Urbanisation: A Major Driver of Infrastructure Spending

Three overlapping megatrends, covering globalisation, urbanisation and digitisation, are currently shaping global economic growth. That growth is, in turn, creating huge demand for private and public sector infrastructure development such as power stations, electricity grids, water supply and treatment plants, roads, railways, airports, bridges, telecommunications networks, schools, hospitals, and more.

The world may be suffering from an economic slowdown, with some countries, especially in Europe, feeling the pinch more than most, but the long-term outlook is positive. China, India and other large emerging markets are still registering strong growth and the advanced economies should start to recover next year and beyond.

Infrastructure is increasingly viewed by the World Bank as the vehicle for transforming low and middle income countries into emerging or developing nations. In fiscal year 2011, the bank committed US$26bn in infrastructure financing, accounting for 43% of all its commitments. “The developmental challenges that these countries face are numerous, ranging from rapid urbanisation to the threat of a changing climate, and catastrophic natural disasters,” says the bank. “To address these challenges, the infrastructure sectors – water, transport, energy and information and communications technology – have emerged as real agents of change.”

Rapid urbanisation in developing countries, and continued urbanisation in advanced economies, will be the biggest driver of infrastructure spending over the next few decades. Today, 3.5 billion people, 50% of the world’s population, live in cities. By 2030 that will have risen to 5 billion, 60% of the population. This rise will require sustained infrastructure investment in railroads, highways, bridges, ports, airports, water, power, energy and telecommunications, creating massive opportunities for multinational contractors and their international and local suppliers.

Opportunities Abound for Infrastructure Companies

ABB, a Swedish-Swiss multinational corporation and leader in power and automation technologies, has firmly aligned its strategy to urbanisation and the lucrative contracts it will create. “Experts estimate that over US$40 trillion will be invested in urban infrastructure over the next 20 years,” said ABB in a corporate statement released at this year’s World Economic Forum (WEF) in Davos. This investment will include transportation, housing, hospitals and other social amenities, all of which will be reliant on electric power, ABB’s core market.

Siemens, a German multinational electronics and electrical engineering company, employing 360,000 people in nearly 190 countries, is also tying its future to urban development. Its operating businesses used to be organised around three sectors, energy, healthcare and industry but in October last year it added a fourth, naming it infrastructure and cities.

By forming this new sector, the company aims to be a leading participant in the dynamic growth of cities and infrastructure investments. “The infrastructure and cities sector will open up additional business opportunities in the growth market of cities,” says Peter Löscher, Siemens’ chief executive officer (CEO).

No Shortage of Financing Needs

The urban projects of the next few decades will be financed by public administrations and private contractors in the usual ways: equity capital, municipal and corporate bonds, project finance, public private partnerships (PPPs), private finance initiatives (PFIs), bank syndicated loans, and so on. However, these sources of finance are under pressure. Equity and debt capital is not as easy to raise as it once was, due to the dislocation of the capital markets, falling credit ratings and Basel III regulations. And in the UK, many PPPs and PFIs have been criticised for being poor value for money in the long run, a view that could spread.

Banks like Citi are able to offer alternative, often innovative, financing solutions for their infrastructure clients in the private and public sectors. Citi is promoting the urban agenda with its ‘Citi for Cities’ initiative, which harnesses solutions and capabilities across the bank to provide a wide range of financial services.

For companies operating in cities around the world, banks need to provide a wide range of solutions, including liquidity and cash management, export agency finance (EAF), accounts receivables (A/R) solutions, and supplier finance (see box).

Three Financing Solutions for the Infrastructure Sector

Export agency finance: Companies exporting to overseas clients often seek help from their country’s official export credit agency (ECA) or a multilateral financial institution (MFI). ECA services include helping:

  • Overseas buyers purchase goods or services by guaranteeing bank loans to finance those purchases.
  • Exporters sell goods or services by guaranteeing payments due under bills of exchange or promissory notes.

Citi has partnered with more than 60 ECAs and MFIs, lending its global reach to support companies in many challenging regions of the world.

Accounts receivable (A/R): Payments due from customers can add up to significant amounts of trapped cash. Citi’s global receivables solutions help companies streamline receivables processing, reduce days sales outstanding (DSO), release trapped cash as early as possible, and optimise working capital.

Supplier finance: Supplier finance is widely used by large corporations to provide suppliers with early payment. It is like factoring, except that supplier finance is initiated by the buyer, with banks basing the arrangement on the high credit rating of the buyer. Factoring, on the other hand, is initiated by the supplier, with the arrangement based on the lower credit rating of the supplier.
Because supplier finance is based on a higher credit rating, the supplier finds it easier and cheaper to arrange than factoring. The benefit for buyers is the ability to help suppliers access affordable finance, and the likelihood of being able to negotiate more favourable payment terms with a positive impact on DSO. It also helps protect supply chains from both economic and competitive pressures.

Looking Ahead

Predicting the future is always fraught with difficulty, but a report published by the Urban Land Institute and Ernst & Young, entitled ‘Infrastructure 2011: A Strategic Priority’, not only sums up the current issues facing infrastructure companies and public administrations but looks a few years ahead. It explores how many nations and cities are finding it hard to develop the necessary infrastructure policies. Most leading countries see infrastructure repair and development as high priorities for the future, “but struggle to address funding shortfalls,” according to the authors.

The US still shows no signs of developing a national infrastructure plan and spending lags behind other major countries, but the outlook is good in other parts of the world, according to the report. The UK has committed £200bn between 2011 and 2016 on rail, energy and broadband infrastructure projects; Canada is expanding its PPP initiatives to update aging facilities; China is building new power stations, airports, ports and subways; the United Arab Emirates (UAE) and Kuwait are using oil wealth to build transport hubs and seek energy efficient solutions for future power and water needs; and Brazil is preparing for the 2014 World Cup and 2016 Olympic Games.

The investment, finance and business opportunities in these and countless other projects around the world is vast. Global businesses should be proactively examining the prospects and ensuring they have to finance in place to deliver them.

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