Delivering sustainable infrastructure: bridging the gap between demand and funding

Infrastructure networks are proactively driving these priorities. Better transport connectivity is critical to unlocking growth, and new forms of energy generation are needed for decarbonisation. Globally, these priorities are being reflected in both national and local government strategies. 

Adapting to change

However, the need for greater resilience and digitalisation requires assets to adapt to change, whether by redistributing transmission grids in line with new energy sources or by taking alternative approaches to water capture and storage that are essential in a changing climate.

This combination of ambition and critical need requires substantial funding to deliver the transformational changes that are required to meet sustainability goals.

Whilst public investment has been rising worldwide – latest statistics from the Global Infrastructure Hub (GI Hub) estimate this to have reached US$978bn in 2022, the overall level of infrastructure spending has decreased.

This comes down to a shortfall from private sector players. Non-public funding has been stagnating over a period of around eight years. The US$172bn invested globally in infrastructure projects by private investors in 2021 remained shy of what is needed to close the increasing funding gap, which GI Hub estimates will reach US$15tn by 2040.

In the UK, the government now assesses the overall gap as standing at £500bn – a monumental chasm to bridge. However, there is plenty of funding available. According to financial researchers Preqin, in 2022 global private equity held a record $1.96tn of ‘dry powder’ cash which is accessible to private equity firms to make investments. The challenge is getting these funds to flow into infrastructure at the scale and speed needed.

Framing opportunities for private investment: focusing on resilience

Attracting the necessary funding needed for infrastructure projects will take a strategic approach from governments to help remove barriers and incentivise private investments, including identifying and defining opportunities through clear risk categorisation. There are three key drivers which, for the forseeable future, are shaping up policy, regulation and attracting investment.

1. A changing climate

One of the most transformative focuses for investment is climate change. This reflects a growing trend towards impact investment, where funding is designed to generate social or environmental benefits as well as financial. ESG commitments, as well as the impact of changing regulation and sustainability requirements are important considerations for investors and also influence their perception of risk.

There is opportunity for investors in new infrastructure as there is a clear need to facilitate the reduction of carbon emissions and curb the effects of climate change. In the energy sector this includes renewable power generation, a bolstered transmission network, unlocking carbon reductions through travel, and the electrification of rail and road transportation.

Private sector investment products in these areas are increasingly well established, if not exactly straightforward. Returns are typically generated through payments to funders – collected through bills, charges or taxation – by those who benefit, creating a long-term revenue stream to infrastructure investors. However, inflation and rising household bills risk squeezing these returns due to affordability constraints.

In the case of investment in new technology, the challenges of accurately forecasting demand present significant concerns where government support is needed.

To focus on new networks alone, however, misses the importance of upgrades to existing assets that must be made more resilient to new threats, from flood mitigation to heat-resistant roads. Historically, attracting private funding into these assets is harder, and the level of renewal and creation needed across infrastructure to meet this challenge must not be underestimated.

2. Nearshoring

A key driver in the current international market is also the deglobalisation of economies. The impact of the COVID-19 pandemic, where long supply chains suffered from waves of disruption, made many countries think again about resilience. However, a more significant trigger for the trend has been changing geopolitics, from the far-reaching global repercussions of the conflict in Ukraine, to the more localised impact of Brexit.

Governments are seeking to bolster energy security, investing in infrastructure to produce and distribute energy locally.

This is especially the case in Europe, where the continent has had to radically adjust to falling gas imports from Russia – from 50 percent of supply before the conflict in Ukraine to just 12.9 percent a year later.

Meanwhile ‘reshoring’ or ‘nearshoring’ production of goods and materials is supporting a boom in logistics and transportation need.

3. Digitalisation

Digitalisation is also an opportunity for infrastructure investment. Both public and private stakeholders are looking to digital tools and new technologies to drive productivity and social outcomes through better programme performance.

Some of the most ambitious plans are seen across the rail industry for example where artificial intelligence is being used to run railway systems, which aims to improve reliability, safety, customer satisfaction and costs.

There are also less visible but equally important ways that digital is driving investment.

This also includes new cyber security of infrastructure – a vital element of counteracting the increased threat. Clients are seeking to use digital tools and technologies to enhance programme delivery, and earlier in our Transforming performance of major programmes content series we looked in detail at how data and digital tools can be implemented to support project outcomes and processes.

Each of these drivers is underpinned by the need to have a developed supply chain and clear legal and regulatory frameworks.

The interplay between public and private funding

Collectively, these three areas of critical investment paint a picture of overlapping priorities, some of which are instinctively or traditionally more appealing for funding than others.

Attracting finance into a more complex infrastructure asset landscape means that the industry as a whole needs to think more creatively.

The scale and pace at which investment is needed is unprecedented and traditional delivery and financing models won’t be enough. A fundamental shift in mindset and closer alignment than ever between public and private sectors is needed. We are entering a new era of infrastructure investment which aims to drive demand while building confidence from the market and clarity around delivery.