Moving the Movers: Where are Energy and Airport Infrastructure Going?

Infrastructure: A Powerful Economic Engine

Santhanam began by explaining that infrastructure is a powerful economic engine: it represents only 1.5% of US GDP but serves as a fiscal multiplier, with each $1 spent on infrastructure adding $3 to GDP. Globally, investment in infrastructure is expected to average $3.2 trillion per year from 2016 to 2040 (Exhibit 1). Geographically, more than half of infrastructure investment has been taking place in Asia, with the Americas and Europe tied for second place.

Exhibit 1

Sources of Demand Growth

Second, demand growth has been driven by several trends: urbanization, a growing middle class, and the transition toward lower-carbon energy production. The urbanization of the world’s population has been dramatic. In 2009, the urban population surpassed the number of people living in rural areas. And as more and more of the world’s population enters middle-class status, demand for goods and services requiring major infrastructure is increasing. For example, global energy use is forecast to increase nearly 50% between 2010 and 2050 (Exhibit 2), while the past decade has seen a surge in sustainable infrastructure projects that address the environmental impact of meeting this demand.

Exhibit 2

A Key Role for the Private Sector

A third message of Santhanam’s keynote addressed the investment required to meet the growing demand. The public sector spends a lot, and as the COVID-19 pandemic wanes, governments have announced infrastructure investment packages that will provide further boosts. However, an investment gap of up to $75 billion per year remains (Exhibit 3). Filling the gap will fall to the private sector.

Exhibit 3

Challenges to Performance

Achieving the necessary investment is difficult because the sector historically has produced subpar returns (Exhibit 4). Whereas the S&P Global and S&P 500 indexes saw returns increase 7.6 times and 2.6 times, respectively, between January 1, 2008, and December 31, 2022, Indices for global infrastructure exchange-traded funds declined slightly. The sector struggled to recover from dips during the global financial crisis and the onset of the COVID-19 pandemic. Reasons for lagging performance include lagging productivity and digitization, fragmented structure, limited private-sector investment and M&A activity, and a growing regulatory burden. There are, however, signs of life, such as improved multiples for energy and aviation.

Exhibit 4

Answering the Call for Infrastructure Investment

Finally, there is potential for companies to sustainably meet the call for investment, but only if they take measures to improve returns. To sustainably answer the call for investment in the future, companies will need the right approach to where to play and how to play. The first decision—where to play—involves identifying the optimal micro-segments in which to participate, in light of their tailwinds, headwinds, industry structure, and regulatory environment. Based on these criteria, energy and aviation are among the more promising micro-segments (Exhibit 5). Decisions on how to play require a focus on performance improvement and digital enablers of transparency, digitization, and decision support, combined with a clear story for the capital markets. 

Exhibit 5

In these areas, we are already seeing some green shoots of what future growth could be, but to fully realize their potential, companies still have a long way to go. The companies that make the journey have the potential to generate alpha returns.