According to a rule of thumb developed by the World Bank that is now accepted around the world, every dollar invested in infrastructure generates two dollars in economic performance.
This rule makes no distinction between energy, transportation and residential infrastructure. An investor in a developing country will generally receive a greater return than investing in Western Europe, as the productivity gain in Africa is proportionally higher than it is in Western Europe.
Investments in infrastructure within the same jurisdiction can have two vastly different outcomes. Not only do regulatory, social and environmental considerations affect the economics of infrastructure development, but so too does the size of the population being served, the costing structure (for cost recovery purposes), financing costs and uptake of usage of the infrastructure.
The West’s crumbling roads, bridges and ports are viewed very favourably by sovereign wealth funds (SWFs) as public money and other funding opportunities become available after a period of austerity. However these projects still face regulatory and government policy delays and fierce competition for deals. Roads, bridges and ports are viewed as strong and stable cash flow generators. These investments hold huge appeal for a $6.5 trillion industry.
US President Donald Trump has floated plans to spend up to $1 trillion on projects that will take years to complete. The US$800 billion sovereign fund Chinese Investment Corporation (CIC) chairman has told the Asian Financial Forum in Hong Kong that the US would need at least US$8 trillion to fund the rebuilding effort, and money from the federal government and American private investors would not be sufficient.
About 40 per cent of the CIC’s US$200 billion overseas investments are now held in US government and agency debt, among other US assets. Business leaders speaking at the forum doubted whether Trump’s protectionist rhetoric would be reflected in real policies, given that history shows that protectionism would only hurt the economy.
Britain has flagged projects worth nearly 500 billion pounds ($632 billion) including expanding Heathrow airport and high-speed rail. European governments are backing more spending on energy, transport and telecoms, and Canada is speaking to SWFs and pension funds to create an infrastructure bank. In Indonesia, 12 significant infrastructure projects worth a combined 721 billion baht, marking the highest level of joint investment since the enactment of the Joint Public Private Partnership Act in 1992, are set to seek approval from the public-private partnership (PPP) Committee this year. By their very nature, PPPs and “value capture” financing models are ideal opportunities for SWF infrastructure investment financing structures.
Similarly, in Australia the high speed train between Melbourne and Brisbane, Cross River rail in Brisbane, NSW Metro Trains and Melbourne’s Metro upgrades and electricity asset sales around the country are providing opportunities for SWFs, other foreign investors, Australian superannuation and banking sectors and infrastructure asset owners and constructors to invest.
Concerns about foreign ownership of strategic assets (perceived or real) have stifled investment opportunities in some jurisdictions. The lack of transparency by decision-makers regarding foreign investments has created uncertainty and sovereign risks for many participants. Some examples include:
- an outcry over national security forced UAE-based DP World to sell management leases for six U.S. ports in 2006
- Britain held up a $24 billion power project on concerns over Chinese investment in nuclear infrastructure in 2016
- Australia is not immune to this reality – just look at the outcries, both positive and negative, regarding foreign ownership approvals/roadblocks and backflips across the political divide and at state and federal government levels since 2010.
A report by the World Bank notes that as the functioning of infrastructure worsens, the wealth gap increases. The infrastructure and housing plights of US cities serve as examples. A serious consequence of under-investment in recent decades, neighbourhoods that are poorly served have deteriorated even more quickly, followed by crime, drug addiction and poverty.
How high is the price when infrastructure is not built?
Questions remain as to how an equitable value-sharing model can be developed. Will levies be a once-off tax at sale time to cover the cost of development of the rail lines and other infrastructure? Will the private sector be accountable for the cost of remediation and ongoing maintenance? Will tenants or landlords who directly and/or indirectly benefit from public transport projects be charged an annual levy to subsidise the fare box and operational costs, particularly for those pre-project approval tenants, landlords and owner occupiers that benefit?
Governments need to prove the infrastructure has gone through a rigorous planning regime and that those footing the bill will have some say in the way in which their money is spent by contractors and public servants.
Another important question to ask is: where will people choose to live?
The answer is often driven by economic activity and proximity to jobs. Developments within existing cities do not need to create their own economic activity, unless of course the city itself is in financial disarray, as many US cities have found themselves. The disadvantage is that old cities have limited potential to rewrite the rules. They cannot significantly change people’s living and working experience.
However, it is not possible to just go to “anywhere” and start building a new city. The economic nucleus needed to sustain growth would be missing, and that is (normally) too expensive for the private sector to create. China’s investments in new cities (sometimes ghost cities) are an exception to the norm. New cities built in Australia are rare. The city of Aura at the southern end of the Sunshine Coast is a case in point, with an 11-year approvals process undertaken. Significant infrastructure is required to support these new cities. Springfield near Ipswich is another.
Consolidated Land and Rail Australia Pty Ltd (CLARA) is proposing to build compact, sustainable, smart-cities connected via high-speed rail between Sydney and Melbourne. CLARA’s privately funded plan will build new regional, compact, sustainable, smart-cities and connect them by most advanced high-speed rail, supported by a comprehensive plan for population management and economic transition for Australia. CLARA has land under its legal control upon which to build its new regional cities.
CLARA can truly capture the value from the land uplift and apply it paying for the high speed rail link – a business model that projects a commercially viable development that should not call on taxpayer funding. CLARA’s pre- feasibility business model has the city sites and rail infrastructure being privately funded through the use of land value capture. CLARA’s infrastructure can be paid for from the city development rather than from government funds or infrastructure charging regimes.
Cities that provide the most efficient transport infrastructure, on top of essential social infrastructure, will place themselves in the best position to maintain liveability and deliver sound economic performance. These cities become the preferred home for the best and most skilled workers and the hi-tech industries that employ them over the next decade.
Major transport infrastructure provides the backbone of investment opportunities, and it is generally around such infrastructure that industries agglomerate, but light rail, tram, bus, cycling and street networks are equally important in delivering liveability.
Whatever the model used to fund infrastructure, house residents, and develop sustainable economic activity in new and old locations that benefit from the investment, the following steps need to occur:
- Identify the most appropriate business models to cater for consumer demands.
- Be innovative, making sure costs are kept under control while delivering good service. Everything that applies to consumer-product companies in terms of innovation, quality control, and after-sales service also applies to this city.
- Do even more to build facilities in common spaces so the value capture is not just to the developer, as capture values will differ for each stakeholder.
- Speed and efficiency in the build cycle is critical for cost management for the developer and to minimise the impacts on residents and business owners.
- Recognise that residents feel the need to “belong” to a community, suburb, city and/or state and building infrastructure in the most cost effective, timely, least disruptive and most functional manner will mean the developer (and the government) is likely to be seen in a more positive light.
- Transparency in decision-making is crucial.
Buildings, including government offices, law courts, hospitals, schools and universities, and sporting and entertainment facilities, provide the basic social infrastructure for growing communities. These are magnets for population growth, but increasingly childcare and aged care are the ‘must haves’ for skilled workers and their extended families. Good governance, transparency and the right funding model will see success.
Successful infrastructure is valuable anywhere.