Barita Insights: Weekly Newsletter January 25, 2021

Analyst Insights

Context

In the last century, modern civilization has transcended, at an ever-increasing pace, its historical achievements. However, despite continuous growth and improvements in many areas across the economic and social spectrum, modern societies have failed in several ways. One such failure has been broad-based/inclusive, sustainable growth. Within every economy, there are certain “pillars” that must be in place to support and drive inclusive growth and once these pillars begin to deteriorate then the sustainability of growth becomes increasingly compromised. Infrastructure development is one such pillar and in the last few decades, while we’ve witnessed tremendous growth in the global economy driven by rapid technological advancements, infrastructure development has lagged which leads to the deterioration mentioned. As the world looks to modernize further, a modern infrastructure network will be necessary to support this modernization. In this article, we look at why infrastructure development will shape the future; thereby providing an avenue for long-term value to investors.

 

Dissecting the Infrastructure Need

At present, the US is one of many countries facing this infrastructure development lag. Essentially, large subsections of the US’ infrastructure, inclusive of roads, bridges, dams, energy infrastructure, etc., have outlived their useful lives. Consequently, according to the American Society of Civil Engineers’ 2017 Infrastructure Report Card, US infrastructure gets a D+ grade. The report further notes that the US faces a total “infrastructure gap” of more than US$ 2 trillion needed by 2025. Now, while some of the infrastructure-related issues can be addressed temporarily through maintenance, the cost of not spending this US$ 2 trillion is approximately $4 trillion of lost GDP.

 

Why Hasn’t it been done yet?

Importantly, the need for modern infrastructure is not a new issue but there have been significant blockages to this broad-based initiative. One of these blockages is quite frankly, “political whims”, which just speaks to one of the main drawbacks of democracy. A change in government can easily disrupt and even cancel infrastructure projects that require multi-year investments to be completed. Essentially, politicians need to deliver in their very short 4 – 5 years in office and so, it becomes disadvantageous to start a series of projects that don’t get completed while you’re still president. Another issue has been government inefficiency and we’ve witnessed this in many countries – private companies tend to be far more efficient. Notwithstanding, public-private-partnerships for large scale infrastructure projects tend to overrun their budgets.

 

Joe Biden’s Plan – The winds of change

While this has been the case, we’ve finally approached a point in history where governments simply cannot keep avoiding the task. Joe Biden, the new US President, has identified and intends to make infrastructure development one of the cornerstones of his presidency. The fact is, President Biden prides himself as a leader that follows “the science” and the science unequivocally states that new infrastructure is needed. Consequently, his “Build Back Better Recovery Plan” aims to inject $2 trillion into infrastructure development. Luckily for Biden, his party has the majority in the Senate and they control the House which means, in all likelihood, he’ll receive enough political support to bypass the red tape and get it done.

 

Incentive and Tailwinds

Against the backdrop of all we’ve covered, it’s important to outline that massive capital injection requires incentive and at present, infrastructure development has more tailwinds and incentives than ever before. Climate change, for example, requires that we evolve and live sustainably which means cities have to be reshaped to accommodate electric vehicles on a grandiose scale. Technologies like 5G and the race towards achieving 5G coverage across nations requires massive investments. Legacy infrastructure that has depreciated for half a century or more, need to be replaced. Above all, COVID-19 has displaced multitudes of people, disrupting lives and livelihoods while fueling the greatest unemployment levels since the Great Depression. Governments in developed economies have provided citizens with enormous amounts of cash to keep their economies afloat but at this scale, it is unsustainable. We see Infrastructure development as a key step towards solving some of these issues as it will provide jobs on a large scale while driving economies towards a more modern, sustainable future. With that said, we believe the future is being written and infrastructure development on a scale we’ve never seen in our lifetimes is on the horizon. Investors can benefit from this long-term growth by investing in infrastructure ETFs that provide exposure to companies that will benefit from these projects

 

Local Infrastructure – Opportunities

Finally, it’s important to give a local perspective and note that much of the same applies. However, unlike the US, Jamaica is not a reserve currency and therefore, our fiscal space is far more limited which essentially places a constraint on the scale of the government’s infrastructure spending. This, we believe, creates an immense opportunity for local entities to strategically access the capital markets to deliver well needed infrastructure. The lifespan for these projects is typically decades and the cash flows are generally consistent as they are public necessities which makes them perfect for institutional investors like pension funds. Moreover, the COVID-19 pandemic has unveiled how much Jamaica and the wider Caribbean to upgrade our technology infrastructure. Consequently, there is a significant untapped opportunity to create Information and Communications Technology (ICT) infrastructure here in Jamaica. Of course, we cannot end without highlighting that the government has started and continues a series of road developments. These will add value to Jamaicans on a whole and investors can benefit through listed companies that should benefit from these projects including Caribbean Cement and Transjamaican Highway.

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Written by Awah Muirhead, Senior Investment Strategy Analyst

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