Politicians, economists and research companies all agree that major works are the driving force behind development. However an essential factor is becoming increasingly important to ensure that the impact of such works on economic growth is multiplied: a long-term national development plan for infrastructures that above all ensures investments in an integrated system involving as many public and private stakeholders is a necessity.
A number of countries are already moving in this direction, planning long-term strategies and involving private entities such as companies already operating in this industry to overturn the standard model according to which infrastructures are costly works that dry up state funding without boosting public finances.
The example given by a number of countries today illustrates the opposite, actually confirming that major works are not only able to provide direct utility (in terms of more efficient mobility, more intense trade, etc.) but also an economic benefit in terms by generating income.
Their role has always been important and even more so now that the world economy continues to show signs of uncertainty and little growth, as indicated in the latest outlook from the International Monetary Fund forecasting growth of 3.1% in 2016 with respect to 3.2% in 2015. This forecast combined with the limited effectiveness of monetary policies implemented by numerous central banks confirms that more consistent investment in infrastructures is one of the few incentives capable of encouraging growth.
This is what both USA presidential candidates Hillary Clinton and Donald Trump are promising and what has taken place in a number of countries over the last few years, as illustrated in a survey carried out on behalf of consulting group McKinsey by Christopher Heathcote, CEO of Global Infrastructure Hub, a G20 structure that aims to improve the quality and quantity of infrastructure projects throughout the world.
The McKinsey survey commenced with the indication from the IMF whereby increasing investments in infrastructures by 1% would lead to an average rise of 1.5 percentage points in gross domestic product (GDP) for the following four years. However the return on GDP in countries where infrastructure projects have been implemented under an “integrated” system increased and on average reached 2.6 percentage points.
Private investors undoubtedly play a decisive role in this process, as confirmed by the increase in public-private partnerships (PPP) in financing major works. According to a report by Prequin, over 660 PPP contracts to the combined value of $350 billion were completed in 2015, however their contribution to economic development in countries will remain marginal if these investments are not accompanied by efficient public administration capable of creating the best conditions for participation by the private sector.
Looking at the best practices in public-private cooperation for infrastructure development throughout the world McKinsey ranks the United Kingdom first, describing the country as pioneer in encouraging private investor to join the market. According to Christopher Heathcote, in 1997 the newly-elected Labour government placed infrastructures at the centre of its economic strategy – however in order to do so the government had to accelerate the pace of investments. At that time, in fact, investing in infrastructures was virtually the exclusive domain of the public sector, with only a few projects completed by private concerns.
Five years later, the United Kingdom had the largest PPP market in the world with over 900 projects under construction or about to roll out. Encouraged by this tradition, the private sector took part in some of the most important projects in the country over the following years, such as the London Summer Olympics in 2012. The government’s support was decisive in achieving this result: in addition to checking the economic viability of each project before giving it public funding it set up a Treasury Taskforce, a workgroup that answered directly to the Chancellor of the Exchequer. This ensured better selection and planning of the projects involved.
After the United Kingdom, the McKinsey survey ranked two other countries that have become leaders in planning infrastructural development. One of these is the Philippines. When former President Benigno Aquino III came into power in 2010, he identified developing infrastructures as a strategic priority. His government set up a PPP unit, which drew up a list of projects to implement. The budget for infrastructures was also increased from 2.2% of GDP 2012 to 5.1% in 2016. Since then 14 projects have been completed and 15 more are currently underway. The impact of this strategy on the country was later acknowledged at the World Economic Forum, which improved the Philippines’ world ranking from 104th in 2010 to 90th due to improvement in the quality of its infrastructures.
Colombia also followed this virtuous path. In 2011, President Juan Manuel Santos created a national agency for infrastructures, while a year later Parliament approved a bill to make it easier to acquire land required to build infrastructures. Currently 40 concessions to the amount of $25 billion have been granted to build roads, which will double the number of kilometres across the country when completed. The railway lines granted to private concerns by way of concession will also more than double from 900 to 2,000 kilometres over the next few years. Heathcote wrote, «According to the infrastructure and project-finance journal IJ Global, Britain, Colombia and the Philippines had double the international average in private infrastructure markets (in terms of transactions closed in relation to GDP) in 2015.»
Claiming a lack of capital to invest in this sector therefore appears to be an alibi: McKinsey calculates that $106 trillion of institutional funds are available from resources such as sovereign funds and pension funds. The Organisation for Economic Cooperation and Development (OECD) estimates that only 1.6% of these funds are currently invested in infrastructures. Regarding this, a study by the Global Infrastructure Hub estimates that 69% of institutional funds would be ready to increase the amount of resources for the sector, especially in emerging markets.