Infra investment gap widens as low growth takes toll

If underinvestment continues at its current pace the world will face an annual shortfall of $350bn by 2030, McKinsey warns.

The world could face a $49 trillion infrastructure investment gap by 2030 should it fail to shift gears on upgrade programmes, consulting firm McKinsey said in a report this week. The size of the gap triples if additional investment required to meet the UN Sustainable Development Goals is taken into consideration.

Bridging Global Infrastructure Gaps provides an update on the consultancy’s initial report released in January 2013.

“From 2016 through 2030, the world needs to invest about 3.8 percent of GDP, or an average of $3.3 trillion a year, in economic infrastructure just to support expected rates of growth,” according to McKinsey’s latest report. Instead, the world invests about $2.5 trillion in sectors such as transportation, power, water and telecommunications.

What’s more, infrastructure investment has declined as a share of GDP in 11 of the G20 countries since the global financial crisis. Canada, Turkey and South Africa, however, have allocated more money to the sector.

In addition to measuring the investment gap, McKinsey also fine tunes some of the recommendations it had made in its 2013 report to address the problem. These include building a better pipeline of bankable projects by establishing solid cross-border principles, amending laws and regulations that impede the flow of financing; and unlocking public funding by raising user charges, capturing property value or selling existing assets and recycling proceeds to invest in new infrastructure.

Governments around the world could achieve savings of 40 percent by improving project selection, delivery and management of existing assets, according to McKinsey, which cites Infrastructure Ontario as an example. A provincial government agency, Infrastructure Ontario has implemented a long-term investment plan and has rebuilt the province’s hospital infrastructure. The agency acts as an independent organisation, has clear responsibilities and works closely with the private sector.

Similarly, South Korea’s Public and Private Infrastructure Investment Management Centre has helped lower the nation’s infrastructure budget by 45 percent, “in part by instituting a much more rigorous selection process,” according to McKinsey.

While PPPs have increased, even in those jurisdictions where they are widely used they only account for about five to 10 percent of overall infrastructure investment. The average stands at 3.1 percent. As a result, “they are unlikely to provide the silver bullet that will solve the funding gap,” McKinsey states in its report. “But PPPs can play an important role – not only financially, but also in terms of increasing efficiency and innovation in the sector.”

The consultancy also examines technological disruption and how it may impact the infrastructure sector, noting however that it is too early to quantify such impact.

Examples cited include autonomous vehicles and a potential shift from public transit systems back to cars, an increase in road traffic and a change in traffic flows. The increase in road traffic, however, may be offset by the increase in road capacity as a result of vehicle-to-vehicle communication that will allow for tighter spacing between cars.

Other disruptors include drones, which could take some delivery vehicles off the road but create new requirements for air traffic control.

“Some breakthroughs could render some current types of infrastructure obsolete, but they may create entirely new needs – and the transition itself will require investment,” McKinsey states.