Brick by brick

16 Dec 14
Although the urgent need to upgrade infrastructure is a challenge shared across the G20, potential solutions lie in wait, says Bill Banks.

By Bill Banks | 16 December 2014

Although the urgent need to upgrade infrastructure is a challenge shared across the G20, potential solutions lie in wait, says Bill Banks.

Thanks to the miracle of the motorcade, G20 leaders and their delegations are likely to have little trouble as they make their way from Brisbane’s airport to their hotels. Fortunately, Brisbanites themselves are not likely to look on in envy as theirs is a city that has long benefited from strategic planning for its transport needs.

Nine kilometers of road tunnels, delivered through two public-private partnerships (PPPs), are a fine illustration of what can be achieved when the public and private sectors work together to deliver a major infrastructure project. Such an example, though, is all too rare. For too many of the city’s commuting counterparts around the world, the blight of traffic-clogged streets and delayed, overcrowded trains is a far more familiar tale.

Partly this is down to assets simply showing their age. Many transport systems and hubs were constructed in the 1940s and 1950s and can no longer cope with today’s demands. Take the US, for example. Its status as a global and G20 powerhouse is assured but its transport systems — particularly rail — are in need of a substantial overhaul. But this issue is by no means confined to developed countries or just the transport sector.

Developing countries, as one might expect, have their own set of challenges, with even the fastest growing proving far from immune. The prevalence of India’s slums and the lack of basic water systems in parts of China, for example, are testament to these lingering issues, as well as the ever-progressing impact of urbanization. Ours is now an increasingly urban world, one where — for the first time in human history — more people live in cities than elsewhere and long-standing global dynamos such as London and New York are being joined by younger megacities like São Paulo, Lagos and Dhaka. But as more and more people flock to city borders in search of jobs and prosperity, they create a demand for enhanced infrastructure that can limit congestion and pollution, as well as providing up-to-date communications, power and transport systems.

The global population, too, is rapidly increasing. The United Nations expects it to reach about 8.3 billion by 2030, requiring an investment of US$57 trillion to enable us to just keep pace with the global GDP growth — a figure that exceeds the estimated value of today’s total infrastructure. Similarly, the OECD has projected that by 2030 port container traffic and air freight traffic will more than triple while air passenger demand will double. Such demands add up to a need for US$60–US$70 trillion of infrastructure investment by 2030, but a gap of US$15–US$25 trillion is projected. So what can G20 policymakers do?

Sound foundations required

Of course, governments have a pivotal role to play in closing the gap, but the scale of the challenge is such that they have little option but to work with international donor organizations such as the World Bank. Certainly, there is little — if any — reluctance from the private sector to increase its involvement. On the contrary, the business community is increasingly willing to invest, collaborate with policymakers and explain the benefits of improved infrastructure to the public. Unfortunately, it’s not proving straightforward.

Although robust economic scrutiny is critical to the success of any infrastructure project, there is too often inadequate project selection and prioritization, which is frequently driven by political considerations rather than a sound cost-benefit assessment that would reassure policymakers that their investments will deliver maximum impact. We also found there to be weak project preparation and execution capabilities, including inadequate funding arrangements, inappropriate risk allocation and inefficient procurement policy and procedures.

These obstacles are particularly acute in complex PPPs, where high-profile failures have damaged credibility for investors, even though they remain a crucial funding instrument. PPPs need to be seen as a delivery mechanism, implemented after the detailed planning has already occurred. To work best, governments need to tailor procurement models and make the process more efficient to encourage the adoption of best practices. The taskforce also identified weak and unstable investment and regulatory environments, as well as corruption and a lack of transparency, as important hurdles to overcome. Such issues not only deter investment, but they also make it more expensive to deliver infrastructure. And there also remain barriers to financing, including the unintended consequences of financial regulation, underdeveloped local currency capital markets, and limited availability of appropriate, standardized instruments to align projects’ risk and return profiles with investor needs.

