How to invest in infrastructure

Demand for infrastructure improvements will continue to grow as more people move to cities in the coming decades.

In addition, the coming decades are critical for global efforts to respond to climate change. Energy efficiency will become a more important priority for builders, bringing new technologies, challenges and opportunities for investors.

Taken together, “the sector as a whole is on an upward trajectory,” said Sadek Wahba, founder and chairman of I Squared Capital, a global infrastructure management firm that currently manages about $40 billion worth of investments in infrastructure projects in more than 50 countries.

Wahba, who is also a member of President Biden’s National Infrastructure Advisory Council, shared with CNBC how investors can get in on the trend.

“The entire electrical grid must be completely renewed,” Wahba said.

Power generators often have to wait years to get new energy sources connected to the electrical grid because the wires used to transmit power over long distances are practically broken. Companies looking to add new wind and solar power to the grid often must first complete lengthy and expensive upgrades to the transmission system.

Utility companies will sometimes do similar construction, but utility stocks are not “100% infrastructure” because they have many more parts than building infrastructure

So the best way to capitalize on this demand for a new electric grid is to invest in the specialized construction companies that build it, Wahba told CNBC.

“It’s an area that I think is going to be very interesting because it’s going to be a lot of work, it requires specialization, and it has relatively high barriers to entry,” Wahba told CNBC. “Not just anyone can build these distribution transmission lines. You have to be trained, you have to get a license, you have to get an environmental permit, there are safety issues.”

Wahba is also set on electrifying urban transport. New York City is in the process of implementing pricing for drivers entering midtown Manhattan. If congestion pricing becomes more common, it will make electric urban transportation a desirable investment, Wahba said.

Another area that Wahba sees as “very interesting” is the technology that will support the growth of new infrastructure.

“It’s derivative of infrastructure investment, yes. It’s not infrastructure investment directly,” Wahba told CNBC.

For example, in the case of congestion pricing, cities would need systems to measure and record when drivers are on the road and implement credit card processing and payment systems to collect such a tax.

“I think all the technologies around infrastructure services are going to grow exponentially,” Wahba told CNBC.

Demand will also grow for technology products that improve building efficiency and adapt to changing conditions in real time, Wahba said. “Nobody goes to Burger King or Chipotle or whatever, and the temperature changes based on how many people are in the room, but the technology exists to do that,” he told CNBC. “Millions of dollars can be saved this way.”

Another derivative of the trend toward energy efficiency is the exponential growth of cybersecurity, Wahba said. More infrastructure systems will be digitized, which means these systems will become increasingly vulnerable to cyber security attacks.

“Digitalization is inevitable because we need digital so that we can improve the efficiency of our infrastructure and be able to grow,” Wahba told CNBC. “Digital means more efficient, more efficient means lower costs. Lower costs mean less impact on the budget, less capital needed to invest in infrastructure. But it also means a much greater vulnerability to attack.”

The risk of malicious hackers infiltrating infrastructure systems is particularly dire.

“What if I control the HVAC system in a hospital? And no one has the ability to control her except me. Think about surgery, operating rooms. What if I control the hospital’s back-up power generation? What if I take control of a sewage treatment company and I have the ability to control the amount of waste that goes into the water system because I physically control the equipment?” Wahba said.

“So cyber security is going to be a big, big challenge in the coming years. Because the more technology we use to manage our infrastructure, our airports, our ports, our hydroelectric plants, the more vulnerable they become,” Wahba said.

Digitization of infrastructure will also boost demand for fiber optic cables and data centers, but those stocks are already trading at relatively high prices due to interest in artificial intelligence and the move to 5G mobile networks, Wahba said.

The public market for infrastructure investment is actually very limited in the United States, Wahba said. Most infrastructure in the US is built by states, cities, and municipalities and financed through the municipal bond market.

However, not so in the rest of the world.

In the United Kingdom, individual investors can put money into a water company, Wahba said. “You and I can buy the Charles de Gaulle airport in Paris: it’s 50% owned by the government and 50% listed,” Wahba said. “You and I cannot buy JFK shares. Now we want because we think it’s an interesting investment that gives you long-term cash returns and so on. But that just doesn’t exist in the US.”

But Wahba says that needs to change in the US.

“That’s the dilemma we have in the U.S.: We need to expand ownership of infrastructure assets, precisely to create a market and create capital flowing into the sector,” Wahba said.

Making more of our infrastructure systems public for investment will make them better. “Wide ownership creates more competition, more competition creates more efficiency, more efficiency creates lower prices for consumers,” Wahba said.

If most of America’s infrastructure is to be privately owned and available for public investment, then there must be a strong regulator to prevent this private company from raising prices too far. Otherwise, privatizing infrastructure “is a recipe for disaster,” Wahba told CNBC.

One place in the United States where infrastructure is typically privately owned is in the energy sector.

“Overall, our energy sector is the most sophisticated, the most advanced in the world. So, you may not believe it, but it’s true,” Wahba said. Now the transmission system is not working well, but “the power generation system, look, what we’ve done is amazing. We have the most complex integrated power system. That’s a fact.”