Capital project and infrastructure spending is set to reach a total of $78 trillion globally in the ten years to 2025, according to fresh research by PwC and Oxford Economics.
In a study of 49 of the world’s largest economies – covering 90 percent of global fixed investment spending – the consultancies found that infrastructure spending will be $9 trillion annually by 2025, more than double the $4 trillion growth rate it currently displays.
A large part of this boost will be provided by the Asia-Pacific market, which is set to represent 60 percent of all spending by 2025. This will happen on the back of strong demand in China and emerging Asia, where spending is forecasted to grow from 28 percent to 47 percent of the world’s total.
Western Europe, meanwhile, is projected to contribute less than 10 percent of the growth by 2025 – against 20 percent in 2006 and 12 percent now. The region is not due to catch up with its pre-Crisis spending level before 2018.
The report used a broad definition of the asset class, encompassing core sectors such as transportation and utilities as well as capital projects in the field of telecoms, extraction, manufacturing and social infrastructure. It identified demographic shifts, an evolution in global economic power and urbanisation as the key drivers behind the expected growth.
“[The world] is incredibly different now. It’s even changed from how it was five weeks ago or five months ago,” said Juan Bejar, chief executive of Fomento de Construcciones y Contratas (FCC), in the report. “The spiral of change is speeding up.”
Funding the infrastructure needed to cope with such changes would require a huge amount of fresh financing, further commented Richard Abadie, global leader for capital projects and infrastructure at PwC, during an interview with Infrastructure Investor.
While the report did not dwell upon how the gap would be filled, Abadie said the answer would likely involve a mix of multilateral and unilateral solutions, with development finance institutions assuming a major role at first but gradually ceding ground to commercial lenders and investors as emerging markets mature.
He cited the example of Central and Eastern Europe, where institutions such as the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) provided the bulk of riskier financing – with commercial banks “coming behind” – 20 years ago but where projects’ capital structures are now almost entirely looked after by the private sector.
Abadie reckoned some Western investors remained a bit coy of investing in emerging markets, where there was sometimes a perception that returns did not sufficiently reward the risks taken. Yet “if global spending needs double in 10 years then the private sector element of it should also double,” he said, with the caveat that some Asian markets could also count on the liquidity provided by home-grown development or export-import banks.
The report found that growing infrastructure investment would not be the monopoly of Asia-Pacific among emerging markets – yet it stated that Africa would still represent a very small portion of the total by 2025 while 75 percent of Latin American spending would be provided by Brazil and Mexico alone.