Global demand for infrastructure is skyrocketing and governments around the world are struggling to keep pace.
The world’s population, estimated at around 8 billion, has more than tripled since 1950 and is forecast to increase by more than 20 percent by 2025, according to the United Nations. This has driven up demand for more provision of electricity, transport, water and sanitation and telecommunications.
In addition to the pressure for additional core infrastructure capacity to come onstream to support a growing population, there is also growing demand for investment in new areas, including digital, renewables and decarbonization. Ageing infrastructure also requires capital for urgent upgrades and maintenance, usage of existing assets increases in line with rising populations.
A widening fund gap
It has become increasingly difficult for governments – who have had to rein in spending after pandemic financing stimulus and in the face of rising borrowing costs – to keep up with the accelerating demand, as required investment outstrips available public resources.
According to The G20 Global Infrastructure Hub initiative, current levels of investment in infrastructure will not be enough to meet long-term demand, with $15 trillion investment gap opening by 2040 if investment doesn’t increase materially.
If governments do not make the necessary investment to fix, upgrade and build new infrastructure, the costs to economies and societies will be immense, with impacts on domestic and cross-border trade, economic competitiveness, consumers and the environment.
Governments will remain ultimately responsible for infrastructure development, but will have to work with private sector capital providers to finance the build of new projects and operate and maintain existing assets.
The investment case for private markets
The urgent requirement for governments to up infrastructure investment align with the commercial objectives of private markets fund managers, who can invest in infrastructure on a sound commercial basis at the same time as serving a wider societal objective.
The solid long-term fundamentals that underpin infrastructure demand, and the stable contracted revenue streams tied to infrastructure assets, have drawn more and more capital into private infrastructure funds during the last 15 years.
Infrastructure assets under management (AUM) have expanded at a compound rate of 16 percent since 2010 and now exceed US$1 trillion, according to Preqin figures. By 2026 AUM could exceed US$1.8 trillion.
The levels of infrastructure AUM relative to the forecast 2040 US$15 trillion infrastructure funding gap suggests that their a is still a long runaway of growth ahead for infrastructure funds, and clear incentive for the public sector to funnel this capital into infrastructure projects.
Bringing in the private sector
Bringing in private capital to finance the construction of new infrastructure can be facilitated through the range procurement channels and public-private-partnerships (PPPs), where the private and public sector share the risk and capital expenditure burden of construction new assets. Private sector operators can also back existing infrastructure assets, investing in the ongoing provision and maintenance of services.
Funding core infrastructure operations and build-out with private sector capital, however, is not a silver bullet that will magic away the widening infrastructure funding gap and eliminates financial risk and delay on infrastructure projects
There have been high profile examples of PPP deals. for example, that have been hit by long delays and large cost overruns, such as the California High-Speed Rail project in the US and the Sydney light rail development in Australia. Direct private ownership of infrastructure assets has not always worked either.
Projects run only by the public sector, however, have also been subject to prolonged timelines and mushrooming budgets, and there is a body of research showing that in the round, PPP projects offer better value for money than vanilla government procurement.
In addition, G20 Global Infrastructure Hub analysis shows that the increase in capital flows into private infrastructure funds has translated into more investment. Private investment in infrastructure does not come without its risk, but with the infrastructure gap widening every year, the requirement to accelerate private investment is becoming ever more pressing.
In it for the long-haul
From an investor and private funds manager perspective, while infrastructure does offer protection against downside risks, there will be points in the cycle when wider macro-economic and geopolitical trends impact deployment and fundraising opportunities.
Interest rate dislocation during the last 36 months, for example, has taken a toll on infrastructure fundraising, which has declined for the last three years, falling to a decade low in 2024.
Deployment can also prove challenging, through all points in the cycle. Competition for a limited pool of existing assets, with bankable, established cashflows is intensifying and high valuations on entry can make it tough for managers to meet investor return expectations.
The Global Infrastructure Hub, meanwhile, notes that sourcing suitable greenfield projects is also difficult given the risk that comes with backing these projects. The highest share of uninvested infrastructure dry powder is held by managers who are targeting greenfield projects exclusively.
If governments want to draw more private capital into funding infrastructure, preparing a longer pipeline of bankable investment opportunities will be essential.
Even entirely privately funded infrastructure projects involve close coordination with government agencies to cover of planning permissions and permitting. According to the World Bank project preparation can take between 24 and 30 months and absorb between five and 10 percent of total project investment before ground is even broken.
When crowding in private capital governments also have to ensure that risk is allocated sensibly between the private and public sector. Private investment in infrastructure is not sustainable if managers are seen to be taking excessive profits from building and running public assets without taking on any risk, but at the same time private markets players won’t have the balance sheets or capacity to bear all the risk of large projects entirely in isolation. Rigorous planning, structuring and negotiation is necessary to strike this fine balance.
Governments that expedite pre-project planning and permitting work and take a balanced approach to risk sharing, will have a deeper pool of bankable projects for private funds managers to back, and be in the front of the queue to attract more private investment.
Demand for infrastructure, across all geographies and all categories, is not slowing down. private markets managers have the potential to generate excellent returns when serving that demand. Governments should be ready to help them every step of the way.