Steps to success

To facilitate a larger and more effective role for the private sector in infrastructure provision, countries need to find better ways of engaging business resources, increase the number of bankable projects, and substantially improve the investment environment. In most cases, governments need to commit to market-based infrastructure policy frameworks that promote efficient investment, safeguard users’ long-term interests, and enable private ownership and management of infrastructure where appropriate.

The taskforce recommended six practical steps that G20 nations should take to promote more investment in infrastructure. Collectively, these actions could generate US$8 trillion worth of additional infrastructure capacity by 2030, and US$1.6 trillion of additional investment by businesses in their own operations every year. They could also contribute up to 1% to the G20 target of 2% of additional growth over the next five years, and lay the foundation for sustainable, inclusive growth and employment over the longer term.

As a first priority, we recommended that G20 governments should set infrastructure investment targets consisting of a prioritized list of projects rigorously assessed by an independent national infrastructure agency. Having found that an associated roadblock to increasing the number of investment-ready projects is the variable quality of practices used for analyzing and selecting projects — average times for the regulatory approval of projects vary across the G20 from two to 10 years — we also recommended that the G20 should establish a Global Infrastructure Hub. This new organization would be tasked with promoting ongoing improvements through the sharing of leading practices and approaches, including improving the efficiency of regulatory approvals and standards for transparent procurement processes.

A third roadblock to increased private infrastructure investment is the deficiency in appropriate financial instruments and capital markets. For example, in Australia self-managed super funds represent US$550 billion and growing, yet these funds cannot invest in non-listed infrastructure because of the lack of appropriate instruments. Similarly, many countries in the G20 cannot access locally denominated capital markets for infrastructure investment. In response, we recommended that the G20 and the private sector should actively promote diversity in the range of infrastructure investment instruments, encourage the development of local infrastructure investment markets, and facilitate stronger cross-border investments to address declining foreign direct investment (FDI).

Moving forward

It is hugely encouraging that among the commitments of G20 finance ministers and central bank governors following their meeting in Cairns in September was an agreement on infrastructure. The communiqué stated: “We have agreed to a Global Infrastructure Initiative to increase quality investment, particularly in infrastructure. The Initiative will seek to implement the multi-year infrastructure agenda, including through developing a knowledge sharing platform, addressing data gaps and developing a consolidated database of infrastructure projects, connected to national databases, to help match potential investors with projects.”

The communiqué demonstrates clear progress toward meeting the 2% additional growth target, but there remains scope to encourage further commitments on growth, infrastructure and investment, and to broaden the agenda to cover human capital and trade commitments. It is important to keep up the momentum because in our world of deeply interconnected economies, high-quality infrastructure underpins economic activity both within and across national borders. It is one of the most powerful levers available to support businesses — from SMEs to large multinationals — to make the investments that drive inclusive, sustainable growth across the globe.

Different patterns of labor markets, capital flows and consumer markets, all of which are globalizing faster and deeper than ever before, present a range of challenges and opportunities to the G20. Its governments are now much more connected and there is increasing recognition that solutions to today’s problems can be identified from global best practices and be coordinated across borders. Infrastructure is no exception. Providing the building blocks to stronger economic growth and an improved quality of life for citizens the world over, its importance is clear — both for today’s generation and the next.

G20 leaders should:

1 Reaffirm the critical importance of infrastructure — and private investment in infrastructure — in their national growth plans, and set specific infrastructure investment targets to 2019.

2 Establish, publish and deliver credible national infrastructure pipelines that have been rigorously assessed and prioritized by independent national infrastructure authorities.

3 Establish a Global Infrastructure Hub with a mandate to collect and disseminate leading practice, and collaborate with key stakeholder organizations to increase the pipeline of bankable, investment-ready infrastructure projects.

4 Implement infrastructure procurement and approvals processes that are transparent, consistent with global leading practices, and include a commitment to specific time limits for regulatory and environmental approvals.

5 Work toward greater promotion and protection of cross-border capital flows, especially FDI.

6 Increase the availability of long-term financing for investment, including for infrastructure, by removing unnecessary disincentives for long-term investment.

This feature was first published in the November edition of EY's Citizen Today

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