The World needs Infrastructure!

According to The Economist, much of the world faces a familiar supply side constraint: the need for massive investment in infrastructure.

The article quotes the World Economic Forum which argues that global spending on basic infrastructure—transport, power, water and communications—currently amounts to $2.7 trillion a year when it ought to be $3.7 trillion. The gap is almost as big as South Korea’s GDP. And it is likely to grow fast.

How should this gap be financed? Very often infrastructure is perceived as a public good. It would be worth thinking if this is true, in all cases. Partly because of this, much of the money to plug the gap needs to come from the public purse: even in an age of austerity many governments should be spending more. According to The Economist, with the economy weak and borrowing cheap, it is daft that America’s public infrastructure spending is at a 20-year low, even as many of the country’s roads, bridges and dams are in poor shape. Governments in many developing countries should also be investing more.

Unsurprisingly perhaps, The Economist argues that more infrastructure spending should come from private companies. The big global banks which used to lend money to finance infrastructure projects are pulling back, so perhaps a greater share should come from the $50 trillion of capital managed by pension funds, sovereign-wealth funds, insurance companies and other institutional investors. Only 0.8% of this is currently allocated to infrastructure.

In principle, investing in a power station or toll road ought to be an attractive prospect for institutional investors. The long life of these assets is a perfect match for the long-term liabilities of a pension fund. Infrastructure projects offer reliable cash flow, a hedge against inflation, low volatility and good returns. But private companies are often scared off by the scale, complexity and political risk involved. Corruption is rife and political pitfalls are significant. In emerging economies these dangers are magnified by the possibility of currency crises.