GE Reports, 7 February 2016
To attract the trillions of dollars needed in infrastructure investment to fuel global growth and create jobs, we need better information about what’s working and why.
There are many varying estimates of the global infrastructure gap, but one thing they all agree on is that it is large and it is not closing on current policy settings. Whether it is McKinsey’s estimate of $57 trillion, or PwC’s of $78 trillion in infrastructure needs — leaving an expected infrastructure deficit widely estimated at around $20 trillion to 2030 — it is clear that for the world to meet its growth potential, this gap needs to be addressed.
Beyond providing a needed boost to global growth, McKinsey’s analysis suggests that an increase in infrastructure investment equivalent to 1 per cent of GDP could translate into an additional 3.4 million direct and indirect jobs in India, 1.5 million in the U.S., 1.3 million in Brazil and 700,000 in Indonesia.
So what is holding back increased investment in infrastructure? The answer isn’t necessarily the same for all markets. In the more developed markets, the barriers are primarily public discomfort with privatized or partly privatized models, and a desire by governments to be seen to be making savings in a post-crisis austerity environment. Austerity, regardless of whether it has proved the right economic policy for governments in the circumstances, has undoubtedly made the development of large infrastructure projects more difficult.
In the emerging markets, the question is more about skills and capability — those skills generally around planning, project selection and matching the right form of funding to the project. Are countries planning far enough ahead to have a logical progression through their infrastructure aims and desires? Are the right projects prioritized? And of those prioritized projects, are private-public partnerships or private structures applied to the correct projects? That’s the capability gap.
Then there are longer-term planning issues such as land acquisition, permitting and sustainability — where the rights of the people need to be preserved while still allowing progress. There are also issues of economic capability. Countries that lack developed capital markets struggle to provide long-term finance and the currency-exchange protections that investors require. Without solutions to these issues, attracting long-term foreign investment in infrastructure is going to be challenging.
So what are the priorities to address this infrastructure challenge? To improve public and private collaboration we need to learn from successes — what has worked well previously, and why? How can this success be expanded across the globe to close the gap in infrastructure needs?
We need to focus on new, more targeted approaches to build knowledge and capability in developing and emerging markets that will ultimately help expand the pipeline of quality, bankable projects. These approaches need to draw on existing expertise from multilateral development banks, international organizations and the private sector. They also need to incentivize governments to better understand their own capabilities and better access appropriate expertise from around the world.
We need a much sharper focus on more efficient utilization of existing assets, moving this issue from the sidelines into the mainstream. We need to focus on the data gaps that exist and that are important to the private sector. One obvious area of data weakness is in relation to the operational record of infrastructure assets as not only an investment, but also whether they provided the expected benefits to the people and the economy.
This knowledge would then allow us to present infrastructure as an asset class, opening new sources of debt and equity finance. If we cannot provide better data on expected risks and returns, greenfield investments in infrastructure will remain essentially a niche activity for specialized project teams — rather than a realistic investment prospect for funds managers seeking the stable, long-term returns that infrastructure investment can provide.
The G20 recognized the need for new approaches to lift quality public and private infrastructure investment, with this recognition underpinning the Hub’s establishment. The Hub will work closely with both the public and private sectors to build the pipeline of infrastructure projects available for investment across the world, in both G20 and non-G20 countries. We are also working closely with established multilateral development banks (MDBs), as well as newer arrivals, to ensure our work complements their efforts. It is great to see so many countries joining with the Chinese to create the Asian Infrastructure Investment Bank, and we look forward to seeing it provide a more streamlined approach to investment, achieving timelines closer to private sector norms.
The Hub is different from most of the MDBs in that it is not a project financer, nor will it advise on specific projects. It is genuinely independent and impartial to funding source. The Hub will operate as an open platform, focused on finding the best available global infrastructure knowledge and adapting it for local application in developing, emerging and advanced markets.
Our target is to provide help where it is both needed and where it is requested, but also where it will make a difference. Some emerging markets may want help with specific areas in their procurement chain. Some of the more developed countries may want to understand how other countries are implementing quite technical innovations. The Hub’s knowledge network can assist to link up examples of best practice with those who are seeking it.
There is tremendous energy in both the public and private sectors to fill the global infrastructure gap. With the right knowledge, we can harness that energy.
Chris Heathcote, CEO, Global Infrastructure Hub