The Economist January 3rd 2021|Finance & economics| “The infrastructure infatuation” “In the works” “Governments and investors hope to stoke a global infrastructure boom, but they are terrible at making projects happen. Can that change?”
Upgrading current infrastructure. Predictable and preferred by investors. Image ase.org
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Summary of Article
General-government capital stocks % increase on a year earlier, a measure of investment on capital projects, has declined from about 4% in 1961 to about 0.6% in 2017 in advanced economies and in the same timeframe has increased from about 4% to about 5.5% in emerging economies and about 5.7% in low income developing countries. As a % of GDP China has increased from 150% in 1992 to 161% in 2017 while Advanced economies have fallen, in the same timeframe, from 83% to 67%. World, private investment in infrastructure deals ($Bn) has declined in Primary markets from about $133Bn in 2010 to $89Bn in 2019 while investments in safer Secondary markets has increased, in the same timeframe, from about $89Bn to $355Bn.
These data reflect the overriding trends about infrastructure investment; less investment by advanced economies with private investment focused on less risky secondary investments rather than greenfield investments. In contrast China has led infrastructure investment over the last two decades.
Hoping to rebound from COVID infrastructure projects are enticing but governments and government/private investment partnerships have a history of failure especially for transformative projects. These larger projects creating new infrastructure are difficult to accurately budget and can lose commitment as they often span many election cycles. For this reason the more predictable and short-term projects that upgrade existing roads and bridges for example are preferred and more successful.
Now, “America’s president-elect Joe Biden, has pledged to spend $2trn on roads, bridges, and electric-car charging points.” Similar investments generally are planned for the EU, China, Latin America and Asia. Besides past struggles, Obama’s “Recovery and Reinvestment Act…failed to greatly expand the capital stock, largely because it focused on small maintenance projects that could pass through congress…[and] “Trumps $200bn plan was hobbled by disagreements over the distribution of cash”, the additional complications now relate to the potential for COVID-19 to “divert funds: governments may need to bail out struggling urban-transport system” as an example. Having said that the pandemic provides “enthusiasm for infrastructure: it can boost growth, both in the near term and further out.” According to the IMF, “increasing public investment by 1% of GDP across advanced and emerging economies would create 20m-33m jobs and lift GDP by 0.25%-0.5% in the first year and up to four times that after the second.” Also, low interest rates make investment doable and with solid returns “pension funds and insurers, starved of safe yield they need to meet future liabilities, are eyeing the steady cashflows from infrastructure assets.” As it is, there are many “shovel-ready projects” pent up including highway and bridge repairs but with the rise of the e-economy greenfield investment is in demand as well for digital infrastructure, including fiber networks and data centers, and green projects like “offshore-wind and electric transport infrastructure.”
Greenfield investments less predictable and potentially plagued by cost-overruns. Image construction-property.com
Getting these projects done can be affected by politics, poor execution, and for greenfield projects unknown risk and a history of cancellations or huge cost overruns. To avoid past mistakes “Governments could lure more capital by tailoring contract to provide more certainty.” “Governments that start small and keep their word seem to whet investors’ appetite for more ambitious plans.” A big help currently is that there is more investor interest and enthusiasm for “digital and renewable” projects.