In a jam? Pay as You Grow

Investment in infrastructure is needed for countries to grow. Governments lack the cash but insurance funds could provide an answer, according to a Handelsblatt commentator.
Take a walk when the tube is packed.

Anyone who has ever experienced a power cut in New York, has had to take a train during rush hour in London or is left stuck in a traffic jam in Cologne because one of the bridges spanning the Rhine has been closed due to technical problems knows exactly what it feels like to bear the direct brunt of inadequate infrastructure expansion.

These inadequacies are becoming more and more apparent. Traffic jams in the United Kingdom, France, Germany and the United States alone cost these four economies a whopping €160 billion, or $189 billion, in 2013. This figure takes into account lower employee productivity levels, price increases due to higher transportation costs and expenses associated with excessive carbon dioxide emissions. According to the London Centre for Economics and Business Research, these costs correspond to 0.8 percent of total gross domestic product (GDP). The Centre forecasts that these countries will incur traffic jam-related costs to the tune of €240 billion a year in the period leading up to 2030 if road construction programs fail to keep pace with vehicle density levels.

Since 2003, infrastructure depreciation in Germany has been higher than the corresponding investments made by the public sector.

The world's industrialized nations are now reliant on infrastructure that is around 30 to 50 years old: high time for renovation or replacement. But public-sector investment in roads, power plants, public buildings and networks has been on the decline across the board. Since 2003, infrastructure depreciation in Germany has been higher than the corresponding investments made by the public sector. And yet competitive infrastructure and investment in this area are an absolute must for any country wanting to secure growth and employment.

Infrastructure investments promote demand in the short term and in the long run, provide a shot in the arm for the economic production potential. According to the IMF, this productivity effect corresponds to around 1.5 percent of GDP every time infrastructure investments are upped by one GDP percentage point. Nevertheless, the amounts we are talking about here are huge. McKinsey estimates that, in order to cover the global infrastructure demand between now and 2030, €46 trillion would have to be invested during this period. This means that, worldwide, €3 trillion would have to be pumped into these projects year in, year out, instead of the €2.2 trillion postulated to date.

One thing is sure: most governments are not in a position to foot this sort of investment bill. Almost all countries have to consolidate their budgets first. This is compounded by the increase in social security spending due to demographic effects.

With the situation as it is, calling for countries to borrow more, as many economists and the IMF suggest, would not only undermine Europe's commitment to the stability pact, with incalculable consequences. It would rob policymakers of the room for maneuver they need by creating heavier interest burdens, leaving the generations to come with even more debt to pay off.

At the same time, the generation currently in work is faced first and foremost with the need to set adequate funds aside for retirement, which is proving very difficult in the sustained climate of low interest rates.

Insurance and pension funds have investment funds worth around €40 trillion at their fingertips.

So what could make more sense than bringing these challenges, which are already loosely intertwined, together to find a solution that suits everyone and using private retirement capital to finance infrastructure, stimulate growth and take pressure off the budget?

Insurance and pension funds have investment funds worth around €40 trillion at their fingertips, less than one percent of which is invested in infrastructure projects. They can, and indeed want, to significantly expand the construction, running and financing of streets, networks, supply facilities and public buildings. There are a whole manner of possible forms of cooperation with the public sector. All of them involve the state being responsible for the overall framework in order to protect the public interest. The operating costs and debt servicing can be covered by user fees.

If infrastructure is to be financed and operated privately, the costs cannot be higher, in the long run, than with public-sector financing. If the interest expenses for private financing are higher, this has to be offset by efficient project construction and operation.

So it is a good thing that policymakers and institutional investors are starting to tiptoe towards each other. If we can streamline and standardize the project award and assessment process to make it as transparent as possible, ruling out the risk of changes being made to agreements later on down the line, then everyone will benefit.

If this then results in a surge in the number of public-private projects coming on to the market, then - for the sake of the economy as a whole - bring it on!

 

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