Saturday, November 29, 2014

Infrastructure Unbound

WASHINGTON, DC – Consider a simple statistic. Every month in the developing world, more than five million people migrate to urban areas, where jobs, schools, and opportunities of all kinds are often easier to find. But when people migrate, the need for basic services – water, power, and transport – goes with them, highlighting the boom in infrastructure demand.

The reality is evident from Kenya to Kiribati – everywhere where rapid urbanization, the need to support trade and entrepreneurship, and efforts to confront the challenges of climate change have exposed a wide infrastructure deficit. And it is a deficit that confronts advanced economies as well.

Simply put, infrastructure construction and modernization worldwide needs to be part of a strategy for long-term global growth. That is why G-20 finance ministers, meeting recently for the first time this year in Sydney, Australia, singled out investment in infrastructure as one of the elements vital to ensuring a strong, sustainable, and balanced recovery.

But, with G-20 finance ministers preparing to meet again in Washington, DC, next month, a note of caution is in order: Simply increasing infrastructure investment is not enough to foster growth and job creation.

At the start of the financial crisis, both advanced and emerging-market economies pumped money into “shovel-ready” infrastructure projects to boost short-term economic growth and create jobs. Now, in the wake of the crisis, the infrastructure challenge has become more difficult to address. In emerging and developing economies, government budgets are constrained, while the private sector accounts for less than 15% of total infrastructure investment on average.

Indeed, a key challenge in financing infrastructure investment in emerging economies is that many of the commercial banks (mainly European) that had a significant presence in the past have withdrawn – and are unlikely to return until they repair their crisis-hit balance sheets and build capital to meet strengthened regulatory standards.

That leaves huge unmet financing needs. In emerging and developing economies, it is estimated that an additional $1-1.5 trillion in annual investment will be required through 2020 to meet growth targets. Factoring in additional spending for reducing greenhouse-gas emissions or adapting to climate change could add $170-220 billion each year to the cost of these countries’ infrastructure needs.

Obviously, the G-20 is right to emphasize how important meeting these needs is to how many people. For example, more than 69% of Sub-Saharan Africa’s population lack access to electricity; 65% of people in South Asia lack access to a simple pit latrine; and 40% of rural people in Latin America and the Caribbean lack access to all-weather roads.

But we also know that promoting infrastructure investment requires more than money. Some countries generate massive growth benefits from their infrastructure spending, while others hardly see a return. As a background note prepared by the World Bank Group for the G-20 explains, governments should pay more attention to the selection, quality, and management of infrastructure projects, as well as to the quality of the underlying investment climate.

Prioritizing investments, good planning, and sound project design can significantly boost the impact of new and modernized infrastructure on growth and job creation, as well as raise returns on scarce resources. Better investment planning can also help to avoid locking infrastructure into inefficient and less “green” technologies.

Yes, all of that is easier said than done. As I heard in Sydney, many developing countries face real difficulties in identifying, preparing, and implementing projects. The price tag for technical, financial, economic, and environmental feasibility studies and long-term plans can be high, running into the millions of dollars.

The World Bank Group has been helping developing countries build up their capacity in these areas. But more must be done to enable countries to develop a robust project pipeline that supports a stronger public-investment program, which is critical to any strategy to attract substantial resources from the private sector.

And, in today’s economic climate, attracting private financing is essential, because there is simply no way that public funding alone can close the infrastructure gap. Doing so will also require ensuring appropriate governance, predictable pricing structures, and a credible regulatory environment.

Countries have no time to waste. The unique role of infrastructure in helping to provide basic services for poor people, creating jobs and opportunity, facilitating access to markets, and ensuring sustainable growth in our ever-growing cities requires policymakers to act quickly and decisively.

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    1. CommentedNathan Coppedge

      I see this as an optimistic article, in a good sense. Infrastructure is always a good investment, as people are learning, or already knew. Government budgets are not infinite, but they sometimes eclipse the nature of localized problems on localized agendas.

      I wouldn't be surprised if the government was more concerned about disaster spending than infrastructure.

      The responses to global warming are not likely to be quite as difficult as people imagine, except on a fiscal level. People are fairly adaptive, except perhaps mentally. There is a lot of tolerance in the short term, and in the long term people adapt.

      I was surprised to hear that there were so many functioning roads in Latin America. That's probably a good sign of infrastructure development that has already occurred.

      I think economic questions are divided between being more concerned with virtual reality and pure information, and being concerned with localized quality-of-life benefits. At this point, it seems that local governments and businesses are on the verge of solving both problems, relative to previous estimates.

    2. CommentedZsolt Hermann

      I think similarly to our insatiable pursuit for more, better and more effective energy sources, this extra investment into infrastructure, urbanization is based on the most important, and harmful misunderstanding of our times.
      We think we have to constantly grow, we think we have the right and possibility to constantly grow.
      But we don't.
      Despite our widely held belief we are not outside or above the vast system of nature we evolved from, and on which system's laws and principles our own natural body's functions are still based on, we are still very much part of the system and all of its laws are binding to us as well.
      And the natural system, although it is dynamic, is in equilibrium, it has a very finely balanced homeostasis that is crucial for maintaining balance and life.
      It is the same with our own biological body, after the exponential growth of our childhood, constant, quantitative growth stops and is replaced by a dynamic qualitative "growth" change, maturation which forms and shapes the true human being.
      With the appearance of the global, integral human system, humanity basically saturating the planet, exploiting most of its resources, many times causing irreversible damage in ecosystems, we have arrived to this point of maturation, from which point on we have to replace quantitative growth with a qualitative one.
      Since these changes are evolutionary and not man-made, we have no free choice about the necessity of adaptation.
      What we can choose is whether we adapt consciously, by initiating the changes on ourselves, or we wait for the system to push us through suffering, crisis after crisis, increasing to an unprecedented, global scale meltdown due to the interconnections and the inter-dependency of the system.
      Just looking into the news each day we can see that the process is already ongoing, basically we have lost control of all the natural and human-made artificial systems we thought we had in our hands.
      We have no more time to waste.
      Thus the question is not how to twist the system, modify everything around us to keep on forcing our artificial, and unsustainable excessive demand base lifestyle, but how, by changing ourselves, how we live and how we relate to each other can we adapt to the system and conditions around us.