This year I was honored to take part in the Business 20 (B20) summit in Sydney, an event which enabled common views from the international business community to be put forward to G20 leaders this weekend in Brisbane. As a member of the Infrastructure & Investment taskforce, my colleagues and I found that one of the primary barriers to increasing private infrastructure investment has been the small number of properly assessed investment-ready projects. This isn’t due to one single factor, but rather, a range of different issues.
Although robust economic scrutiny is critical to the success of any infrastructure project, there is too often inadequate project selection and prioritization, which is frequently driven by political considerations rather than a sound cost-benefit assessment that would reassure policymakers their investments will deliver maximum impact. We also found there to be weak project preparation and execution capabilities, including inadequate funding arrangements, inappropriate risk allocation, and inefficient procurement policy and procedures, especially in emerging markets.
Sound foundations required
The taskforce also identified weak and unstable investment and regulatory environments, as well as corruption and a lack of transparency, as important hurdles to overcome. Such issues not only deter investment, but they also make it more expensive to deliver infrastructure. And there also remain barriers to financing, including the unintended consequences of financial regulation, underdeveloped local currency capital markets and limited availability of appropriate, standardized instruments to align projects’ risk and return profiles with investor needs.
These obstacles are particularly acute in complex public-private partnerships (PPPs), where high-profile failures have damaged credibility for investors, even though they remain a crucial funding instrument. PPPs need to be seen as a delivery mechanism, implemented after the detailed planning has already occurred, and to work best, governments need to tailor procurement models and make the process more efficient to encourage the adoption of best practices.
To facilitate a larger and more effective role for the private sector in infrastructure provision, countries need to find better ways to engage business resources, increase the number of bankable projects and substantially improve the investment environment. In most cases, governments need to commit to market-based infrastructure policy frameworks that promote efficient investment, safeguard users’ long-term interests and enable private ownership and management of infrastructure where appropriate.
Steps to success
The taskforce proposed six practical steps that G20 nations should take to promote more investment in infrastructure. Collectively, these actions could generate $8 trillion worth of additional infrastructure capacity by 2030, and $1.6 trillion of additional investment by businesses in their own operations every year. They will also contribute up to 1 per cent to the G20 target of 2 per cent of additional growth over the next five years, and lay the foundation for sustainable, inclusive growth and employment over the longer-term. Of these six proposals, three stand out.
As a first priority, we recommended that G20 governments should set infrastructure investment targets consisting of a prioritized list of projects rigorously assessed by an independent national infrastructure agency.
Secondly, having found that average times for the regulatory approval of projects vary across the G20 from two to 10 years — we recommended that the G20 should establish a Global Infrastructure Hub. This new organization would be tasked with promoting ongoing improvements through the sharing of leading practices and approaches, including improving the efficiency of regulatory approvals and standards for transparent procurement processes.
A third priority to increase private infrastructure investment is to address the deficiency in appropriate financial instruments and capital markets. Many countries in the G20 cannot access locally denominated capital markets for infrastructure investment. In response, we recommended that the G20 and the private sector should actively promote diversity in the range of infrastructure investment instruments, encourage the development of local infrastructure investment markets and facilitate stronger cross-border investments to address declining foreign direct investment (FDI).
It is hugely encouraging that among the commitments of G20 Finance Ministers and Central Bank Governors following their meeting in Cairns in September was an agreement on infrastructure. The September communiqué demonstrated a clear progress toward meeting a 2 per cent additional growth target for infrastructure, but there remains scope to encourage further commitments on growth, infrastructure and investment, and to broaden the agenda to cover human capital and trade commitments.
It is important to keep up the momentum because in our world of deeply interconnected economies, high-quality infrastructure underpins economic activity both within and across national borders. It is one of the most powerful levers available to support businesses — from SMEs to large multinationals — to make the investments that drive inclusive, sustainable growth across the globe.
Different patterns of labor markets, capital flows and consumer markets, all of which are globalizing faster and deeper than ever before, present a range of challenges and opportunities to the G20. Its governments are now much more connected and there is increasing recognition that solutions to today’s problems can be identified from global best practices and be coordinated across borders. Infrastructure is no exception. The importance of providing the building blocks to stronger economic growth and an improved quality of life for citizens the world over is clear — both for today’s generation and the next.
An article from Bill Banks, Global Infrastructure Leader at professional services firm EY. The views reflected in this article are the views of the author and do not necessarily reflect the views of EY or its member firms.