Underinvestment in infrastructure weakens economy

Every year, the world spends an aggregate of $2.5 trillion on transportation, power, water and telecommunication systems. However, this is far from what is needed. According to an McKinsey estimate, $3.3 trillion need to be spend annually to support currently expected rates of growth. Especially the emerging markets require investments in infrastructure.

Since the financial crisis, infrastructure investments as a percentage of GDP have been decreased in eleven of the G20 economies. If the current level of underinvestment continues, the world will fall short of the required spending by 11 percent or $350 million per year. However, taking the UN Sustainable Development Goals into account, the gap triples. According to McKinsey’s option in their article “Bridging global infrastructure gaps”, continuous investment gaps will erode future growth potential and productivity. Financing infrastructure is thus a critical task - whether it be through corporates, institutional investors or the public sector.

Corporate finance makes up about three quarters of private financing for infrastructure. To increase corporate investments in privatised infrastructure, regulatory certainty and attractive risk-adjusted returns need to be offered. Another source of private financing are institutional investors using public-private partnerships. However, they account for only a small part of infrastructure investments.

The main part of funding will still be required to come from governments. Those can increase funding using new revenue streams such as user charges, capturing property value or selling existing assets and recycling the proceeds from new infrastructure. Thereby, spending needs to be made less cyclical and more effective, in regards to selecting, delivering and managing infrastructure.