Infrastructure: Mind the gap

International Futures Programme

©David Rooney

Ageing, migration, climate change, healthcare, poverty: these all form part of the lengthening list of pressing public policy challenges for the 21st century. But what about infrastructure?
With competition for finance putting budgets under pressure, how can we afford to upkeep our roads, sanitation, energy, ports, and other communications systems, let alone invest in new ones?Infrastructures have always been part of the lifeblood of strong economies and societies. Consider the aqueducts that for centuries brought clean water to ancient Rome. Built and extended from 312 BC, at the height of imperial Rome this advanced water system provided over a cubic meter of clean water per day per inhabitant, which is a lot even by modern standards. In the 5th and 6th centuries AD, the aquaducts were cut by besieging warriors, further weakening an empire already in demise.Now as then, infrastructure is a vital means for ensuring the delivery of goods and services that promote prosperity and growth and contribute to quality of life. It underpins social well-being, the health and safety of citizens, and the quality of their environments. Infrastructure is more than just a means to an end–it embodies an economic sector in its own right, commanding huge investment in capital equipment and employment, as well as procurement services, financing and so on. Whether water, energy, transport or communications, now as in the past, infrastructure demands constant and heavy investment.Modern-day globalisation has brought new challenges in the form of the so-called networked economy. Thanks largely to technology, as well as new skills, management and markets, infrastructure systems now interact ever more closely with one another, linking systems as well as cities, regions and countries. This creates efficiencies, but also greater interdependencies. It heightens vulnerability and risks too. The attendant policy challenges have both intensified and become more global.Already, infrastructures face huge pressures. The infrastructure requirements of OECD countries and countries such as China, India and Brazil are ever greater, reflecting economic growth and the drive for modernity and competitiveness. The world economy could grow by some 3% per annum to 2030 as many experts forecast, and the performance of developing countries should outstrip that of the developed countries by a wide margin–4% per annum versus 2.4% per annum. Add to this the emergence of new markets and new players, and it is easy to see that supply chains will only lengthen, and pressures mount on key ports, airports and transit corridors, not to mention roads and other communications systems.Other factors will affect the broader picture. Ageing populations, urbanisation and migration all impact on infrastructure, as will tighter public finances, security concerns and environmental issues, such as climate change. Technological progress also counts, especially, but not only, in information and communications. And let us not forget the constant need to maintain and upgrade existing infrastructures. The troubling issue is that, looking across the full range of economic, social and environmental forces affecting the infrastructure sectors addressed in this project, nowhere does the current public policy, regulatory and planning frameworks appear adequate to tackle the multiple challenges facing infrastructure development over the next 25 years.Yet bridging the infrastructure gap is necessary to avoid costly congestion, unreliable supply lines, blunted competitiveness and growing environmental problems. Indeed, investment is needed to safeguard and improve living standards and the quality of life.But what orders of magnitude of infrastructure investment are we talking about? Rough estimates from the OECD Infrastructure Project to 2030 suggest that annual investment requirements for telecommunications, road, rail, electricity (transmission and distribution) and water taken together are likely to total around an average of 2.5% of world GDP. If electricity generation and other energyrelated infrastructure investments in oil, gas and coal are included, the annual share rises to around 3.5%. Remember, our project does not cover ports, airports and storage facilities, and clearly the figures would rise if it did.OECD countries will mainly need to invest in maintenance and upgrading. This is because many infrastructure networks and systems are, broadly speaking, already in place. However, maintenance and upgrading are not easy, and getting old infrastructures to work more efficiently can be harder than starting from scratch. New technologies and management strategies will be needed to better control traffic flows through road, rail, electricity and water systems.In most developing countries, by contrast, the lion’s share of investment is in new construction, which brings its own heavy costs. In either case, a central issue is financing. In advanced countries, public capital investment has accounted for a steadily declining proportion of total government expenditure. Indeed, for the OECD area as a whole, government spending on gross fixed capital formation as a share of total general government outlays fell from 9.5% in 1990 through 8% in the mid- 1990s, to approximately 7% in 2005.Whatever priorities