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Editor’s blogAugust 16 2016

Why isn't infrastructure investment booming?

One the face of it, it's an easy win: governments spend money on infrastructure projects and the spluttering economies of the developed and developing world would be transformed. However, as Brian Caplen explains, the solution is more to do with political commitment than available funding.
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How many times do we hear that increased infrastructure spending is the answer to all our problems? If only governments spent more on infrastructure, we are told, recessed economies in Europe would recover and the same kind of spending in emerging markets would transform lives.

In reply, finance ministers say that this would add to already high budget deficits and debt-to-GDP ratios and that the impetus must come from the private sector. Yet lowering of interest rates to historically low levels has not brought about this private sector investment spree. Why not?

The failure to invest in infrastructure is definitely not due to a shortage of funds. Estimates of the total investment capital available from pension and sovereign wealth funds are north of $100trn of which, according to the OECD, only 1.6% is invested in infrastructure. This comes at a time when the search for yield has become ever more desperate, meaning that insurance firms are completely rethinking their business models due to low investment returns. 

According to Christopher Heathcote, CEO of the G-20 initiative the Global Infrastructure Hub, “the problem is the dearth of financeable projects, not of ways to divvy up risks”.  This means that all the thinking about infrastructure as an asset class is fine but it doesn’t get to the nub of the problem.

The solution, he says in an article for the McKinsey Global Institute, is not for governments to spend more money – although clearly this would help – but much more about political commitment to projects, setting up the right agencies and removing legal and red-tape barriers. He cites the Philippines and Colombia as countries that have been successful with such initiatives. On this basis, there is no reason why infrastructure investment should not be booming.

Brian Caplen is the editor of The Banker.

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