Investing in infrastructure for a more resilient world

In 2001, Tropical Storm Allison swept through southeast Texas in the US, bringing with it devastation and more than 100cm of torrential rainfall. The resulting floods caused power outages and patient evacuations, and destroyed years of valuable research at the world-leading Texas Medical Center.

By the time Hurricane Harvey struck in 2017, the centre was ready. After suffering USD83 million worth of damage in 2001, it had spent USD20 million on a flood protection system¹ that included nearly 5m metal submarine doors, a system of barriers, emergency generators, water collection pits and pumps, and a wall able to withstand high-pressure floodwaters. This time, it suffered no water damage or power outages, and accepted patients throughout the storm.

This is an example of resilient infrastructure in action. And while governments will need to address the debt built up as a result of increased stimulus and spending during the coronavirus crisis, they are focusing on infrastructure investment, prioritising it as a way to rebuild post-pandemic – in turn closing the global USD15 trillion investment gap² following years of underinvestment in infrastructure. Governments are turning away from the austerity that followed the global financial crisis, and borrowing costs are very low.

We’re already seeing huge spending from some of the world’s biggest economies – the US in November signed a USD1 trillion infrastructure bill into law. For investors, it translates into an opportunity that cannot be ignored.

“There is no question that infrastructure is going to be a megatrend for years to come,” says Willem Sels, Global CIO, HSBC Global Private Banking. “Investment in infrastructure will open the door to a virtuous cycle of technological innovation, job and wealth creation, and improved productivity.”

Physical, digital and social resilience

Infrastructure is the fabric of the world we live in: the networks, buildings, systems and institutions that connect, power and move us. Alongside physical structures such as roads, bridges, ports and railways, ‘soft’ infrastructure has an equally important role to play. This includes research centres, innovation labs, healthcare and intellectual property – the things that strengthen the economy as well as health, culture and society. Our electricity, water, fibre-optic and telephone networks bridge the gap between hard and soft.

As the world changes, infrastructure means something more – a defence against future shocks. A way to build resilience, which unlocks opportunities for growth.

“Sustainability must be built into our infrastructure,” Sels notes, “Renewable energy, carbon capture, electric vehicle supply chains and green technologies will aid the transition to a greener energy mix. Next-generation digital technologies serve as an enabling tool, tying it all together.”

Natural disasters and extreme weather events are set to become more common given the impact of climate change, and our essential systems will need to be able to withstand them. In Hamburg, Germany, authorities are planting on rooftops to turn the city into a giant sponge that can absorb excess rainfall and prevent flooding following deadly floods in 2021³. This is green urban infrastructure at work – an adaptation strategy that anticipates future risks.

Resilient infrastructure, resilient world

Infrastructure investment creates jobs and supports wealth creation, boosting economic activity and extending the economic cycle, although the effects tend to be so long term that they can be hard to quantify.

“While numerous new elements of physical infrastructure have recently been developed all over the world, from bridges to power plants to water systems, there has historically also been underinvestment in maintenance of many structures,” notes John Macomber, senior lecturer in business administration at Harvard Business School.

Meanwhile, there has been little investment in many geographies that need it – “witness river flooding in Germany and China, drought in India and Kenya, power shortages in Nigeria, and in Texas,” he says. “This is understandable since infrastructure has a very large and concentrated up-front capital need, but the benefits are long term and they are very diffuse, flowing to all citizens and businesses, and hard to capture financially.”

That said, we’re entering a multi-year rollout of next-generation technology that will support digital infrastructure and lift productivity – and profits – across the world. The pandemic compressed a decade’s worth of technological change into just a few months, rapidly accelerating the path to digitalisation.

The US and China are leading the way here, with vast spending packages designed to create a cycle of technological advancement and wealth creation.

