Infrastructure 2021: Five key considerations for policy makers

The business case for infrastructure spending is strong

Infrastructure investment is pivotal in rebooting economies severely impacted by COVID-19. Public infrastructure investment is more effective in increasing economic output in the medium-term than other types of public spending. Marie Lam-Frendo, CEO of Global Infrastructure Hub (GI Hub) explains: “On average, infrastructure has achieved a fiscal multiplier of 1.5 within two-to-five years versus 1.0 for public spending”. The benefits of infrastructure spend are further increased when countries coordinate their efforts, reinforcing the role G20 countries can play in boosting infrastructure through collaborative action. IMF research has found that, when countries act in concert, infrastructure investment can lift growth across the board through enhanced trade linkages. This spill-over effect is particularly impactful when economic conditions are weak and interest rates are low.

The funding gap reflects a knowledge gap

There remains a lack of investment in infrastructure from both public and private sector sources. Infrastructure is often overlooked by the financial markets because it is not viewed as a traditional asset class. At governmental level, finance ministers often lack infrastructure expertise, tending to view the topic as “too technical.” There is therefore a need to translate the language of infrastructure into a fiscal and a macro business case. GI Hub is currently working on a roadmap for infrastructure as an asset class. It is also putting together a data-driven digital tool to inform infrastructure decision-making.

Public-Private Partnerships are back on the table

The momentum generated by the Build Back Better movement provides an opportunity to refine the traditional Public-Private Partnership model. The UK’s recent Construction Playbook, which sets out expectations for contracting parties, is an example of how governments are looking to improve infrastructure delivery. Ms Lam-Frendo also cites the example of a project in Ontario, Canada, where the Alliance Model, built on the principle of “mutual gain and pain”, has been adopted. The pandemic has brought an increased focus on creating flexibility within contracts. Take, for instance, Metro line concessions in Sao Paulo, Brazil. There, the state government has agreed to introduce a flexible demand mechanism which takes into consideration the consequences of Covid-19 on the traffic forecast. And Brazil is not the only country to build regulatory flexibility into public works contracts. In both Chile and Italy concession contracts have been drafted to include clauses that recognise adjustments will be necessary as markets evolve and new InfraTech comes online.

A healthy infrastructure pipeline is a valuable asset in times of crisis

Governments that had developed an infrastructure pipeline prior to the pandemic have been better placed to respond to the crisis. Regrettably, across the G20, few countries have pipelines that link to a longer-term vision. This short-sightedness could become more damaging still if, in the rush to kickstart the global economy, shovel-readiness becomes the key criterion in funding decisions. Such fears were reflected in the results of a recent WBEF survey. Ms Lam-Frendo, while acknowledging the validity of these concerns, notes that shovel-ready projects, if quickly implemented, can be beneficial in driving job creation and economic confidence. In the longer-run, though, they must be integrated into broader, transformative infrastructure programmes.

Building social value into infrastructure projects

From an industry and investor performance perspective, the social component of Environmental, Social and Governance frameworks has been underplayed. As such, governments must regulate to ensure that social inclusion is prioritised through entire project lifecycles. This will require the industry to innovate. In 2017, GI Hub published a report on inclusive infrastructure that found the social component of projects was all too commonly neglected.

The UK, Canada and Austria are at the vanguard of efforts to include social value considerations in infrastructure planning, with an initial focus on women and disabled communities. More groups will need to be brought in, including the elderly, those living in remote locations, and lower income families and individuals. If COVID-19 has shown us anything, it is that community needs should be at the core of every project. Ms Lam-Frendo characterises this as “a movement from shareholder capitalism to stakeholder capitalism.”