CEO of Fernweh Group, Chairman of Avail Infrastructure Solutions and Chairman of Ayna.AI.
As the CEO of a company that provides infrastructure solutions, one of my distinct privileges is to convene prominent leaders and influencers from the infrastructure sectors and its ecosystems to discuss critical topics shaping the industry at the FIS (Future of Infrastructure Summit). During the course of the event, it became clear from these decision makers that while the sector has recently received its fair share of coverage—whether it be from the new LaGuardia Airport or the Bipartisan Infrastructure Law—very few in the outside the industry truly understand how this sector operates and how pivotal the sector is for the rest of the economy. Given my career working in this sector, along with recently convening with infrastructure experts, I thought it’d make sense to provide my insights on exactly this.
How The Infrastructure Industry Works
First, it makes sense to discuss how the industry operates. In general, the sector utilizes a four-stage value chain: equipment provider, service provider, construction/engineering companies and operators. This makes the most sense when looking at an example. Take aviation infrastructure: Equipment providers deliver ground service equipment, which is then utilized by service providers (e.g., air traffic management, ground and cargo handling, and facility management services). Various construction/engineering companies are then involved with constructing the terminals, hangars, runways and aprons. Finally, airport operators ensure that travelers and cargo shippers receive excellent service and that the facility operates safely and efficiently.
This can be similarly seen in energy infrastructure. Equipment providers provide hardware for power generation and transmission. Service providers then help to make sure that said equipment is operated efficiently. As in the airports’ infrastructure sector, construction/engineering companies construct various facilities. And lastly, operators of utilities and pipelines have efficiency and safety by using all these inputs to deliver electricity reliably.
Why It’s Important
Now that I’ve discussed how the sector operates, it’s important to explain why exactly this sector is important. According to the Council on Foreign Relations, while the infrastructure sector represents only 1.5% of GDP, the sector is significantly more critical to the overall economy, as these assets are used for a variety of productive activities ranging from transportation, power generation, water use and communications.
Additionally, infrastructure spending is a huge job maker where, for every $1 billion invested in highway infrastructure, 13,000 jobs are supported. These jobs are also good-paying jobs, as low-skill infrastructure occupations pay 30% higher wages than low-skill work in other sectors. This allows the industry to serve as a fiscal multiplier; according to a University of Maryland study, $1 spent on infrastructure adds $3 to the GDP in the United States. I believe this additional $3 represents a stronger economy, job creation and improved aggregate demand, all of which benefit the American consumer.
While recent infrastructure spending has risen due to the Bipartisan Infrastructure Law, spending still significantly lags behind its Asian economic competitors, particularly that of China. Currently, half of infrastructure investment has been taking place in Asia, with $1.1 trillion per year invested from 2007–2015. This number is only supposed to rise, with $1.8 trillion between 2016–2040.
Looking at infrastructure spending as a percentage of GDP, the Council on Foreign Relations finds that the United States is the second worst in the G20, a forum representing the world’s largest economies. The 1.5% that the United States spends is incredibly minuscule when looking at the 5.1% and 3.6% of China and India, respectively. This significant discrepancy in funding has had dire effects on internal services in the United States but also has resulted in growing Chinese influence through the Belt and Road Initiative.
The reason United States infrastructure spending significantly trails other nations is that the U.S. has a significantly different spending structure that expects greater contributions from state and logical governments. In most European countries, a bulk of infrastructure is paid for by the national government—in the United States, it makes up only 25% of funding. This results in much smaller and cash-strapped local governments bearing the costs of higher interest rates on funding critical projects.
How Leaders Are Making An Impact
While it may seem that the United States, with a decentralized system, is unlikely to overcome the hurdles to close the existing investment gap, one must also look at the role private developers are playing in a growing number of infrastructure plans. A growing joint effort between government and developers, known as public-private partnerships, or P3s, can be used to overcome the current investment gap. In this model, private firms gain the right to build as well as the right to charge fees from the public in exchange for maintaining it. While increased private funding is a promising avenue, historic underperformance by infrastructure companies is a challenge.
Besides P3s, leaders in the infrastructure sector can contribute to the industry’s growth and development by focusing on a few key areas.
• Sustainability: Leaders can embrace sustainability and incorporate green initiatives into their infrastructure projects. With increasing concerns about climate change and environmental impact, I believe businesses that prioritize sustainable infrastructure solutions are likely to gain a competitive edge. This can involve using renewable energy sources, implementing energy-efficient designs and incorporating eco-friendly materials and technologies.
• IoT/Digitalization: IoT-enabled sensors can enhance asset monitoring and maintenance, leading to improved efficiency and cost savings throughout industrial subsectors. AI algorithms can optimize traffic management systems, predict maintenance needs and enhance project planning and risk assessment—improving both the quality and also the longevity. Lastly, this will improve the actual construction as digitalization enables the use of Building Information Modeling (BIM) for better project management, resulting in reduced delays and fewer cost overruns. There is now a prerogative that Business leaders stay updated on these technological advancements to improve capex efficiency.
Staying informed about these emerging trends and technologies, collaborating with technology providers and actively pursuing partnerships can enable businesses to position themselves advantageously in the infrastructure sector.
Key nuanced factors in the infrastructure sector are holding back its potential. But in my opinion, investing in solving these issues now will help build the economy.
Past performance is not indicative of future results. This information is not independently verified and should not be relied upon in making investment decisions or interpreted as investment advice.
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