Public-Private Cooperation key to boosting global growth
The first few weeks of President Donald Trump’s administration have been dominated by early efforts to deliver on some of his most contentious election promises.
While the world watches every pronouncement and, indeed, every tweet, there is hope that attention will soon turn to one of his pledges on which there was consensus, a massive and long-overdue infrastructure overhaul across the United States.
President Trump promised a US$1 trillion, decade-long infrastructure build, including highways, airports, pipelines, and new bridges.
Early indications are that he will seek to leverage some of the trillions of dollars held in investor funds, using PPPs to deliver on his platform.
The promise of massive US domestic infrastructure spending comes as the global growth outlook remains fragile.
Almost a decade after the Global Financial Crisis hit, the scope for low interest rates and quantitative easing to stimulate acceptable growth seem to have run its course. In the face of mounting frustration, the US may be the first major market to undertake a determined policy shift towards stimulating the real economy.
Infrastructure investment can bring significant long-term improvements in productivity, leading to increased competition, and greater wealth creation.
Robust and well-planned projects can expand the long run supply potential of developed and emerging economies, irrespective of how they are financed. IMF simulation suggests that investing an extra 1% of GDP into public capital can deliver a boost to GDP of up to 2.5% over the long run. However, to realise these productivity benefits, infrastructure projects need to be carefully chosen, support an economic plan, and be efficiently procured. No matter how low interest rates are, poor quality investments made without a clear economic rationale will still destroy value in the economy.
To deliver projects at scale for the global economy will require private as well as public financing, and pipelines of quality projects must be developed to attract private capital.
The GI Hub recently launched its Project Pipeline to help investors and governments progress key infrastructure projects. The Pipeline (pipeline.gihub.org) is a dynamic, online platform providing free early stage information for private investors on government infrastructure projects across the globe to give them greater clarity needed to properly assess opportunities.
In the past big investors, pension/insurance funds and sovereign wealth funds, would not have considered either greenfield risk, nor emerging market opportunities. However, a new breed of investors recognise that much of the risk associated with projects is situation-specific.
The Global Infrastructure Hub/EDHEC investor survey, Barriers to Private Sector Investment in Emerging Markets, released in July this year, found that 65% of existing infrastructure investors wanted to increase their allocation to the sector in the next 3-5 years, but 92% of them felt that there were insufficient investment opportunities. Developed market projects have been at a premium with strong bidding leading to falling equity margins and increased bid costs.
Investors are responding by considering entering markets that have historically been viewed as unattractive. In the survey quoted above, 33% of investors said that they were considering investment in emerging markets for the first time.
To capitalise on this growth in smart capital, governments worldwide must expand their pipeline of quality infrastructure projects, drawing on a growing pool of best-practice experience.
The good news is that per capita GDP is not a constraint on building the depth of quality projects that will allow countries to benefit from the most benign financing conditions seen for a generation.
In South America, Colombia has planned to increase concessioned roadways from 6,000km to 11,000km, with rail concessions expected to increase from 900km to 2000km . The Colombian Government established a national infrastructure agency, passed a new PPP law, and updated laws governing risk allocation in relation to land acquisition to progress infrastructure development.
Similarly, and following years of under-investment, the Philippines now has 14 projects in implementation with a further 15 under procurement. Government infrastructure investment has grown from 2.2% of GDP in 2012 to 5.1% in 2016 . Former Philippine President Benigno Aquino put infrastructure at the heart of economic development, establishing and empowering an effective PPP unit, and updating PPP regulations to allow the private sector to take on commercial risk, while the Government assumes regulatory risk.
Despite broader challenges relating to security and low oil prices, the Middle East is also showing the adaptability of the PPP model. Jordan has led the way, with the rebuilding of the Queen Alia International Airport near Amman, starting in 2007 and further projects since then. The Jordanian Government, with guidance from the World Bank and some financing through the World Bank’s International Finance Corporation, opted for a PPP model that freed up Government capital for other purposes.
The success of these countries in building project pipelines and unlocking private investment should be a `light on the hill` for countries grappling with related challenges of meeting surging infrastructure needs, expanding growth potential, addressing inequality, and better connecting their economies to global opportunity.
If the public and private sector can work together there is a unique opportunity for “crowding in” of additional private capital to amplify governments’ ability to deliver much-needed infrastructure. There are trillions of dollars in investor funds seeking projects, historically low financing costs, and the Global Infrastructure Hub and Multilateral Development Banks stand by to help developing economies link public projects and private investors.
Speech, Donald Trump, October 26, 2016
IMF World Economic Outlook, October 2014
Data from the IMF dataset