How to invest in infrastructure
Sadek Wahba, chairman and managing partner of I Squared Capital Advisors LLC, during the 2023 CERAWeek by S&P Global conference in Houston, Texas, US, on Wednesday, March 8, 2023. The global energy industry is facing a welter of uncertainty and change — driven by the effects of the global pandemic; shifting geopolitics and a war launched by one of the world’s major energy powers; high energy prices; supply chain and infrastructure constraints; and economic instability.
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The demand for infrastructure improvements is going to continue to grow as more people move to cities in coming decades.
Also, the coming decades are critical in the global effort to respond to climate change. Energy efficiency is going to become a bigger priority for builders, bringing new technology, challenges and opportunities for investors.
Taken together, “The sector as a whole is on an upward trajectory,” said Sadek Wahba, the founder and chairman of I Squared Capital, a global infrastructure management company that currently manages around $40 billion worth of investments in infrastructure projects in over 50 countries.
Wahba, who is also member of President Biden’s National Infrastructure Advisory Council, shared with CNBC how investors can get in on this trend.
Invest in specialized builders
“The entire electric grid needs to be completely revamped,” Wahba said.
Power generators often have to wait years to get new sources of energy connected to the electric grid because the wires used to transmit energy over long distances are virtually tapped out. Companies that want to add new wind and solar energy to the grid often have to complete lengthy and expensive upgrades to the transmission system first.
Utility companies will sometimes do this kind of build out, but utility stocks are not “100% correlated to infrastructure” because they have a lot more parts than building infrastructure
So the best way to benefit from this demand for a new electric grid is to invest in the specialized construction companies that build it, Wahba told CNBC.
“That’s an area which I think will be very interesting because there will be a lot of work, it requires specialization, it has relatively high barriers to entry,” Wahba told CNBC. “It’s not anyone who can build these transmission distribution lines. You need to have the training, you need to have the licensing, you need to get environmental permitting, there are safety issues.”
Wahba is also bullish on the electrification of urban transportation. New York City is in the process of implementing a congesting pricing plan for drivers coming into central Manhattan. If congestion pricing becomes more widespread, that will make electric urban transportation a desirable investment, Wahba said.
High-voltage power lines at sunset.
Yelantsevv
Look for the technology that operates infrastructure, which will become ever-more digitized
Another area that Wahba says is “very interesting” is the technology that will support new infrastructure growth.
“It’s a derivative of investing in infrastructure, right. It’s not investing in infrastructure directly,” Wahba told CNBC.
For instance, in the case of congestion pricing, cities will need systems to measure and record when drivers are on the road and implement the credit card processing and payment systems to collect such a tax.
“All the technology around infrastructure services, I think is an area which is going to grow exponentially,” Wahba told CNBC.
Demand will also grow for echnology products that improve the efficiency of buildings and adapt to changing conditions in real time, Wahba said. “No one goes to Burger King or Chipotle or whatever and the temperature changes based on the number of people in the room, but the technology exists to do that,” he told CNBC. “You can save millions of dollars that way.”
Another derivative of a the trend towards energy efficiency is exponential growth in cybersecurity, Wahba said. More infrastructure systems are going to become digitized, which means those systems increasingly become vulnerable to cybersecurity attacks.
“Digitalization is inevitable, because we need that digitalization to be able to improve the efficiency of our infrastructure and to be able to grow,” Wahba told CNBC. “Digitalization means more efficient, more efficient means less cost. Less cost means less impact on the budget, less capital required to invest in infrastructure. But it also means much more vulnerability to attacks.”
The danger of hackers with bad intentions getting into infrastructure systems is especially scary.
“What if I control the HVAC system of the hospital? And no one has the ability to control it except me. Think about surgery, operation rooms. What if I control the power generation backup of a hospital? What if I take control of a wastewater company and I have the ability to control the amount of waste that goes into the water system because I physically have control of the equipment?” Wahba said.
“So cybersecurity is going to become a big, big issue over the coming years. Because the more technology we adopt in the management of our infrastructure, our airports, our ports, our hydro plants, the more they become vulnerable,” Wahba said.
The digitization of infrastructure will also grow demand for fiber optic cables and data centers, but those stock prices are already trading at relatively high prices already because of interest in artificial intelligence and the move to 5G mobile networks, Wahba said.
More opportunities to invest in infrastructure would make it better
The publicly traded market for infrastructure investments is actually extremely limited in the United States, Wahba said. Most of the infrastructure in the US is constructed by states, cities, and municipalities and funded via the municipal bond market.
That’s not how it is in the rest of the world, however.
In the United Kingdom, individual investors can put money in the water company, Wahba said. “You and I can buy Charles de Gaulle Airport in Paris: that’s 50% owned by the government and 50% listed,” Wahba said. “You and I can’t buy stock in JFK. Now, we want to because we think it’s an interesting investment that gives you a long term cash yield and so on. But, that that simply does not exist in the US.”
But Wahba says that needs to change in the US.
“That is the dilemma we have in the US: we need to widen the ownership of infrastructure assets, precisely to create a market and to create capital flowing into that sector,” Wahba said.
Making more of our infrastructure systems publicly investable would make them better. “Wider ownership creates more competition, more competition creates more efficiency, more efficiency creates lower pricing for consumers,” Wahba said.
If more of U.S. infrastructure were to be privately owned and available for public investment, then there would have to be a strong regulator to keep that 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 generally privately owned is the energy sector.
“Overall, our energy sector is the most sophisticated, the most advanced in the world. So, you may not believe that, but it’s true,” Wahba said. Now, the transmission grid system is not well functioning, but the “power generation system, look, what we’ve done is amazing. We have the most sophisticated integrated power system. That is a fact.”
