Investing in infrastructure that is fit for the future

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The Covid pandemic has demonstrated that infrastructure investment priorities need to change, argues Graham Pontin.

The Covid crisis has created one of the greatest health and economic challenges seen for a century, if not more. Whilst this challenge has been met with varying levels of success, the determination of the global community to get beyond Covid has remained resolute.

The pandemic has also demonstrated how the mix of infrastructure that we rely on in day-to-day life can change very rapidly. The need for healthcare resilience has increased significantly, railways and roads were replaced with the need for broadband infrastructure and congested urban centres worldwide suddenly needed more green space.

The financial crisis in 2009-10 may not have had such a substantive shift in infrastructure use, but it did call into question the prospect of investing in carbon-heavy infrastructure and whether this could ultimately create a return, as oil prices crashed and environmental goals continued to evolve.
This piece, however, is not about the infrastructure mix, but the prospect of how prepared we are to invest for the future and change it, if at all. I believe that the pandemic has demonstrated that investment priorities must change or, ultimately, we are destined to operate in a manner which no longer meets society’s goals and ideals, is inefficient, or worse, leaves us with stranded assets that are economically useless and use finite resources with no recourse or prospect of recycling.

So why the stark introduction? Surely, times move on, the investment balance changes and why now is it an issue? That’s the trillion-dollar question!

The latest FIDIC State of the World report, Time to $Tn-vest, revealed that the investment to maintenance ratio was falling and if it continues, the current trend by 2030, the time at which the SDGs and sustainable development is due to be a priority, the ratio would only be 1.7 and if that is pushed out to 2050 the ratio would be 1.

Let’s start unpacking the above. Ratios can of course move because of shifts in one or both aspects in either direction. FIDIC’s report did, however, find that the variation and direction of changes were consistent with a continued trend over time. We therefore need to consider the implications of this and what could this mean for the infrastructure sector. There is room to speculate about what would the world look like if we fast-forward to the potential 2050 ratio?

First, let’s look at the financial and economic implications. Infrastructure investment uses resources today to generate economic activity and improve productivity for tomorrow. If we are to spend as much on maintaining current infrastructure as investment, the prospect of future growth via the multiplier effect is reduced, speculation becomes less relevant and pension funds would struggle to find assets that generate long-term stable returns. The market has contracted, prices for projects that were undertaken would rise and investments would potentially be on a necessity basis only, reducing any resilience in systems to deal with systemic or unexpected shocks such as Covid.

Socially, we now potentially live in an environment where whilst products may improve, they are constrained by the core infrastructure that exists, which is now either costing the same as investment to maintain or where the cost has risen to meet infrastructure requirements. Either way, the impact on people’s lives will be significant. Growth in investment portfolios would make ‘asset growth’ for families more difficult and it is likely that the pricing of housing would become unaffordable and intergenerational. As new infrastructure is no longer meeting the demand for growth, this could lead to significant demographic and social change and a very different way of living for future generations.

Environmentally though, did we meet the SDGs on the way? If we did, it’s a positive step but we still have to consider net zero. If we did not meet even the SDGs, progress is constrained by lower investment levels making net zero potentially impossible and even if we did, we are still on a ticking time clock.

“Let’s upgrade the existing infrastructure,” I hear you cry. This is still not classed as maintenance and is still investment so reinforces the problem, where the future is either reduced or constrained by the raised set profile of existing infrastructure, its upgrade and maintenance requirement.

Of course, all the above is theoretical and there are many outcomes that could occur, but it does underline the potential impact if we stop investing in our future, be it through safeguarding people’s futures and ensuring we are physically here tomorrow and making sure that we do not create a position where we can’t be here tomorrow.

It’s therefore crucial that influential organisations such as FIDIC, the UN, WEF, MDBs, governments and private companies continue to ensure that we look ahead and invest.

To return to where I started, the resilience of the human race during Covid has been unprecedented but it has taken many by surprise that the systems we thought would protect us and were so resilient failed so quickly. This is, however, in terms of infrastructure, is not a bad lesson to learn – we have invested and reacted to the pandemic on a global scale to create the tools required to ensure we are here tomorrow. There is no reason why solving the global water crisis, hunger and all the other big issues facing the world could not be addressed with such an approach to investment.

Resilience is hard to price, but as has been shown by Covid it is vital, be it health infrastructure, broadband or many of the other issues and areas that have been laid bare by the pandemic. What should be looked at further and is in my view the issue of the hour, is if we get to the point where we are spending more time and money keeping past infrastructure afloat, rather than ensuring we are here for the future, it is fair to say that we have truly lost our way.

Graham Pontin is head of economic and strategic policy at FIDIC.