Infrastructure

What Is Infrastructure?

The term infrastructure refers to the basic physical systems of a business, region, or nation. These systems tend to be capital intensive and high-cost investments, and are vital to a country's economic development and prosperity. In economic terms, infrastructure often involves the production of public goods or production processes that support natural monopolies. Examples of infrastructure include transportation systems, communication networks, sewage, water, and electric systems. Projects related to infrastructure improvements may be funded publicly, privately, or through public-private partnerships.

Key Takeaways

  • Infrastructure are the basic systems that undergird the structure of the economy.
  • Examples of infrastructure include transportation facilities, telecommunications networks, and water supplies.
  • Large scale infrastructure is usually produced by the public sector or publicly regulated monopolies
  • Infrastructure can often be produced on a smaller scale by private firms or through local collective action.
  • Infrastructure investment tends to be less volatile than some other asset classes and is sometimes sought as an investment.
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Infrastructure

Understanding Infrastructure

Applicable to large- and small-scale organizational frameworks, infrastructure includes a variety of systems and structures as long as physical components are required. For example, the electrical grid across a city, state or country is infrastructure based on the equipment involved and the intent to provide a service to the areas it supports.

The physical cabling and components making up the data network of a company operating within a specific location are also the infrastructure for the business in question, as they are necessary to support business operations.

Because infrastructure very often involves the production of either public goods or goods that lend themselves to production by natural monopolies, it is very typical to see public financing, control, supervision, or regulation of infrastructure. This usually takes the form of direct government production or production by a closely regulated, legally sanctioned, and often subsidized monopoly.

Infrastructure can also often take on the characteristics of club goods or goods most readily produced by localized monopolies when it comes to much smaller scales. As such, it can be provided within the context of a private company producing infrastructure for use within the firm or provided by localized arrangements of formal or informal collective action.

On November 15, 2021, President Joe Biden signed the Infrastructure Investment and Jobs Act, which allocates $1.2 trillion to fund the rebuilding of roads, bridges, water infrastructure, internet, and more. This includes $110 billion in roads, bridges, and major projects, as well as $39 billion in public transit and $7.5 billion in electric vehicle infrastructure.

Special Considerations

The term infrastructure first appeared in usage in the late 1880s. The word comes from French, with infra- meaning below and structure meaning building. Infrastructure is the foundation upon which the structure of the economy is built—often quite literally.

In 1987, a panel of the U.S. National Research Council adopted the term “public works infrastructure” to refer to functional modes including highways, airports, telecommunications, and water supplies, as well as the combined systems that these elements comprise. 

The following are a few of the classifications of infrastructure.

IT Infrastructure

Many technical systems are often referred to as infrastructures, such as networking equipment and servers, due to the critical function they provide within specific business environments. Without the information technology (IT) infrastructure, many businesses struggle to share and move data in a way that promotes efficiency within the workplace. If IT infrastructure fails, many business functions cannot be performed.

Infrastructure as an Asset Class

Infrastructure is also an asset class that tends to be less volatile than equities over the long term and provides a higher yield. As a result, some companies and individuals like to invest in infrastructure funds for their defensive characteristics, such as funds involved in transportation or water infrastructure.

Private Investment in Public Infrastructure

Sometimes private companies choose to invest in a country's infrastructure development as part of a business expansion effort. For example, an energy company may build pipelines and railways in a country where it wants to refine petroleum. This investment can benefit both the company and the country.

Skyway Concession Company entered into a 99-year lease with the City of Chicago in 2005 to operate and maintain the Chicago Skyway Bridge. As part of the agreement, Skyway receives all toll and concession revenue generated by the bridge, while the city benefited from a $1.83 billion cash infusion and is no longer responsible for maintaining the bridge.

Individuals may also choose to fund improvements to certain pieces of public infrastructure. For example, an individual may fund improvements to hospitals, schools, or local law enforcement efforts.

Types of Infrastructure

There are several different types of infrastructure. We've listed some of the most common categories below.

Soft Infrastructure

Soft infrastructure makes up institutions that help maintain the economy. It usually requires human capital and helps deliver certain services to the population. Examples include the health care system, financial institutions, governmental systems, law enforcement, and education systems. 

Hard Infrastructure

This kind of infrastructure makes up the physical systems that make it necessary to run a modern, industrialized nation. Examples include roads, highways, bridges, as well as the capital/assets needed to make them operational (transit buses, vehicles, oil rigs/refineries). 

Critical Infrastructure

This type of infrastructure is comprised of assets that are defined by a government as being essential to the functioning of a society and economy, such as facilities for shelter and heating, telecommunication, public health, agriculture, etc. In the United States, there are agencies responsible for these critical infrastructures, such as Homeland Security, the Department of Energy, and the Department of Transportation.

Along with the aforementioned sectors, infrastructure includes waste disposal services, such as garbage pickup and local dumps. Certain administrative functions, which are often covered by various government agencies, are also considered part of the infrastructure. Educational and health care facilities may also be included, along with specific research and development (R&D) functions and necessary training facilities.

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  1. The White House. "UPDATED FACT SHEET: Bipartisan Infrastructure Investment and Jobs Act." Accessed Nov. 17, 2021.

  2. Online Etymology Dictionary. "infrastructure (n.)." Accessed Nov. 17, 2021.

  3. National Research Council. "In Our Own Backyard: Principles for Effective Improvement of the Nation's Infrastructure." The National Academies Press, 1993.