The economics of infrastructure and the post-COVID-19 recovery

Infrastructure professionals remain cautiously optimistic about the prospects of a “bounce back”

The imminent RICS Global Construction Monitor for Q3 2020 will provide qualitative insight into sentiment across the sector as we approach the end of a difficult year. Simon Rubinsohn, Chief Economist at RICS, provides some context on the initial findings.

Dividing the industry into three categories (non-residential construction, residential construction and infrastructure) he has surveyed workload expectations for the midterm. Explaining the results, he says: “I wanted to get a feel of where the recovery process is going to take root. What we can see very clearly, measured using the net balance methodology, is that it’s in the infrastructure sector where we’re hearing the most positivity. But, I would offer a qualification: a net balance of just over 20 is strong, but it does not suggest that the sector is set to grow as rapidly as some of the rhetoric around public spending and investment might suggest.”

And the road to recovery could be “greener” in the developing markets

Earlier in the year, Build Back Better became a popular rallying cry. The green shoots of recovery were beginning to show, but the trauma caused by the worst days of the pandemic remained fresh in the memory. A consensus had apparently formed: the crisis brought into sharp focus the urgent need to address the climate emergency; it was time to correct the errors of recent history. Talk of shifting paradigms and “the new normal” was common.

A few short months on, and the mood has already shifted. Numerous experts are warning that the talk has so far yielded disappointingly little in the way of action.

However, analysis from the European Bank for Reconstruction and Development (EBRD) paints a more hopeful picture. Sue Barrett, EBRD’s Head of Infrastructure for Turkey, Middle East and Africa, notes significant interest in the region for green financial instruments.

“We’re seeing strong demand for our Green Cities programme. This is the programme by which we encourage cities to develop a future investment plan based on green and sustainability considerations – going forward it will also include smart technologies. In this area we’re seeing clear demand for cleaner urban transport and more investment in metro systems. We’re also seeing investment in water, particularly in regions where water is scarce, and the provision of better systems for wastewater treatment and disposal of solid waste.”

And those same developing markets are a safer destination for private investment than you might assume

“Which region has the lowest default rate on infrastructure debt?” asks Neil Saravanamuttoo, Chief Economist with Global Infrastructure Hub. “Well, the answer is probably not what a lot of people might think. It’s the Middle East, closely followed by Africa. And we find the same results when we look at which regions have the highest recovery rates.”

Nonetheless, long held doubts about private sector enthusiasm for infrastructure investment are not going away. He continues: “One of the major themes from the international development community is that we need to move from a world of billions in infrastructure finance, to a world of trillions. The assumption is that a lot of that will come through private channels, but it is just not happening. Over the past decade, the level of private investment has been lower than we would have hoped for and is not showing signs of increasing.”

Public-Private Partnerships (PPP) can be a vital tool in bridging the finance gap, but existing approaches require significant remodelling…

“We need to re-examine the PPP model,” warns Neil Saravanamuttoo. “What we’ve seen over the last couple of years in a number of jurisdictions is that PPP has been putting an excess of risk onto the private sector. Rebalancing that model might be something that we need to focus our attention on.”

“I certainly agree with Neil,” continues Sue Barrett. “If you want to attract private investment into infrastructure through PPP, you need to have an appropriate allocation of risk between the public and private sector. This is where we in the multilateral banking fraternity have a responsibility to bring forward well-structured PPP projects that can be brought to the market by governments.”

…and funding is only a part of the problem; the sector is also facing a capacity gap

It’s not only a question of money. The sector is also short on the human resource required to complete a global pipeline valued at US$100tn by the World Economic Forum. And even if the requisite manpower were in place, a significant skills gap would likely remain.

“When you start talking about delivering projects worth trillions, well the challenges around that are clearly enormous,” says Simon Rubinsohn. “Over the last decade, there has been progress, but it’s been relatively pedestrian. There have been, in some parts of the world, self-evident problems relating to both finance and skills. I’m not sure we’re equipped to make that necessary leap, no matter how desirable it might be.”