Global infrastructure is back on the agenda
- The demands of economic development and the deterioration of existing infrastructure are factors that make an integral approach to developing infrastructure imperative.
- Funding is critical; it is not enough to rely only on the state and many countries of the world show gaps in this regard.
- Flexibility of use and prioritisation in execution are important factors in the future development of infrastructure. A more efficient approach during execution and maintaining existing infrastructure can help to reduce the financial pressure.
According to a report by McKinsey, the world now invests 14% of global GDP in infrastructure and property assets. The deterioration of existing infrastructure, a growing population and the demands for economic development drive nations to allocate more funds to transport, electricity and other systems that galvanise economic growth.
According to the same study, 54% of the world’s needs are in Asia, most in the two fastest growing economies and the most populated countries. China represents 34% of the global total and India 8%. The trend is also for investment to continue to flow into the emerging markets, accounting for two thirds of global investment by 2035.
Despite this, there is a US$5.5Tr deficit between now and 2035, with regional variations.
Countries like Australia, China and Japan have invested enough to exceed their projected investment needs and they only need to invest a lower percentage of their GDP than they have in the past. Germany, the United Kingdom and the United States on the other hand, have significant short-falls between their current spending and what they require.
The largest gaps could be in Brazil, Indonesia and Mexico, reflecting the fact that this is where most of the demand for infrastructure is located.
Many G20 countries have started to take action based on this pressing investment need. The members of the European Union, for example, have increased their expected investment rate. In the United States, investment in infrastructure seems to have risen on the agenda and President Trump himself has identified this as a potential area of collaboration with the Democratic party.
On the other hand, the World Economic Forum identifies infrastructure as one of the pillars of competitiveness, and it has drawn up a ranking on infrastructure quality based on a variety of criteria: connectivity of roads, their quality, railway density, efficiency of train services, air connectivity, efficiency in air transport services, shipping connections, efficiency of port services, electrification rate, losses in electricity distribution, reliability of water supply and exposure to non-drinkable water.
The leaders of this ranking are as follows:
- Hong Kong
- South Korea
- United States
KPMG has identified a series of emerging trends that define the development of infrastructure in the short term that could help manage it:
- Competition among opposing forces: Public policy makers need to build bridges between opposing visions and balance the needs of the different stakeholders. The challenge is to create a shared future while at the same time taking difficult decisions, such as deciding between funding health infrastructure for the elderly or mobility for the millennials. Against this backdrop, we need better data and more sophisticated analytical tools to obtain more accurate forecasts.
- Planners include flexibility: The design and procurement of projects are expected to take into account a range of different possible futures. For example, when an electric power line is built, thought must be given to how electric vehicles could affect the nature of demand.
- Sustainability climbs up the agenda: The vision of sustainability will expand to create more value and this includes financial sustainability (structures must be relevant and appropriate), operational sustainability (the technologies applied to the assets must be the best to optimise their performance), technological sustainability (consider both the feasibility and the possible obsolescence of the base technology) and social sustainability (benefits must reach all levels).
- The rhythm of development under the microscope: Countries are rethinking the rhythm of planning and execution. In developing markets, this could translate into a slower rhythm to think about the priority of projects in terms of appropriateness and sustainability. In mature markets, it could mean a faster pace, accelerating and standardising these planning, approval and execution processes.
- Security becomes critical: The expansion of the interconnectivity of physical infrastructure makes entire systems vulnerable to hackers. Standards are improving and governments have identified strategic assets and have started to determine clear lines to protect them.
- Alignment between payers, financers and beneficiaries: The balance between who pays and who benefits from infrastructure development is expected to be taken into account and discussed.
- Price models mature: Extended application of dynamic price models, including variables like the ability to pay, the value they add to a service and the urgency of its use, and regulators thinking how these models can be applied fairly.
- The benefits of sharing data become more evident: This would lead governments to acquire more skills in handling, sharing and using data in different departments and jurisdictions and among the different players involved in providing the services.
- Re-convergence of assets: The dividing line between the different asset classes and between investors in infrastructure and investors in property assets becomes blurred, as property assets are an essential component of any infrastructure project. Real estate private equity companies can be seen to set up infrastructure funds.
Reasons for optimism
According to McKinsey, there is a lot of room for improvement in the effectiveness of managing infrastructure. An approach based on facts, fluid execution and optimising the maintenance of existing infrastructure could close the gap and reduce costs by more than $1Tr a year for the same amount of infrastructure.
Neither would it be unlikely that some of the aforementioned countries of the world that lead infrastructure development globally share best practises and contribute to the debate on how to build infrastructure capable of boosting long-term, global economic growth and reduce the funding gap.
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KPMG International. Emerging Trends in Infrastructure. 2018
McKinsey Global Institute. Bridging Infrastructure Gaps. Has the world made progress? October 2017
Stacey, Kiran and Edgecliffe-Johnson, Infrastructure Spending rises up US political agenda. Financial Times, 8 November 2018
World Economic Forum. Global Competitiveness Report 2018. October 2018