Is Covid 19 forcing the infrastructure industry to deal with old problems?

Too often, stimulus announcements are focused on massive infrastructure projects that take years to plan and procure before money starts flowing. These make for great political PR but are pointless as stimuli to grow GDP and jobs.

Is Covid 19 forcing the infrastructure industry to consider infrastructure provision problems that existed before the crisis?

COVID-19 and infrastructure: A very tricky opportunity

My career has seen 1987’s Black Monday, 1997’s Asian market crisis, the 1998 Russian financial crisis, the dot-com bubble burst of 2000, and the global financial crisis of 2008. Like my peers, I’ve spent recent weeks trying to assess what the coronavirus (COVID-19) means for our sector. A look back at previous crises can be informative, however it’s important to note that this crisis is a collapse in demand in the real economy—not the financial markets. This means it’s more akin to the Great Depression or the recovery after World War II.

While bank balance sheets are more robust thanks to regulatory changes following the global financial crisis, the same cannot be said for government finances. Despite debt servicing costs being lower due to sustained lower interest rates, debt-to-GDP ratios are higher. The IMF indicates gross government debt across the “rich world” will rise by $6 trillion to $66 trillion at the end of this year (from 105% of GDP to 122%)—more than in any year during the global financial crisis. The picture in emerging and developing economies (EMDEs) is no rosier, with the World Bank estimating that debt there climbed to a record $55 trillion in 2018. For countries where natural resources are a fiscal bedrock, this deteriorating financial position is exacerbated by the recent oil price collapse.

As governments are trying to stabilize their economies to support both workers and businesses—and with factories, shops, and offices shut—tax revenues are collapsing together with GDP. The stabilization is debt-fueled out of necessity but exacerbates the over-gearing of national balance sheets and reduces future flexibility. Balancing the books in most cases is impossible, but trying requires a combination of cost-cutting and tax increases, which—combined with already higher debt—will make stimulus packages challenging.

Where does that leave infrastructure?
Economies, especially developing economies, were already facing significant infrastructure gaps, amounting to $15 trillion globally, according to the Global Infrastructure Hub for the period 2016 to 2040. Governments now face a dilemma whether to increase infrastructure spending as a means to stimulate their economies or, ironically, to cut committed infrastructure spending to save.

Past experience indicates that, when economic growth declines, so too does public investment. Yet, the pandemic will increase calls for increased spending to address certain priorities, such as digital connectivity, health care, welfare, pandemic-proofing of public services, and infrastructure such as transport.

Where infrastructure stimulus programs are implemented, they should spread spending broadly across the country as well as deeply into construction supply chains. Money needs to flow into the real economy quickly and to small and medium enterprises and the self-employed. Too often, I’ve seen stimulus announcements focused on massive projects that take years to plan and procure before money starts flowing. These make for great political PR but are pointless as stimuli to grow GDP and jobs.

COVID-19 forces us to consider challenges that existed before the crisis that are fundamental to how we tackle infrastructure provision over the long run. It offers:

Opportunity for overdue conversations around risk allocation. Pre-crisis, contractors across the world stopped bidding for PPP projects, blaming tendering costs and risk allocation asymmetry. If they did well, they made tight profit margins; if things went wrong, they lost hugely—pointing to disproportionate risk and return. Also, I suspect the pain being felt by demand-based asset owners (mostly in transport) from dramatic drops in passenger and freight volumes will prompt a reassessment of risk-sharing. It’s illogical that, on assets where owners and investors have limited ability to forecast and manage demand risk for five—let alone 30+ years—risks are not shared more equitably between users, investors, taxpayers or ratepayers. Policy makers and regulators will have their hands full getting this right.

Opportunity to further the sustainability and decarbonization agenda. The impacts of climate change and urbanization continue to mount, and governments and the infrastructure community must respond. Many of us have enjoyed the drop in air and noise pollution and the return of wildlife to urban areas following lockdowns, albeit under tragic circumstances. Surely we want the unexpected positives to continue and will accelerate the push for clean, green infrastructure.

Where governments are stimulating economies or allocating scarce resources, focus must be on low-carbon solutions. Whether wider sidewalks, pedestrianized streets, dedicated bicycle lanes, electric scooter pathways, or car-free zones, the health and safety benefits of such investments are even more important now. The same applies to renewable and climate-friendly electricity sources.

Opportunity to accelerate technological adoption to enhance resilience. We’ve seen technologies such as fiber and IoT (Internet of Things) step up during the pandemic, but the infrastructure sector is relatively underinvested in technology compared to other capital-intensive industries. Pressure from reductions in capacity arising from social distancing, people’s reticence to commute, and demand for carbon reduction will likely spur planners to de-prioritize some infrastructure like airport and road expansions and focus on digital infrastructure and smart mobility. Technology adoption, obsolescence, and resilience will become critical factors when investing scarce resources. Technology will also be necessary to get users comfortable using infrastructure in a post-pandemic world.

To sum up, fiscal positions have deteriorated, but infrastructure needs have not. Narrowing the infrastructure gap just became even more challenging. The reality is the gap was unaffordable; too many commentators had focused on “financing” for plugging the gap rather than how it was to be repaid. In an overtaxed and overborrowed world, affordability is key. So while we may never fully close the gap, we must do our best to provide services like clean drinking water, sanitation, electricity, and accommodation to lift people out of poverty—on a sustainable, resilient, and equitable basis.

The pandemic has given us all more time to reflect on what’s important. Let’s ensure the collective response focuses on what’s good for the planet and its people. We have an important role to play through our work in infrastructure in making the world a better place.

This article was written by Richard Abadie Global Leader of Capital Projects and Infrastructure Group, PwC for the World Bank