The Need for a ‘Novel Solution’ in Infrastructure Finance | srei
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The Need for a ‘Novel Solution’ in Infrastructure Finance

We have held this view that governments are the best financers funders and builders of infrastructure. This model simply isn’t feasible anymore because the needs of infrastructure far outstretch the government’s ability to finance them. This does mean that the government is not needed as there is a lot of risk involved and most of these industries are natural monopolies.  Market failures result in the private sector not being able to cover the investment requirement itself. Public private partnerships (PPPs) offer an alternative in overcoming these failures but first let us look at the big picture.

Infrastructure investments and economic growth generally go hand in hand. Of the 21 countries and six types of infrastructure considered in Egert, Araujo and Kozluk (2009), the vast majority of estimated relationships with GDP are found to be positive and to show a return to infrastructure investment over and above that of investment in the capital stock. Traditionally there has always been a lack of investment in infrastructure and this gap will have to be filled out in the future. Infrastructure UK has estimated that average annual UK investment in infrastructure will need to rise from £30 billion per annum between 2004 and 2009 to £50 billion per annum between 2010 and 2030. The same report estimates that worldwide total investment over 2010–20 is expected to reach more than £20 trillion. In the EU alone, the cost of infrastructure development to match demand for transport has been estimated at over €1.5 trillion for 2010‒ 30 for the entire transport networks of the Member States.

The OECD has previously estimated the average annual expenditure requirements in the road and rail sectors by 2030. In the roads sector, it estimates new infrastructure construction (ie, net additions and maintenance/replacement) over the period 2000 to 2030 at between $220 billion and $290 billion per year. The report estimates that around two-thirds of all new infrastructure construction in roads is expected to take place in OECD countries, with the majority of this investment requirement arising from the need to maintain, upgrade and replace existing road assets.  In the rail sector, the report estimates the infrastructure requirement to be between $50 billion and $60 billion per year over the period 2005–30. This includes rail upgrading from the EU TEN-T programme and future high-speed rail plans. As in the roads sector, approximately two-thirds of the investment is expected to occur be made in OECD countries.

Governments are trying to overcome various constraints on the provision of capital by the public sector. In the next installment we shall take a look at these restrictions along potential alternatives.