Improving digital infrastructure is a key priority of the Chinese government, and since 2015, China’s Digital Silk Road project has supported telecoms and data-related activities by Chinese companies. It promotes ecommerce, smart cities, telemedicine and internet finance, plus computing, big data, internet of things, artificial intelligence, blockchain and quantum computing. Indeed, China is now the world’s second largest spender on research and development and accounts for more than 20 per cent of global R&D spending.⁴

In Japan, construction began in 2021 on a 175-acre smart city at the base of Mount Fuji. Car maker Toyota is building this ‘Woven City’,⁵ which will be a ‘living lab’ for testing emerging technologies like robotics and AI. As more smart cities like this are constructed worldwide, smart grids will be required to power them, along with stronger cybersecurity to protect them, all of which will create jobs.

Smarter cities and systems

While all this futuristic tech is fascinating, something as basic as a mobile network could actually be the building block of the digital revolution.

“The backbone of the next generation in connectivity will be 5G,” says Davey Jose, Thematic Analyst and Global Coordinator of Disruptive Technology, HSBC Global Research. According to the Global System for Mobile Communication, 5G is likely to make up 20 per cent of mobile connections by 2025.⁶ PwC estimates that 5G technology will add USD1.3 trillion to global GDP by 2030.⁷

“This is the key that will unlock access to many emerging technologies for businesses across sectors and geographies,” Jose notes. “When these technologies converge, they will ramp up productivity in ways we can scarcely imagine.”

Done correctly, infrastructure projects can revitalise communities and improve economic wellbeing. Yet with access to healthy infrastructure connected to wealth, opportunity and prosperity, it’s not always a level playing field. Australia, for instance, is rolling out 5G infrastructure, but questions have been asked about whether its rural regions are being left behind.⁸

This is partly because digital infrastructure still requires investment in physical infrastructure, says economist and infrastructure expert Bridget Rosewell, commissioner for the UK’s National Infrastructure Commission. “I would say that digital is physical – it is a matter of laying fibre and trunking,” she says. “It has been a major priority for governments to the extent that supplying it has become a no-brainer. It is also cheaper to supply than heavy infrastructure such as rail, roads and water pipes.”

But things are changing. New technologies such as low-earth-orbit satellites are improving connectivity, even in rural areas where it would be prohibitively expensive to lay miles of new cable. Jose explains that space-based internet is making it easier for people to work from home even in hard-to-reach places, opening up economic opportunities.

“Traditional satellites cost USD400 million to USD500 million and weigh the same as a double-decker bus, but new low-earth-orbit satellites weigh 150kg and cost USD500,000 to USD1 million each,” he says. “By 2030 there could be an estimated 17,000⁹ of these satellites in orbit beaming internet anywhere in the world without the need for physical infrastructure such as 5G. This could help to further bridge the digital divide.”

Meanwhile, virtual reality, the metaverse and video conferencing technologies are all allowing people to work remotely, which has the potential to decentralise economic activity – effectively ‘unbundling cities’¹⁰.

While environmental issues are often highlighted in the conversation about infrastructure, social issues are just as important. In the US, President Biden has earmarked USD1 billion to reconnect and hopefully revitalise the (disproportionately Black) neighbourhoods divided by highways and other physical infrastructure.¹¹

“There are many connections between access to infrastructure and social inequality, from the quality of the built environment, homes and the public realm, to the availability of transport and links to education,” says Rosewell. “We tend to try to identify single causes and deconstruct these to individual impacts, but this is a major error because, in practice, there are multiple causes and effects which generate feedback loops. We need to think at a high level – on a system basis – and then identify the key barriers to improving equality.”

Scaling up sustainability

Most major economies are now focusing on how to create and distribute clean and renewable energy to meet national goals on carbon emissions, and this will be built into any new infrastructure plan.

“Climate change is an urgent issue that will take several decades to address, with governments, businesses and investors committed to finding solutions. It’s a strong structural trend – the energy transition will present a range of opportunities,” Sels says.

