Disruption means $3 trillion global infrastructure investment needed

10 January 2018 Authored by Consultancy.uk

As the world looks to prepare for an uncertain future, a new study suggests that an annual investment of more than $3.7 trillion in infrastructure spending will be required globally. A shift toward sustainable energy, and a need to plan for the worst case scenario of climate change are the largest contributors to this huge bill.

One of the major backbones of developed and developing economies, which often falls from view, is infrastructure. Much of it is already in place, enabling a wide range of possible activities for users. However, changing global priorities, changing economic models and ageing organisation means that, in many instances, considerable investments will be needed to keep society cohesive and functional.

In recent decades, investment in infrastructure has been utilised to enable improvements to productivity, which, in turn, grew economies and ways of life. Since the 2008 global economic crisis, however, the breaks have been put on infrastructure investment, particularly in developed economies. While much has been made of a proposed infrastructure investment campaign in the US, little practical advancement has been made on this by the incumbent administration. Beyond America, in order to meet global challenges such as climate change and ageing infrastructure and growing populations, considerable investments in Paris Agreement compliant infrastructure will be required in the years to come. Green bonds have recently seen a huge spike in demand to this end.Infrastructure spendingBeyond America, in order to meet global challenges, such as climate change and ageing infrastructure and growing populations, considerable investments in Paris Agreement compliant infrastructure will be required in the years to come. Green bonds have recently seen a huge spike in demand to this end.

A new report from McKinsey & Company’s McKinsey Global Institute, explores current trends in the infrastructure investment space, as the world looks to make itself resilient to a stable future put in peril by the poor sustainability of past infrastructure focuses.

Infrastructure spending in 2015 represented an equivalent of around 14% of total global GDP, or $9.47 trillion. The majority of that spending went to real estate, at around $4.8 trillion in investment. Direct economic infrastructure represented around $2.5 trillion in investment, while $2.1 trillion went to a broader definition of infrastructure projects.Infrastructure spending gapDisruption in energy infrastructure is, meanwhile, ramping up the need to invest there. A steady shift to sustainable energy, largely just renewables, coupled with the electrification and automation of vehicles means that major change will be needed. The UK Government alone is already lining up a £15 million infrastructure programme to prepare British roads for the ban of new combustion engine vehicles by 2040.

Overall, around $3.7 trillion in investment will be required, per year, to meet the expected need between 2017 and 2035 – with aggregated total investment at almost $70 trillion. Power will require the largest respective yearly investment, at $1.1 trillion annually, followed by the transportation network, at around $1.6 trillion annually across its various aspects. Water, in the face of potential water scarcity, will require around half a trillion dollars per year – of which around $5 billion annually is needed to curb plastic flows into the globe’s oceans.

When it comes to investment in economic infrastructure, China remains the country projected to need the highest level of investment – at 34% of the almost $70 trillion pie. Eastern Europe will require around 4% while Western Europe will need around 10% of the total. The US, meanwhile, will need to invest around 20% of the total over the next 18 years – or close to $750 billion per year.

Investment gap

Keeping up with growth requirements in productivity, among others, as well as transforming the background to the economy into more sustainable forms of operation, will require countries to invest a considerable % of their GDP in infrastructure.

However, while some countries are ahead of their respective investment requirement to meet domestic needs, such as China and Japan, where 2.5% and a 1% of GDP surplus is being invested, other countries – particularly in Europe – remain behind. In Germany and the UK, around 0.5% more of the GDP needs to be invested in infrastructure to account for infrastructure needs, with a similar % in the US. Emerging economies, such as Mexico, Indonesia and Brazil are the furthest behind, however, at 1.3%, 1.2% and 1.1% respectively.Closing the gapClosing the investment gap is likely to require a considerable effort across a range of areas. Focus on improving efficiency is touted by McKinsey as one way in which to improve overall outcomes. Improvement in construction industry productivity could unlock considerable potential, as does focusing on key areas of need, focused on sustainability of stock, circular economic potential as well as making the most of current stock.

The authors concluded the paper by stating, “There is significant room to improve the effectiveness and efficiency of how infrastructure investment is spent. Up to 38 percent of global infrastructure investment is not spent effectively because of bottlenecks, lack of innovation, and market failures. Fact-based project selection, streamlined delivery, and the optimisation of operations and maintenance of existing infrastructure can close this gap, reducing spending by more than $1 trillion a year for the same amount of infrastructure delivered.”

News

More news on