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December 10, 2012, Monday

Infrastructure development key for next decade’s growth

A total of 1.4 billion people in the world still have no access to electricity. Of the world's population, 2.6 billion lack access to sanitized (clean) water. A sum of $60 trillion worth of investment would be required to meet the world's basic food, water and electricity needs, according to American global management consulting firm McKinsey & Company.

Investing in the infrastructure necessary to provide these needs for the next decade is less a problem for the developing and underdeveloped world. Emerging economies like China, Turkey, Indonesia and India are investing enormously in projects to develop their social services infrastructure. At the same time, the developed world, especially the US, requires investment to improve its existing social service infrastructure. This issue is a vital one for the next decade, and the US is lagging behind a desirable level of improvement by leaving almost all infrastructure investment in the hands of the private sector. It is not always profitable for state governments to undertake infrastructure investments, but their involvement may be needed at certain points -- not necessarily by providing money, but by giving the necessary public guarantees to make sure investment projects succeed.

As was discussed at the 2012 Global Infrastructure Initiative conference organized by McKinsey & Company and held on Nov. 28-30 in İstanbul, deciding what to build, finding the right strategies to finance projects without wasting money and providing the necessary funding outside of public resources are all pressing issues that world leaders need to tackle.

At the conference, Deputy Prime Minister Ali Babacan provided sound examples of partnership between the public and private sector in Turkey where the government backs projects by providing technical -- including innovation and research and development (R&D) -- as well as monetary support. Some of the recently built airports for which the Turkish government provided transportation services are very good examples of such a partnership. With such a guarantee by the state, in the form of transporting customers to airport services, the private sector can easily finance and operate airports.

In the case of these airports, instead of awarding tenders by cheapest building cost -- in build-operate-transfer [BOT] projects -- the state gives priority to companies that are able to successfully operate the airport. A large highway project between İstanbul and İzmir is another example of state support for transportation infrastructure and also represents a success in obtaining international funding. In other words, the government has put forward a sound plan to grow and provide infrastructure to people without hurting the balance of state budgets. A recently published study by Sylvain Leduc and Daniel Wilson of the San Francisco Federal Reserve shows that the fiscal multiplier of infrastructure spending is much greater than the typical multiplier of other forms of government spending. Namely, a dollar of infrastructure investment boosts the economy by two.

Considering that the usual fiscal multiplier for government spending is between one and 1.5, investing in infrastructure offers a much larger boost to the economy than other forms of spending or tax cuts. This is another reason to look for new ways to enhance infrastructure without wasting government money. Rethinking infrastructure requires hard work. There are problems that need to be tackled, like mismatch of capital and labor. Often, underdeveloped parts of the world like Africa and Asia need infrastructure investments but don't have the required capital to support them, nor the necessary organization to carry out the projects or the right companies to build and make them profitable in the end. They also don't have the capacity to provide skilled labor. Often, the companies and skills required for such projects are found only in advanced and emerging economies, and the companies are not willing to do projects without sound financial backing. Institutions like the UN and World Bank are working on those issues, but efforts are too limited and too slow. The world's rich are becoming richer and poor poorer every day due to this mismatch of capital and labor. A sense of urgency is necessary to solve these challenges.

Often, deciding what to build is another issue that needs managing within the environment of an underdevelopment. Infrastructure planners and policy makers are often forced to consider tradeoffs amongst complex political, economic, social and environmental factors. Considering only domestic resources is often not enough to put together financially sound projects that create jobs and spur economic growth, though international resources are not available in every county. The challenges are vast, but solutions to the problems are urgently required. We have to find better and more innovative ways of providing the right infrastructure at the right time.

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