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Meeting the world's infrastructure requires huge investments

Article - April 22, 2016

Around the world, fulfilling basic human needs such as access to water, sanitation or electricity means having the infrastructure required to do so. The investment necessary to build or upgrade existing infrastructure seems overwhelming, but the G20 is working to meet the challenge, with the help of private investors.

Tackling global poverty starts at ground level. In developing nations worldwide, the sheer number of people that lack access to the most basic resources is staggering: over 1.3 billion people, or 20 percent of the global population, have no access to electricity; almost 770 million people lack a reliable source of clean water; 2.5 billion are without adequate sanitation.

The infrastructure necessary to meet these needs is a global issue that demands a global solution. Currently, there are a vast amount of unmet funding requirements. The G20, along with the Organization for Economic Cooperation and Development (OECD) the International Monetary Fund (IMF), and the World Bank Group have made addressing this shortfall, and boosting infrastructure development worldwide, a top priority.

With the effects of the global financial crisis continuing to ripple through the world economy, current public sector investment is a drop in the ocean of what is required to meet infrastructure investment goals. The G20 and its partners -- within the context of the United Nations General Assembly 2030 Sustainable Development Goals -- has adopted a series of measures to “foster efficient infrastructure investment and support financing opportunities for SMEs,” according to the summary of the Brisbane Action Plan, which was drawn up in 2014.

The plan, which will be discussed at the Antalya G20 Summit in November, calls on institutional investors to pick up the slack in infrastructure financing under the G20 Global Infrastructure Initiative, which will complement the efforts of the Global Infrastructure Facility (GIF) launched by the World Bank in October 2014. The latter plan has an initial capital of $100 billion.

The GIF’s purpose is to provide a platform for the creation of public-private partnerships. In order to facilitate international cooperation, a Global Infrastructure Hub has been set up in Sydney, with a four-year mandate to bring together government officials, private sector investors, national, regional and multilateral development banks and other international organizations representing both G20 and non-G20 nations. The GIF will initially run a series of pilot programmes before becoming fully operational. The governments of Australia, Canada, China, Japan and Singapore, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank and the Inter-American Development Bank are among those signed up to the GIF.

UN Secretary-General Ban Ki-moon noted the importance of developing infrastructure assets in an address to the OECD earlier this year:  “Investment in sustainable infrastructure for example is recognized as a major cross-cutting driver that can contribute to achieving all the SDGs.”

So far, there have been in the region of 1,000 individual country plans drawn up under the Brisbane Plan, which the OECD and IMF estimate will amount to a 2.1 growth percentage within the G20 up to 2018. Among the initiatives laid out in the Brisbane Plan was the aim of lifting GDP growth within the bloc by two percent within that timeframe.

However, there are multiple problems facing both the G20 and non-G20 nations. Chief among these is the annual shortfall in global infrastructure investment. A McKinsey Global Institute report published in 2013 found that worldwide,”$57-trillion in new infrastructure investment would be required in the period up to 2030, simply to keep up with projected GDP growth. This estimate suggests a requirement of $3.2 trillion investment a year”.

The global infrastructure investment gap amounts to at least US$ 1 trillion per year, which corresponds to about 1.4% of global GDP. The OECD estimates the gap will amount to $70 trillion by 2030 and that it will continue to grow.

Addressing the shortfall is vital to increasing growth, creating jobs and providing basic needs, including access to safe roads. A recent report by the International Road Assessment Programme stated that between 2015 and 2030, 265 million people will be killed and seriously injured in road traffic accidents worldwide. Simply by encouraging investment in improving roads, the IRAP report estimates that 40 million lives will be saved, with ancillary benefits for GDP within the G20.

Infrastructure development will also help foster job creation. With OECD estimates putting the number of unemployed people globally at over 200 million – 30 million more than before the 2008 crisis – job creation is a key element of the 2030 Sustainable Development Goals programme. The G20 aims to improve the labour force participation rate imbalance by 25 percent among member nations by 2025. “This will bring more than 100 million women into the labour force, significantly increase global growth and reduce poverty and inequality,” the Brisbane plan notes.

“The right policy in times of crisis is to encourage investment, to build yourself into the future and not to simply try to swim with this artificially encouraged consumption,” notes Israel’s Minister of Infrastructure, Energy and Water H. E. Yuval Steinitz: “Therefore, in Israel, we put all our emphasis on encouraging investments. We provided many incentives for investments; we enlarged government investment in infrastructure in order to make investments more profitable in the future.”

While serious money is needed in emerging economies to fund new projects for infrastructure development, within the G20 countries, the issue is often one of maintaining and upgrading dilapidated assets, including roads, railways and bridges. Much of the EU’s infrastructure dates from the 1950s, as does a considerable amount of the USA’s, where the average age of the country’s 607,380 bridges is 42 years, and of its 84,000 dams ,52 years. Population growth, increasing international tourism and EU grants have led many G20 countries to focus on new projects, while neglecting existing infrastructure. In terms of annual road traffic accidents, the G20 accounts for 60 percent of all fatalities.

 The G8 and the United Kingdom have begun initiatives to encourage government and pension fund investment in road infrastructure safety improvements through the issuance of Social Impact Bonds. The World Economic Forum’s Operations and Maintenance Imperative (O&M) stresses the importance of updating and improving existing infrastructure as preferential to starting costly new projects. Transport policy in Switzerland, meanwhile, underlines the importance of optimising the management of existing capacities over expansion.

 The World Economic Forum’s Global Competitiveness Report 2012-13 noted that the U.S. ranked 25th out of 144 countries in terms of overall infrastructure, trailing nations such as Oman and Barbados, and one place ahead of Qatar, where new infrastructure projects are mushrooming. In its 2014-15 report, the WEF placed the U.S. 12th, proof that the worlds of President Barack Obama in his State of the Nation address have been heeded: “Now is the time to build.” However, much remains to be done.

“In the U.S., the gap is about $150 billion a year of infrastructure investment we should be making that we are currently not making,” says Laura D’Andrea Tyson of the University of California at Berkeley, who acts as an adviser to the McKinsey Institute, said in a 2013 interview. “It’s relatively straightforward....to go from spending on infrastructure to job creation. So basically, there you see that the effect is primarily, dramatically, on jobs—the 1.8 million additional jobs that come from infrastructure investment. Infrastructure investment also adds directly to GDP by 2020. The increment there is in the order of $300–400 billion.”

 In the United States, infrastructure development has been focused mainly on airport expansion and improved rail links to major hubs, such as the Dulles Transit Extension and the expansion of Chicago’s O’Hare International Airport.

Other ambitious projects such as California’s high-speed rail link – 800 miles of line connecting Los Angeles with San Francisco – have fallen by the wayside.

 Outside the G20, the BRICs nations (Brazil, Russia, India, China and South Africa) have created the New Development Bank (NDB) to encourage infrastructure development within the bloc, which comprises 43 percent of the world’s population and 22 percent of global GDP. The BRICs nations require investment in ports, airports, road and rail links, pipelines, telecoms and power, and the NDB has been set up with a capital based of $100 billion to complement the funding provided internationally for development.  

 China has become increasingly involved in investment in the UK, where Chinese Prime Minister Xi Xinping in October announced a 33.5 percent stake in the £18 million development of a nuclear reactor at Hinkley Point in the southwest.  

“At present, China’s economy has entered a state of new normal — the gear of growth is shifting from high speed to medium to high speed,” Chinese Premier Li Keqiang said at Davos in January.

Global infrastructure development, within the G20 and beyond, needs to move at the same pace if the UN’s Development Goals are to be met by 2030. For now, the wheels are at least in motion.

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