The Importance of Investing in Infrastructure

We speak with Sadek Wahba, Member of President Biden’s National Infrastructure Advisory Council and the Chair of the Wilson Center’s Wahba Institute for Strategic Competition, about what investors may want to understand about the state of U.S. and global infrastructure today and why it is more important than ever before to invest in infrastructure.

What is the state of infrastructure in the U.S. today? How does it compare globally?

Since the 1980s, China and the E.U. invested heavily in infrastructure. For example, China has invested over 8% of its GDP in its infrastructure compared to the U.S., which invested less than 2% over the last three decades. So, the U.S. has been behind in maintaining its infrastructure, let alone developing new ones or adapting our infrastructure to leverage new technologies that would make the delivery of infrastructure more efficient.

In addition to the problem of decaying infrastructure – as evidenced in cases such as the Flint water crisis – infrastructure is also under severe pressure as a result of climate change and cyberattack.

But the Biden administration’s once-in-a-generation infrastructure investment in the form of the $1.2 trillion Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS act has gone a long way to putting the U.S. on a path to needed infrastructure modernization.

What we need to do next is to build on the success of the Biden administration and develop a long-term plan for sustainable infrastructure, not just the eight years of the Infrastructure Act.

Other countries are under similar pressures but in many places the state of infrastructure is stronger thanks to continuous investment and innovations in how investment is brought to bear.  What is different in the U.S. is that traditional infrastructure like roads, bridges, rails, water treatment have been mostly undertaken by the states, in contrast to E.U. economies or Canada or Australia, which have involved the private sector in the development of their infrastructure.

What has been the demand for better infrastructure in the U.S. and globally like in the recent years?

Demand is strong, both in the U.S. and globally. There are multiple factors – in the U.S. there is the deterioration of existing infrastructure due to decades of underinvestment, as well as the need for urban-related infrastructure as people move to big cities. But in the U.S., Europe and Asia, there is also the need to build new infrastructure that is resilient to 21st century pressures – the climate crisis, urbanization, population shifts, the potential for cyberattack and the need to protect supply chains and make them more resilient and responsive.

Why is demand set to grow? What are the trends driving demand?

The factors include the need to replace aging infrastructure and the need to create fully modern 21st century infrastructure. The latter category includes a full array of responses to the climate crisis, cyber threats and urbanization – which means demand for smart power grids, smart buildings, smart HVAC systems, urban transportation systems, renewable energy and the “greening” of basic infrastructure materials such as concrete and steel via alternatives processes to reduce their massive carbon footprint.

Why is it important to invest in infrastructure?

Investing in infrastructure has a positive and multiplier effect on economic growth and employment, and can also reduce income inequality and poverty levels by giving low-income households access to internet service, better urban transport and other basic services.

Second, it is essential that we invest in modern infrastructure designed to meet the demands of the 21st century – infrastructure that is resilient to climate change, for example, smart power grids, water systems based on operational technology that can respond to environmental stress; infrastructure that is responsive to other 21st century stresses such as urbanization and cyberattack, and the development of “green” forms of basic infrastructure materials – asphalt, concrete and steel – in order to reduce the environmental impact of all infrastructure.

Where are the opportunities to invest in infrastructure?

If we are speaking about private investment, then this is a problem. It is challenging for private investors to identify and invest directly in traditional infrastructure projects. Projects are governed by arcane procurement processes and funded through bond issues and other cumbersome mechanisms that preclude direct private funding. The exception is the power sector where the private sector has been an active investor, including in new technologies such as wind, solar and the development of ground-mounted battery systems to supplement our power generation.

The private sector is eager to invest in infrastructure, which can offer stable, competitive returns over a decades-long time horizon.

But to create pathways for private investment, several steps must be taken. For example, measures could be taken by Congress and at the state level to allow public pension funds to invest more. In my book that will be published in 2024, BUILD: Investing in America’s Infrastructure, I argue that the U.S. should encourage more Public Private Partnerships to encourage private capital to invest in our infrastructure.

How can the U.S. achieve a climate-resistant and sustainable infrastructure?

To meet the climate challenge, we need the kind of long-term funding that the infrastructure bank could provide.