different electorates place on tax and public spending policies is a consideration, but the fact remains that public spending is under pressure everywhere from competing needs. Costs of health, pensions, old-age care and education are rising too and are squeezing public spending choices. Those social expenditures rose on average from about 16% of GDP in 1980 to 21% in 2003. The trend is likely to continue. In fact, expenditures on health and on the retired population are expected to outpace the growth in government budgets and in GDP; OECD projections suggest that for the OECD area as a whole, spending on public health and long-term care could increase from the current level of 6.7% of GDP to between 10.1% and 12.8% by 2050, while pensions could rise on average by around 3 to 4 percentage points of GDP over the same period. Another constraint will come from scarcer labour, which could force more investment in all forms of education, including lifelong learning, not to mention acting as a drag on income tax receipts. In short, the scope for public investment in infrastructure within government budgets will be constrained. What we face is the prospect of an infrastructure investment gap. More private sector finance will be needed to help finance it. This is not new; private finance has traditionally had a strong presence in infrastructure sectors in some countries. In fact, the private sector share in investment in infrastructures has increased in recent years. This reflects privatisations of stateowned assets, which since the 1980s reached more than US$1 trillion, and over the 1990-2006 period, almost two-thirds of all privatisations in the OECD area have concerned utilities, transport, telecommunications and oil facilities.Elsewhere, too, privatisation activity has been vigorous. Over roughly the same period, some $400 billion of state-owned assets were sold in non-OECD countries, of which about half were accounted for by infrastructures.With a sizeable part of infrastructure already in private hands in areas like telecommunications, power supply and transport, the riddle is how to secure more financing without placing an unsustainable burden on public borrowing or taxation.A more recent trend is the emergence of business models based on public-private partnerships. These offer scope for unlocking capital and expertise, while fulfilling public service goals. They already exist in some large-scale projects from major road building to power stations. Pension funds and insurance companies, some of which have a public-private partnership element, should find infrastructure investments more attractive in the future, given their low-risk and steady returns profile. In the OECD area alone, pension funds today amount to some $18 trillion, up from $13 trillion in 2001.Governments cannot rely on private funds alone of course, and so will have to find new income sources themselves. This means diversifying by making more and better use of user fees, creating mechanisms for securing long-term financing for infrastructures as Canada and Switzerland have done, or exploring the possibilities offered by land value capture, such as the elaborate scheme being used to finance Copenhagen’s metro system. Another route is to promote innovative variations of traditional financing mechanisms, for instance by using revenue-based bonds in North America.Other actions will also be important if progress is to be made in closing the infrastructure gap, not least in regulation. After all, private investment must yield a return, and several governments could do far more to improve the business attractiveness of their regulatory environment to draw in private capital, while still upholding standards of public services. Regulatory changes to promote more competition in procurement and operation could enhance efficiency in building and operation, boost management and improve reliability. Legal and administrative changes to speed up planning, procurement and implementation, while setting standards in terms of environmental and security challenges, can bring concrete results too. It can stimulate new design and the application of innovative technologies, and may spark whole new markets and business models. Infrastructures are major markets with strong global networks, and improving international co-operation would give policymakers the support and confidence they need to move forward.All good planning, financing and management relies on sound basic tools, in which information, data collection, research and analysis are vital. And there is ample scope in education and training institutions for greater efforts to develop the interdisciplinary skills and knowledge that will be required to tackle the opportunities and problems raised by infrastructures in the years ahead.Some of these initiatives will require patience, skill and inventiveness to implement, others may be more straightforward. What is clear is that policymakers must act, as waiting will not make the infrastructure challenge any easier.References
OECD (2006), Infrastructure to 2030: Telecom, Land Transport, Water and Electricity, Paris.
OECD (2007), Infrastructure to 2030, Volume 2: Mapping Policy for Electricity, Water and Transport, Paris.
IEA (2007), World Energy Outlook, OECD, Paris. Visit©OECD Observer No. 263, October 2007

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