America is focusing on creating more infrastructure for electric vehicles, and the lack of sufficient charging points has been highlighted as a major stumbling block for electric vehicle sales in Europe. China, meanwhile, wants to become self-reliant as a technological powerhouse, while reducing carbon emissions and improving environmental protection. In addition, ageing infrastructure is gradually being upgraded with environmentally cleaner alternatives. 

There are three major themes in green infrastructure and sustainable cities, explains Macomber. One is energy generation, including wind and solar, and green hydrogen; and the second is making existing infrastructure more efficient and flexible. For example, he notes that almost all roads, water systems, electricity and rail networks have periods of peak use and low use, meaning traffic jams and power brownouts are common. Homeowners with solar panels on their roof may be net electricity producers when it is sunny, but net consumers at other times, so the grid needs to be able to adapt to this. 

“These [issues] can be substantially mitigated with smarter use of what is already built – largely through time-of-day planning, demand management and, in the case of roads, user fees and plain old smarter traffic lights,” he says.

“The third theme just starting to get attention is ‘what next?’, meaning what if there is indeed more river flooding and more extreme heat and storm surges and drought coming our way? Then there needs to be a selection and funding process for what to build where, which has the greatest benefit / cost justification for the greatest number of people,” Macomber adds.

“Society can’t protect everyone, everywhere, everything forever, especially in the case of increasing climate-related weather events. We have to choose. Investors and financial intermediaries will have substantial obligations in this choosing process, and also very significant opportunities in analysis, risk transfer and capital allocation.”

The people and the projects

From global mega-projects to local, grassroots initiatives, infrastructure improvement comes in many forms, and there is innovation happening across the board.

At the small end, in Maharashtra, India, a company called E-Hands Energy created a mini solar power grid to power schools and tribal hamlets. This resulted in safe, reliable lighting in homes and uninterrupted education and e-learning for students.¹²

At the other end of the spectrum, US energy company Con Edison is spending billions to reinforce the utility networks that serve 3 million people in New York and Westchester, following outages caused by hurricanes, tropical and winter storms.¹³ The company says it is now incorporating climate change into its planning and operations, recognising that its energy infrastructure systems will otherwise remain vulnerable.

The vast sums being spent on roads, bridges, schools, healthcare and digital networks supports the investment case for these real assets, which can work especially well in a high-inflation environment.

Sels suggests investors will have a wide range of opportunities to get exposure to the sector, from construction companies to hardware, utilities, software and tech. The true innovators and boundary-pushers in each of these spaces will be the companies that outperform their rivals, and represent the sweet spot where investors will want to be.

“We need ongoing development of smart infrastructure to create a more sustainable global economy, especially now in the face of growing climate issues,” Sels notes. “With so much old infrastructure needing to be updated and modernised, and huge sums already pledged by governments for the purpose, this represents a once-in-a-lifetime opportunity for investors with a medium- to long-term vision.”

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¹ Remembering Allison, Texas Medical Center hospitals close flood gates, Houston Chronicle, August 2020 ↩

² Global Infrastructure Hub, accessed December 2021 ↩

³ Hamburg strengthening its resilience to climate change, Hamburg News, July 2021 ↩

⁴ Investment Outlook Q1 2022, HSBC Global Private Banking ↩

⁵ Business Insider, February 2021 ↩

⁶ The Edge of Disruption -- Finding engines of growth for tomorrow, HSBC Global Research, November 2020 ↩

⁷ The global economic impact of 5G, PwC, 2021 ↩

⁸ Australia’s 5G rollout: concern over ‘large disparity’ between cities and regions, The Guardian, December 2021 ↩

⁹ Leapfrog tech 2.0, HSBC Global Research, October 2019 ↩

¹⁰ Unbundling the city, HSBC Global Research, November 2019 ↩

¹¹ Biden seeks to use infrastructure plan to address racial inequities, The New York Times, April 2021 ↩

¹² E-Hands Energy, CSR-Funded Renewable Energy Projects, accessed December 2021 ↩

¹³ Northeast utilities are spending billions on resilience, and the investments are paying off, Utility Dive, November 2021 ↩