Australia chaired a meeting of G20 finance ministers and central bank governors in Sydney over the weekend to talk about the challenges facing the global economy. One of the fundamental problems is finding the funding for needed infrastruture investment estimated by the McKinsey Global Institute at $3.2 trillion annually or about $57 trillion between 2013 and 2030.
Governments need the private sector to invest in infrastructure. The problem is not a shortage of capital, but making the investment climate attractive to business. Business will only get involved if the projects are economically viable and the risk is manageable so that a reasonable rate of return can be expected. The goal of the Sydney meeting is to find similar ways to break down regulatory barriers and other disincentives for investors.
As a recent example of what governments can do, in the United States where building a new transmission line can take up to 20 years because of regulatory requirements, low cost private funding is readily available for transmission line projects, but only after the necessary regulatory requirements have been met. To simplify and streamline the regulatory process for transmission lines on Federal lands, in October, 2009 nine Federal agencies signed a memorandum of understanding to increase their coordination. The Obama administration has also announced pilot projects to streamline the permitting of transmission lines in order to speed up integration of renewables.
I blogged about McKinsey Global Institute's (MGI) research into construction productivity back in 2012 after a presentation at an international infrastructure conference. The results of this research are encapsulated in a recent report where MGI has estimated that $57 trillion in infrastructure (roads and highways, rail, ports and seaports, electric power, water and waste water and communications) investment will be required from 2013 through 2030 ($3.2 trillion per year) just to support the projected growth in the world economy, estimated at 3.5% growth in world GDP annually. This is about 60% more than the $36 trillion that was spent over the past 18 years, but it still is not sufficient to address some of the major backlogs in infrastructure maintenance in developed economies, the infrastructure development goals of the emerging economies, or the cost of making the world's economies more resilient to climate change.
If the world does not invest in infrastructure, this will create a drag on the world's economy that will slow GDP growth especially in emerging economies. Slower growth in GDP means lower employment. MGI estimates that every 1% of of GDP that is invested in infrastructure translates into, for example, 3.4 million direct and indirect jobs in India, 1.3 million in Brazil, 700,000 in Indonesia or 1.5 million in the United States.
MGI makes a case that it is possible to reduce the cost of infrastructure while at the same time improving its quality. MGI estimates that if world's infrastructure owners were to adopt proven best practice to improve construction productivity which has been stagnant for the past 20 years in some of the world's most important economies (US, EU, Japan, Korea) it would be possible to save 40% of the total cost of infrastructure (not including telecom). This amounts to savings of about $1 trillion per year or a 60% improvement in infrastructure productivity. To arrive at this conclusion MGI has analyzed 400 case studies of best practices - projects that used what is currently recognized as best practices. So this does not require new and untested technology and business practices, this means applying what we already know.