“Sometimes countries need more investment in infrastructure, but sometimes they have to make more efficient use of what’s already built.”
- How has a lack of infrastructure hurt your business?
- Are there markets that are too costly because of lack of roads?
- What priorities do you see?
Roads, water, power, rails, sewage, phones: infrastructure is “the framework on which our economic development and society depends,” says Anthony Holmes, co-founder and director of the Institute of Infrastructure Studies in Doha, Qatar.
McKinsey Global Institute forecasts $57 trillion of infrastructure needs between 2013 and 2030 world-wide.
The challenge is managing to keep up not just with maintenance, but also with continuing to build and expand access for more people, who more than ever live closely concentrated in cities.
Growing Urban Population
The global population is expected to reach nearly 11 billion by 2100, according to United Nations estimates. The proportion of people in the world who live in cities is forecast to reach 66% by 2050, from 54% today and not quite 30% in 1950.
Meanwhile, the needs—and opportunities—remain great. Only 20% of people in the world have access to running water. About 85% have access to electricity. Only 14.5% of people around the world have fixed telephone lines, though 97% have mobile phones.
Developing countries have to cope not only with starting from a lower base of existing infrastructure but also with faster urbanization, driven by both faster population growth rates than in developed countries as well as by migration.
“The needs in developing markets are across almost every category,” says Manny Hontoria, partner with management consulting firm Oliver Wyman. “In developed markets, the issues are more about extension and in some cases recapitalizing existing infrastructure. In developing markets, it’s about new infrastructure.”
The United Nations Conference on Trade and Development estimates that developing countries need $1.6 trillion to $2.5 trillion of investment in power, transport, telecommunications, water and sanitation between now and 2030. However, governments in those countries cannot finance such investments alone, leaving a gap of $750 billion to $1.6 trillion between what’s needed and what’s estimated to actually be spent.
Challenges in Emerging Markets
Developing countries face more difficulty than developed ones in attracting private capital in general. “There is a limited pool of capital that is interested in investing in infrastructure in emerging markets, compared with investing in existing infrastructure in developed markets,” Mr. Hontoria says.
In addition, developing countries have less experience with large projects, creating a lack of skilled infrastructure professionals. “World-class skills are required, from a planning, design, structuring and financial standpoint,” Mr. Hontoria adds.
Quite aside from “hard” infrastructure, like roads or water, developing countries also need social infrastructure, such as courthouses, schools, hospitals and more.
“In emerging markets, where there are needs for all those things, how to prioritize and how to sequence them is a question many jurisdictions face,” Mr. Hontoria says. These countries all have a growing middle class, with growing expectations, which puts pressure on governments to show results quickly while keeping a long horizon for how all the pieces will fit together in the future.
The payoffs can rebound through the economy. Spending to design and build the physical infrastructure boosts private-sector companies, especially in the construction sector. The infrastructure itself is vital to ensuring greater efficiency in the economy, increasing productivity, getting goods to markets, etc.
Trade in parts and components—which dominates in emerging markets—is almost 50% more sensitive to logistics improvements than trade in final goods, which dominates in wealthier countries. In its Latin America Economic Outlook 2014, the Organization for Economic Cooperation and Development (OECD) says logistics-intensive or time-sensitive goods account for 57% of Latin American exports, versus 17% on average in the OECD. The benefits of better logistics from infrastructure investment would spread through the economy.
Some countries are seeing results. ”Panama is a good example of a lot of infrastructure being built, turning it into a logistics hub,” says Christian Daude, head of the Americas desk at the OECD in Paris. “Sometimes countries need more investment in infrastructure, but sometimes they have to make more efficient use of what’s already built, doing maintenance. This is holding back growth for many countries in the region.”
By cutting transport costs 1%, Colombia could increase exports by as much as 7.9% in agriculture and 7.8% in mining, according to the World Economic Forum.
Infrastructure is “a very unique asset from an economic standpoint, in that it requires almost a 50-year horizon to do it well,” Mr. Hontoria says. “Many markets have come to recognize that.”
- Maintain and make efficient use of existing infrastructure.
- Recognize the value new infrastructure can bring to the economy.
- Focus on cities.