Sadek Wahba, chairman and managing partner of I Squared Capital Advisors LLC, speaks at the 2023 S&P Global CERAWeek conference in Houston, Texas, U.S., Wednesday, March 8, 2023. changes in geopolitics and a war waged 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 need for infrastructure improvements will continue to grow over the coming decades as more and more people migrate to cities.
Furthermore, the coming decades will be critical to the global effort to combat climate change. Energy efficiency will become a higher priority for builders, bringing new technologies, challenges and opportunities for investors.
All in all, “the whole industry is on an upward trajectory,” he said. Sadek WahbaFounder and Chairman I Squared Capitalis a global infrastructure management company currently managing approximately $40 billion worth of infrastructure project investments in more than 50 countries.
Wahba is also a member of President Biden’s National Infrastructure Advisory Committeeshared with CNBC how investors can capitalize on this trend.
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“The entire grid needs a complete overhaul,” Wahba said.
Utilities sometimes do this kind of construction, but utility stocks aren’t “100% infrastructure related” because they have a lot more components than building infrastructure
As a result, the best way to benefit from the need for a new grid is to invest in the specialist construction companies that build it, Wahba told CNBC.
“I think it’s a really interesting space because there’s going to be a lot of work, there’s a need for specialization, and the barriers to entry are relatively high,” Waba told CNBC. “Not just anyone can build these transmission and distribution lines. You need training, you need permits, you need environmental permits, and there are safety issues.”
Wachba is also bullish on the electrification of urban transport. New York City is implementing a congestion pricing program for drivers entering downtown Manhattan. Wachba said electric urban mobility would be an ideal investment if congestion charging becomes more common.
High voltage power lines at sunset.
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Find the technology to operate the infrastructure, which will become more digital
Another area Waba said was “very interesting” is the technology that supports the growth of new infrastructure.
“It’s a derivative of infrastructure investment, right. It’s not direct investment in infrastructure,” Wahba told CNBC.
For example, in the case of congestion pricing, cities will need systems to measure and record when drivers are on the road, and implement credit card processing and payment systems to collect such taxes.
“I think all technology around infrastructure services will grow exponentially,” Wachba told CNBC.
Demand will also grow for technology products that improve building efficiency and adapt to changing conditions in real time, Wachba said. “No one goes to a restaurant like Burger King or Chipotle where the temperature changes based on how many people are in the room, but there is technology that does that,” he told CNBC. “You can save millions of dollars that way.”
Another spin-off of the energy efficiency trend is the exponential growth of cybersecurity, Wachba said. More infrastructure systems will be digitized, which means these systems are increasingly vulnerable to cybersecurity attacks.
“Digitalization is inevitable because we need digitalization to make infrastructure more efficient and enable growth,” Wahba told CNBC. “Digital means more efficiency, and more efficiency means lower costs. Lower costs mean less impact on budgets, less capital required to invest in infrastructure. But it also means greater vulnerability to attack.”
The danger of malicious hackers gaining access to infrastructure systems is especially dire.
“What if I control the HVAC system in a hospital? Nobody but me has the ability to control it. Think about the operating room, the operating room. What if I control the back-up power generation in the hospital? What if I control a wastewater treatment company and I have the ability to control the amount of waste that goes into the water system because I actually control the equipment?” Waba said.
“So cybersecurity is going to be a very, very big problem in the next few years. Because the more technology we have in the management of infrastructure, airports, ports, hydroelectric plants, the more vulnerable they become,” Wahba said.
The digitization of infrastructure will also increase demand for fiber optic cables and data centers, but those stocks are already trading at relatively high levels due to interest in artificial intelligence and the shift to 5G mobile networks, Wahba said.
More opportunities to invest in infrastructure would make things even better
The publicly traded market for U.S. infrastructure investment is actually extremely limited, Wachba said. Much of America’s infrastructure is built by states, cities, and municipal governments, and financed through the municipal bond market.
However, this is not the case elsewhere in the world.
In Britain, individual investors can put money into water companies, Wachba said. “You and I can buy Paris-Charles de Gaulle: 50% owned by the government, 50% listed,” Wachba said. “You and I can’t buy JFK stock. Right now, we want to buy because we think it’s an interesting investment that gives you long-term cash gains and so on. But, that doesn’t exist in the U.S. at all.”
But Wachba said the U.S. needs to change that.
“This is the dilemma we face in the U.S.: We need to expand ownership of infrastructure assets precisely to create a market and generate capital flowing into that sector,” Wahba said.
Making more infrastructure systems available for public investment will make them better. “Broader ownership leads to more competition, more competition leads to greater efficiency, and greater efficiency leads to lower prices for consumers,” Wahba said.
If more of U.S. infrastructure is private and available for public investment, there must be a strong regulator to stop private companies from raising prices too much. Otherwise, privatizing infrastructure “would be a disaster,” Wachba told CNBC.
In the United States, the energy industry is one of those areas where infrastructure is generally privately owned.
“Overall, our energy sector is the most complex and advanced in the world. So, you might not believe it, but it’s true,” Wahba said. Right now, the transmission grid system isn’t working well, but “the generation system, look, what we’ve done is amazing. We have the most advanced integrated power system. It’s a fact.”
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