Investments in infrastructure represent an opportunity to kick start global growth and create a new asset class for investors in the years ahead, according to a new report from New York-based Citigroup Inc.
Although investments in infrastructure represent a declining share of gross domestic product (GDP) spending, there’s a desperate need for new building in emerging markets and much of the existing infrastructure in developed markets is aging and needs replacement, the report states.
Indeed, the report estimates the global need for infrastructure spending will amount to US$58.6 trillion over the next 15 years. This represents an “immense opportunity” for private sector investment. Yet, the Citigroup report also finds that the global equity and credit markets have been hampered from meeting this need for a variety of reasons, including the lack of bankable projects, a mismatch of risk perceptions and an immature, fragmented and relatively disorganized industry.
To overcome these obstacles, the report calls for making infrastructure a more accessible asset class, which allows investment to take place in a liquid, transparent market.
“We believe that some of the key building blocks for the future must be regulatory and political stability, collation and availability of data, transparency, specialized institutions, and financial and structural innovation,” the report says. “All are key to developing a large and liquid global market for infrastructure investment vehicles.”
Expanded investments in infrastructure could also help drive global economic growth, which remains sluggish despite highly expansionary monetary policies, the report suggests.
Historically, a 1% increase in infrastructure investment is associated with a 1.2% increase in GDP growth, thus infrastructure investment could provide stimulus to boost growth, create jobs and provide attractive returns for investors, while also providing a valuable social good, the report suggests.
“Policy-makers are running out of monetary levers to pull,” says Jason Channell, managing director of Citi’s research department and the report’s lead author, in a statement. “It’s incumbent on the private sector to help facilitate infrastructure spending, which can boost growth by both short-term demand effects and longer-term supply effects. We need to bridge the gap between private capital wanting to invest, what cash-strapped governments can feasibly afford and the desperate need for a global improvement in infrastructure by creating a new and liquid global asset class.”