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Sadek Wahba, Chairman and Managing Partner of I Squared Capital Advisors LLC, during the 2023 CERAWeek Conference organized by S&P Global in Houston, Texas, United States, on Wednesday, March 8, 2023. The global energy industry is facing a wave of uncertainty and change – driven by the effects of the global pandemic; changing geopolitics and a war waged by one of the world’s major energy powers; rising energy prices; supply chain and infrastructure constraints; and economic instability.
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Demand for infrastructure improvements will continue to grow as more people move into cities in the coming decades.
The coming decades are also crucial in the global effort to respond to climate change. Energy efficiency will become a greater priority for builders, as new technology will bring challenges and opportunities for investors.
Taken together, “the sector as a whole is on an upward trajectory” Sadek WahbaFounder and President I squared the capitala global infrastructure management company currently managing $40 billion in investments in infrastructure projects in more than 50 countries.
Wahba, who is also a member of President Biden National Infrastructure Advisory CouncilWe shared with CNBC how investors can get in on the trend.
Invest in professional builders
“The entire electrical network needs a complete renovation,” Wahba said.
Utility companies sometimes do this type of construction, but the utility stock is not “100% related to infrastructure” because they have much more parts than building infrastructure.
Wahba told CNBC that the best way to take advantage of this demand for a new electrical grid is to invest in the specialized construction companies that build it.
“This is an area that I think will be very interesting because it will be a lot of work, it requires specialization, and it has relatively high barriers to entry,” Wahba told CNBC. “Not everyone can build these transmission distribution lines. You need to get the training, you need to get the license, you need to get the environmental permits, there are safety issues.”
Wahba is also optimistic about the electrification of urban transport. New York City is implementing a crowdfunding pricing scheme for drivers coming into midtown Manhattan. Wahba said that if congestion pricing becomes more widespread, this will make electric urban transport a desirable investment.
High voltage power lines at sunset.
Yelantsev
Look for the technology that powers the infrastructure, which is going to be more digital than ever
Another area Wahba says is “very interesting” is technology that will support the growth of new infrastructure.
“It’s a derivative of infrastructure investment, right. It’s not direct infrastructure investment,” Wahba told CNBC.
For example, in the case of congestion pricing, cities will need systems to measure and record drivers on the road and implement credit card processing and payment systems to collect such a tax.
“I think all technology related to infrastructure services is an area that will grow exponentially,” Wahba told CNBC.
Wahba said demand will also grow for technology products that improve building efficiency and adapt to changing conditions in real time. “Nobody goes to Burger King or Chipotle or whatever and the temperature changes based on how many people are in the room, but the technology is there to do that,” he told CNBC. “You can save millions of dollars this way.”
Another derivative of the trend towards energy efficiency, Wahba said, is the exponential growth in cybersecurity. More infrastructure systems will be digitized, which means that these systems become increasingly vulnerable to cybersecurity attacks.
“Digitalization is inevitable, because we need that digitization so that we can improve the efficiency of our infrastructure and for us to be able to grow,” Wahba told CNBC. “Digitalization means more efficiency and more effective means lower cost. Lower cost means less budgetary impact and less capital required to invest in infrastructure. But it also means more vulnerability to attack.”
The risk of malicious hackers entering infrastructure systems is particularly frightening.
“What if I control the HVAC system in a hospital? And no one else has the power to control it but me. Think surgery, operating rooms. What if I control the backup power generation in a hospital? What if I take control of a wastewater company sanitary and have the ability to control the amount of waste that goes into the water system because I physically control the equipment?” Wahba said.
“Therefore, cybersecurity will become a big and big issue during the coming years. Because the more technology we adopt in managing our infrastructure, airports, ports, and water stations, the more vulnerable they become,” Wahba said.
Wahba said that the digitization of infrastructure will also increase the demand for fiber optic cables and data centers, but the prices of these stocks are already trading at relatively high prices already due to the interest in artificial intelligence and the transition to 5G mobile networks.
More opportunities to invest in infrastructure will make it better
In fact, the publicly traded market for infrastructure investments is very limited in the United States, Wahba said. Most of the infrastructure in the United States is created by states, cities, and municipalities and is funded through the municipal bond market.
However, this is not the case in the rest of the world.
In the UK, Wahba said, individual investors can invest their money in the water company. “You and I can buy Paris’ Charles de Gaulle Airport: 50% government-owned and 50% runway,” Wahba said. “You and I can’t afford to buy shares in JFK. Now, we want to because we think it’s an interesting investment that gives you long-term cash return etc. But that simply doesn’t exist in the US.”
But Wehbe says that needs to change in the United States.
“This is the dilemma we face in the US: We need to expand ownership of infrastructure assets, specifically to create a market and create capital flowing into this sector,” Wahba said.
Making more of our infrastructure systems investable in general will make them better. “Wider ownership creates more competition, more competition creates more efficiency, and more efficiency leads to lower prices for consumers,” Wahba said.
If more of America’s infrastructure is to be privately owned and available for public investment, there must be a strong regulator to prevent that private company from raising prices too high. 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.
“In general, our energy sector is the most developed and most advanced in the world. Therefore, you may not believe it, but it is true,” Wahba said. Now, the transmission grid system isn’t doing very well, but “the power generation system, look, what we’ve done is amazing. We have a well-developed integrated power system. That’s a fact.”
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