Trends, transitions and transformations

The energy transition is probably the greatest single challenge facing the infrastructure investment community.

Since our 2021 Infrastructure Index was published, the world has largely embraced the goal of net zero emissions, at least in principle. Practically every nation in the Index has at least a partly developed plan for carbon neutrality, even if many are currently not on track to fulfil them.

But the race towards net zero has many hurdles, from political pressures to supply chain constraints. Above all, it requires massive investment – not only in renewables themselves, but to deal with the broader social and economic consequences of a move away from fossil fuels.

Another key transition is in digital infrastructure. With every sector in the economy investing heavily in digital platforms, the amount of data that has to be to be stored, processed and analysed – whether locally or in the cloud – has exploded.

Future applications that need data in real time, such as driverless vehicles, will require even more capacity and close-range infrastructure to be successfully rolled out.

Even recent developments that are now taken for granted in developed nations, such as streaming and working from home, will continue to require significant investment in the digital infrastructure that makes them possible.

Digital expansion and the net zero transition are also interconnected, with developments such as artificial intelligence thriving where they intersect.

Although digital growth itself has a climate impact thanks to the energy it requires, digital developments are an important part of the net zero toolkit. Smart grids and smart cities are obvious applications, while the potential value of AI in the predictive maintenance of infrastructure, the management of systems and the delivery of increased energy efficiency is increasingly clear.

AI can additionally be used to help optimise asset
performance, or extract insights from huge datasets. But there are also concerns that hostile actors may be able to harness its power to launch attacks on infrastructure.

The global infrastructure investment gap – the difference between the infrastructure investment the world needs and the infrastructure investment it gets – is universally recognised as huge. While estimates vary, the World Bank’s projection of a USD 15 trillion shortfall between now and 2030 is fairly typical.

Private sector finance is vital for closing the gap. But the global gap is a headline figure that conceals big variations between sectors, nations and regions. The Catch-22 of infrastructure investment is that the more a place needs to attract finance because of a wide gap, the less likely it is to appeal to the investors who might be able to provide that finance.

One of the most pressing reasons for closing the investment gap is the disproportionate effect it has on emerging markets and developing economies, which can typically only access capital at a much higher costs and on less favourable terms than most of the countries in the Infrastructure Index.

Combined with the shortage of funding that accounts for the investment gap, this can entrench existing  social and economic disadvantages.

The Bridgetown Initiative launched at COP27 is pressing for “urgent and decisive action to reform the international financial architecture”, partly to reduce the “excessive risks” that these nations have to accept when borrowing.

This is hardly a new topic in the field of infrastructure. It has been widely discussed for years. But a number of governments – our report highlights some in the Americas – have recently taken serious steps towards building factors such as sustainability and social justice into their infrastructure plans and budgets.

It is too soon to say whether this presages any permanent or systemic change. But there does appear to be increasing acceptance of the need to ensure a just transition, and to make sure that infrastructure investment observes ESG best practices. Exactly how this may affect the other trends we have discussed is something that will become clearer over time.

Recent shocks such as the pandemic and the war in Ukraine have led many nations to reassess their approach to issues such as energy and food security and the control of critical infrastructure and manufacturing capacity. Some FDI is coming under additional scrutiny because of these concerns.

The EU, meanwhile, has been pushing back against FDI from businesses that are more generously subsidised by foreign governments then their EU equivalents, or that enjoy cost advantages arising from carbon policies that are less advanced than those in the EU.