Infrastructure Investment
As economic growth languishes and worries about the specter of deflation mount, much-needed infrastructure development and new sources of project financing could provide a panacea to global growth.
Economic recovery worldwide is uneven, despite the strong push by central banks in recent years to employ a number of unconventional measures to give their own economies—and ultimately the global economy—a kick-start. Developing and developed countries are on the hunt for the next driver of growth. Fiscal constraints continue to affect governments everywhere, making a significant increase in public spending unlikely. But the solution for leaders from Vietnam to Brazil is right under their noses: the crumbling, or nonexistent, ports, power plants and sewage systems on which their citizens, and economies, rely. Infrastructure could hold the key to unlock the global savings glut that endures in the face of near-zero interest rates—that is, if political will is found and a comprehensive vision for infrastructure investment involving the private sector is laid out.
“Infrastructure investment can fuel growth and reduce income disparities,” says Bernie Sheahan, global director for infrastructure and natural resources at the International Finance Corporation (IFC). “Analytical work shows that, on average, a 10% increase in the stock of infrastructure contributes to 1% growth in the long term.” Sheahan says that infrastructure has contributed about half of the recent acceleration in growth in sub-Saharan Africa. In China real income by 2007 was about 6% higher than it would have been had its inter-urban expressway network not been built. According to an estimate by consultants Wendell Cox and Jean Love, the US interstate highway system has returned more than $6 in productivity for each dollar it cost.
Infrastructure investment in the transport, energy, water, telecommunication and social sectors (schools, hospitals and prisons) presents advantages for governments, corporates and investors alike—particularly in the current economic climate. It is needed both in developing countries, where good infrastructure has yet to be built, and in developed nations, where it is screaming for a face-lift. Hence there are boundless opportunities for private companies, from engineering, procurement and construction (EPC) to real estate to financial services.
DUAL IMPACT
Additionally, infrastructure investment has both a direct and an indirect effect on growth, contributing to job creation in the short-term and, by smoothing out wrinkles in supply chains, to increased economic efficiency in the long run. And though it requires public funds, it doesn’t have to burden governments as much as social assistance programs—especially when done via public-private partnerships (PPPs). Finally, in today’s low-interest-rate environment, infrastructure projects can attract institutional investors. “They offer long-term, stable cash flow, and many of these sectors are regulated, so entry barriers are high,” says Stefano Gatti, associate professor in the department of finance at Bocconi University in Italy.
The overall numbers are staggering. According to the World Bank, low and middle-income countries alone should invest an additional $1 trillion to $1.5 trillion in infrastructure annually until 2020. “There is definitely a lot of demand in Latin America and the Caribbean,” says Olga Lucía de Narváez, lead investment officer at the Inter-American Investment Corporation. “The region should increase investment by at least 2% of GDP over the next several years, about $150 billion to $250 billion per year.” The Asia Development Bank estimates that, between 2010 and 2020, the Asia Pacific region will require nearly $8 trillion in infrastructure investment, while the African Development Bank says that sub-Saharan Africa requires $50 billion dollars a year more than it gets now. As for the developed world, the American Society for Civil Engineers calculates that the US should invest $3.6 trillion by 2020, while the European Commission puts infrastructure needs across the European Union at more than $2 trillion over the next five years.
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