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What is Infrastructure?

definition

Infrastructure is the framework that allows society and the economy to run smoothly — from roads to electricity to essential public services.

🤔 Understanding infrastructure

Infrastructure refers to the systems that allow businesses and nations to operate — from telecommunications networks to water and electricity grids to transportation systems. It includes hard infrastructure, which encompasses physical structures like roads and bridges. It also includes soft infrastructure, which is made up of the institutions and people that keep society running. Infrastructure is often financed by governments through grants, taxes and fees, bonds, or public-private partnerships. A healthy infrastructure is essential for economic development. Supplying infrastructure can often lead to natural monopolies because of high start-up costs and barriers to entry.

example

Roads are a key example of infrastructure. Having roads in good repair is vital to keeping the economy running smoothly. They allow people to get to work, raw materials to reach factories, and products to make it to market. Since this benefits society as a whole, governments often use gasoline taxes or tolls to pay for road upkeep.

Takeaway

Infrastructure is like the foundation of a house…

You need a solid foundation to keep your home standing upright. Likewise, society requires a solid infrastructure as a base to ensure that the economy functions. A crack in the foundation can lead to systemic problems that spread to all areas of the house (or the economy) if it’s not repaired. illo-infrastructure-desktop mobile

Tell me more...

What is the purpose of infrastructure?
What are the different types of infrastructure?
What role does the government play in infrastructure?
Why invest in infrastructure?
How can you invest in infrastructure?

What is the purpose of infrastructure?

Infrastructure is the framework that allows companies and societies to run smoothly, but that most people take for granted. Infrastructure is what allows businesses to produce goods and services and get them to consumers. It’s also what allows governments to provide essential public services like healthcare, sanitation, and education. Infrastructure is key for everything from economic growth to public health and safety to reducing pollution.

Because of its public importance, most types of infrastructure are either government-run or receive substantial government subsidies. Examples of infrastructure include:

  • Roads and bridges
  • Mass-transit systems (buses and trains)
  • Airports and airport control towers
  • Water systems
  • Power plants, electric grids, and solar panels
  • Schools and universities
  • Police and fire departments

What are the different types of infrastructure?

Infrastructure falls into several categories, some of which overlap.

Hard infrastructure

Hard infrastructure refers to the physical systems that underpin a modern society. This includes transportation networks (like roads, bridges, and railways) and communication systems (like broadband and telephone networks). For instance, the bus you take to your doctor’s appointment and the roads it drives on are examples of hard infrastructure.

Soft infrastructure

Soft infrastructure refers to the institutions that help the economy run. This includes the education system, healthcare, emergency services, law enforcement, the banking system, and the government. Soft infrastructure requires human capital (the skills and knowledge of individuals) and often includes public services. The nurses and doctors who treat you are a part of soft infrastructure (although they require the “hard” structure of the hospital to operate).

Critical infrastructure

Critical infrastructure refers to the assets and institutions that the government deems necessary for society and the economy to run. This includes shelter, heating, food production (including agriculture) and distribution, healthcare and medicine, security, and more.

Military infrastructure

Military infrastructure refers to the buildings and other fixtures the military needs to operate. Examples include barracks, airfields, headquarters, and communications systems.

Green infrastructure

The idea that nature can also be part of infrastructure has become more widespread. Natural resources like parks, forests, and wetlands can support communities by protecting them from flooding and improving air and water quality.

What role does the government play in infrastructure?

Infrastructure is critical to economic development and public welfare, and it usually requires a large upfront investment. For these reasons, governments often play a role in creating and sustaining it. In some cases, infrastructure might fall entirely within the purview of the government. For example, governments often pay for the construction and upkeep of roads and highways. Other times, governments partner with private companies to build infrastructure, such as dams or bridges. Governments can also outsource some types of infrastructure, such as provision of electricity or water services, to regulated private companies.

One reason governments are often involved in infrastructure is that providing it often leads to natural monopolies, meaning high startup costs and other barriers to entry make it difficult for others to enter the market. For example, supplying electricity or water means laying miles of pipelines and cables. Once one provider exists, it’s difficult and inefficient for others to step in.

Because of its public benefits, the government often foots at least part of the bill for infrastructure. Sometimes, this occurs through taxes and fees. For example, taxes on your phone or utility bills may help pay for telecommunications infrastructure, or bridge tolls can pay for the bridge’s maintenance. Governments may also fund major infrastructure projects through federal grants, selling bonds, or partnering with a private company that shares in the investment. The government’s role in infrastructure can help ensure that it’s available to everyone, not just to those who can afford to pay.

Why invest in infrastructure?

Infrastructure is necessary for keeping society and the economy running. It allows trade to occur, companies to do business, and workers to get to their jobs. It also provides millions of jobs directly and helps communities weather natural disasters and the effects of climate change.

Many experts agree that the US has fallen short with infrastructure spending in recent decades. The American Society of Civil Engineers gave the national infrastructure a grade of D+. And nearly 20% of the country’s roads are in poor condition, according to a survey from the Federal Highway Administration. The US has spent only around 2.5 percent of gross domestic product (GDP) on infrastructure in the past few decades, and spending fell by nearly $10B between 2007 and 2017 in real terms.

Many experts argue that increasing investment in infrastructure is key for providing critical services and supporting economic growth.

How can you invest in infrastructure?

Individuals can also invest in infrastructure as an asset. One way is by buying bonds that governments issue to raise money for infrastructure projects. Another is to purchase shares of publicly traded companies that provide utilities, such as American Water Works, which supplies water and wastewater services to people in 46 states.

People can also invest in multiple infrastructure companies at once through infrastructure funds. These focus on companies that provide services people rely on, like electricity, waste management, shipping, agriculture, and communications.

Infrastructure tends to be a more stable asset class than many other investment options. That’s because there is always demand for infrastructure as a necessary part of the economy. Individual transportation or utility companies may perform poorly in the stock market. But as a whole, infrastructure probably isn’t going anywhere because of the vital role it plays in the economy. In addition, infrastructure companies often do better than others during an economic downturn, which can help investors diversify their portfolios. Some infrastructure providers, such as solar companies, may also benefit from government subsidies.

Investing in infrastructure also comes with risks. Private companies involved in infrastructure are likely to be subject to heavy government oversight, which may increase costs and reduce potential for growth. Infrastructure is also expensive to build and maintain, which can boost costs.

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