That is because climate-resilient infrastructure is expensive. It requires technology – AI to run smart grids, operational technology to run water systems and other physical infrastructure, research and development of renewable energy, and costly alternative processes to bring about the greening of industry – such as the use of recycled plastics in road paving materials and less carbon-intensive processes for the manufacture of concrete and steel.

In terms of energy transition alone, the International Renewable Energy Agency estimates that annual investments have to more than quadruple to more than $5 trillion if the world aims to stay on the pathway of minimizing global warming to 1.5 degrees Celsius.

In addition to funding, we need the active participation of the private sector – in particular the technology industry – in R&D and in public-private partnerships to develop and deploy climate-resilient infrastructure solutions.

Such large-scale collaborations and partnerships are difficult to bring off, but there are models to point to. The Everglades restoration, with the $3.4- 3.5 billion Everglades Agricultural Area reservoir project as its centerpiece, is an example of the kind of climate-focused infrastructure project that can be realized when federal, state and local government work together with the private sector, including expert advocacy groups such as the Everglades Foundation; when the right level of funding is brought to bear, and when barriers including pathways for funding and political polarization can be overcome.

What should investors understand about the infrastructure bill?

That it is a landmark achievement – a once-in-generation investment unmatched since the Eisenhower Administration built the Interstate Highway System. The results of the Biden-Harris infrastructure plan can be seen as we speak today across the 50 states. But at the same time, it is not adequate to fund our long-term infrastructure needs. The IIJA provides $1.2 trillion in infrastructure funding over an eight-year period, but the American Society of Civil Engineers estimates that over a 10-year period, our infrastructure investments are $2.59 trillion short of our actual needs.  

Political polarization and the short-term nature of the political cycle makes it unlikely that anything like the IIJA will be replicated anytime soon. Private investment will be needed to make up the gap.

What is the climate crisis’ impact on geopolitical security?

The impact of the climate crisis on geopolitical security is severe.

The Pentagon’s 2021 Climate Risk Analysis provides a succinct account. To summarize:

• Climate change creates a primary impact—for example drought, wildfires, flooding, hurricanes and massive winter storms.
• Those conditions create secondary impacts, such as crop loss and longer-term agricultural failures due to the loss of arable land. Famine is the result. Water scarcity and flooding alike render whole areas uninhabitable.
• Mass migration begins as displaced populations seek food, shelter and basic economic security.
• Migrations spark security crises in unstable regions where governments are unable to cope, and destabilize established states, such as those in the EU, where migration becomes a political crisis.
• The result is that already unstable states and regions are further destabilized.

There are a number of examples. Drought is implicated in the outbreak of the Syrian civil war.  The Middle East and North Africa house 12 of the most water-scarce countries in the world. In sub-Saharan Africa, 400 million people lack access to drinking water. The World Resources Institute describes the resulting destabilization.

The Pentagon is by no means the only voice at the climate-security intersection. The World Economic Forum called attention to it in the spring of 2021. The Center for Climate and Security, an institute of The Council on Strategic Risks, is dedicated to the problem and continues to shed light on it. The topic is a major focus for The Wilson Center, which maintains a center on climate and migration, and which addressed climate-security risks ahead of the Pentagon’s study.

How can the U.S. better work with global players like China to tackle climate change and extremities?

The climate crisis is global. Solutions must be global as well.

In addition, collaboration on climate solutions represents an opportunity within the context of complex relationships such as ours with China.

China is desperately short of fresh water, the result of decades of policy decision starting with Mao’s initiative to electrify the agricultural north, which led to heavy demand on the aquifer and its eventual collapse. Today China represents 20% of the world’s population but has only 7% of its freshwater supply. China’s water crisis – as well as its related struggles with water contamination and other forms of pollution – significantly constrains China’s economic growth.

Collaboration with China on water initiatives – or more broadly on climate initiatives – might serve as a positive area for cooperation, consistent with the Biden administration’s “invest, align, compete” policy on China.

Such a collaboration might also involve other nations as well.

An additional advantage is that collaboration would not involve giving China access to sensitive or restricted information technology. There would be little if any security risk.

The effort should also include our renewed participation in multilateral development institutions such as the World Bank and other multilateral development banks, including a decision to join the Asian Infrastructure Investment Bank (AIIB).

In other words, within the context of the climate crisis, we can pursue global engagements that make the world more stable and that enhance our international standing.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.