies to work closely with governments or government agencies in the public sector to complete projects. In exchange for its assistance, the private-sector partner receives a share in the revenue stream generated by the project. Not only can PPPs help propel a project by providing financial assistance, but they can also help increase efficiencies. Projects are typically completed faster with PPPs, and private companies can help share the burden of various risks associated with these projects, such as completion risk and the risk that usage will not be as widespread as predicted. Private-sector partners can also play a large part in the operation and maintenance of the asset that results from the completion of the project, whether it’s a toll road or a hospital.
For institutional investors, PPPs offer the ability to gain access to a steady stream of cash flows that is predetermined by long-term contracts generally lasting 25 years or more. Often, the contract will include compensation arrangements in the event of a contract termination, as well as provisions to account for unforeseen events. This can reduce some of the risks of being involved in a project that may last decades.
However, infrastructure projects are complicated, and unforeseen events can occur. Therefore, investors should be selective about the infrastructure opportunities in which they invest, as well as the infrastructure managers that they support.
Investors should be selective about the infrastructure opportunities in which they invest, as well as the infrastructure managers that they support.
Projects may have a better chance of success if they are based in countries that are stable from a political and economic standpoint and have strong legal frameworks, with courts that will acknowledge the legality of the contracts in place. It’s also important to work with government centers that have a history of bringing ideas together to achieve a common long-term goal. An experienced infrastructure manager with local expertise can help navigate these often complex environments.
Social infrastructure is expected to be an important contributor to the global economy in the years to come. And for long-term investors, it may be the right time to determine whether this opportunity would be a good fit for their portfolios.
1 “Capital project and infrastructure spending outlook: Agile strategies for changing markets.” PricewaterhouseCoopers, 2016.
2 “Infrastructure challenges and how PPPs can help.” PPPKnowledgeLab, 2016.
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.