Infrastructure lies at the heart of the relationship between government and citizens, and when provision is good, there are sizable social dividends. Consider a mother in Texas bringing her children to school, willing to take the pricier toll road for the time efficiency it offers. The gifts of time, efficiency and connection to communities alongside wider economic growth for countries are among the promised benefits of building the future of infrastructure on solid foundations. In this era of increasing trade scepticism, infrastructure could be a key driver of growth across the global economy.
Yet, as highlighted by Ren Hongbin, Chairman of the China National Machinery Industry Corp., there is a $15 trillion to $20 trillion gap in infrastructure investment – about the size of the annual US GDP – and governments are increasingly looking to private investment to fill the gap. Much progress has been made in creating more public-private cooperation on infrastructure, including of strong projects involving business, multilateral finance institutions and strong government leadership.
To drive growth through investing in infrastructure, government leaders need to put money to work – mapping out a long-term investment pipeline and connecting the demand for infrastructure to capital. If, traditionally, governments saw themselves as the funders of infrastructure projects, to unlock the potential of public-private partnerships, a shift in mind-set is needed onto acting to mitigate risk.
Leadership of infrastructure projects provides distinctive challenges to government leaders, including facilitating the right legislative environment, synchronizing regulations with other governments on cross-border infrastructure projects, and drawing out the roles of public and private institutions alongside building trust. Success stories show it can be done.
The opportunities are ripe, but require thoughtful action, noted Christian Mumenthaler, Group Chief Executive Officer of Swiss Re Group. We are in an era of abundant capital and, in today’s low-interest-rate environment, the insurance industry is increasingly interested in investing its sizeable assets in infrastructure projects. Yet, accurately assessing the wider financial risks is critical to ensuring that the long-term prospects of public-private investment partnerships yield more benefits than drawbacks. All parties will need aptitude in transferring risk and building trust between public and private actors. Given the different funding and governance cycles of different stakeholders, Mumethaler said that he expects that good dispute resolution mechanisms will be the key to alleviating fears and unlocking private capital.
We cannot forget one final stakeholder – citizens. Throughout their life cycle – from inception to completion – infrastructure projects are faced with significant challenges in engaging citizens and communicating their intent. Badly needed maintenance of existing infrastructure is harder to hype than a new bridge, and charging citizens for the use of new infrastructure is difficult to rationalize. Some countries, such as Australia, have progressed in that regard, abandoning heavy terminology for easier-to-communicate ideas – think “asset recycling”.
Two key actions can build this particular relationship:
1. Highlight where the dividends are going (it should be back to those accepting the cost)
2. Establish a paid service at an agreeable cost, even if it does not fit the financial model perfectly
Leaders contemplating these options will need to think with the long-term perspective, and have enough financial acumen to calculate the true short- and long-term costs and risks of possible partnership models. It can be appealing to use government guarantees, preferred creditor status or, in fact, privatize existing infrastructure. Harvard University Professor Lawrence Summers cautioned that, if mishandled, some of the instruments used by government to drive public-private partnership – such as guarantees – have the potential to induce new financial crises.