Infrastructure investment is failing to attract the funding it needs to support global growth.
As of June 2014, the managed funds industry in Australia had just over $2.4 trillion dollars under management, with pension funds comprising $1.74 trillion. Superannuation funds are seen as excellent vehicles for infrastructure investment, however in Australia these funds invest less than 10% of their portfolio in this asset class.
Meanwhile the Organisation for Economic Cooperation and Development reports the global average for investment in infrastructure is as low as one percent.
Infrastructure is a base requirement for economic activity and while empirical evidence is mixed, there is general consensus that investment in infrastructure has a positive effect on output, productivity and long term growth rates.
It is not surprising that many global leaders have therefore targeted infrastructure investment as a means of economic stimulus, with Australia leading the call for the development of a G20-led infrastructure hub to boost funding.
What are the benefits of an infrastructure hub?
It can act as a knowledge centre
The hub will be able to differentiate itself by being a knowledge centre to help countries increase efficiencies in the bid tendering, preparation and evaluation phases of infrastructure investment.
These phases currently add significant transaction costs to a project before it has even begun. Much of this cost can be attributed to the legal and financial complexity inherent in these large projects with numerous parties placed in essentially new environments.
A global infrastructure hub can leverage global experience with innovative contracting in design and maintenance to enable governments to create a more attractive investment environment.
It will be an advocate for projects
Anecdotally, a lack of definition and transparency with respect to the government process can also greatly add to uncertainty and thus transaction costs. A global hub will be able to advocate a more uniform regulatory and governance structure.
Creating a more palatable investment environment in a post-GFC climate is important. It is not a scarcity of funds that is arguably the issue, rather a reticence by the private sector to invest those funds in infrastructure.
While infrastructure theoretically represents a long-term investment with potentially stable cash flows, new projects may not match this in reality.
It can promote innovation
A future infrastructure hub may be able to innovatively develop ways of leveraging sources of money. One way may be through creating conditions that reduce the risk of projects collapsing before they are established or even generating cash flows. Another may be by acting as a single entity which could borrow from such funds for infrastructure investment, while absorbing the risk of the investment in place of the pension fund.
Generally speaking, a new hub could add significant value by not just providing funds for investment into infrastructure, but by using those funds to provide guarantees that encourage public and private institutions to engage in more innovative ways of funding infrastructure. This may be through the increasingly common public-private partnerships or approaches such as the Milton Keynes Tariff, Tax Incremental Financing or even the ultimate in user-pay financing - crowd-sourcing.
It can benchmark best practice
Perhaps the biggest contributors to failures in infrastructure investments are shortfalls in estimated demand and cost blowouts. A properly established global authority could collate methods and benchmark techniques for forecasting costs and benefits. A global body could also develop a class of reference projects for nations to use in assessing their own projects. This would help governments cut overly optimistic and strategically misrepresented forecasts by providing actual data on the performance of comparable assets which are often difficult to find at a domestic level.
A database that also keeps information about successful infrastructure providers, as well as the requirements of different nation-based participants, has merit. It is also likely to cut the costs of information asymmetry.
How will an infrastructure hub compete with the World Bank?
While the World Bank does do some of these tasks, it is largely focused on providing loans and advice for capital programs in developing nations. More mature economies have clearly different needs and pressures, so an organisation assisting decision making and policy formation will add value.
The difficulty for such a hub will be pushing measures that facilitate private sector investment rather than distorting it. Also, it must allow for policy innovation rather than stifling new ways of investment.
Its success is also reliant on the ability of the organisation to be seen as a truly independent body free of both private and political influence. The global traction of the World Bank is somewhat limited by the perception of a Western hegemony funding it. The Asian Development Bank, borne out of a wariness for the World Bank, has always been led by Japan. There may therefore be increased pressure from China for Australia to support a new Asian-based infrastructure bank.
Finally, the success of such a proposal is almost exclusively in the hands of the constituent organisations. On a domestic front, Infrastructure Australia has been marginalised at times by the government. Infrastructure announcements have been made without projects being assessed by the body. The challenge for an international body is to ensure that G20 countries value its worth and support it.