The major issue for infrastructure in developed economies is who pays for it, according to research from rating agency Fitch Ratings (“Private Infrastructure Investment in Developed Economies”).
The study points out that the only two ultimate sources of payment are users of facilities or taxpayers. Politicians are left to determine “who should pay for facilities that only a fraction of the population uses, that will be used by many others in future and, when it comes to replacing existing assets, have already been paid for”.
According to Fitch, the focus in developed markets – partly as a result of weak economic growth – should be on upgrading existing “failing” infrastructure rather than building new facilities. But it is “politically difficult”, the study says, to make people pay more for a service that is not new and merely aims to maintain what already existed.
This “difficulty” means that there is a counterintuitive “bias” towards new infrastructure projects rather than maintenance. The study says that, to change this, the concept of intergenerational equity (paying for something that will benefit future generations) needs to be high on the public agenda.
The study suggests that by focusing on new rather than existing infrastructure, the likes of transport and energy networks, utilities and social infrastructure in Western economies – despite still being among the best in the world – may soon deteriorate to an extent “that may be considered unacceptable in many ways, including economic”.
Furthermore, by putting needed maintenance work on hold in the face of fiscal pressure, economies may be storing up trouble. Repairs left undone today will ultimately cost more to address in the future, the study points out.
The study goes on to stress that funding is the big issue that needs to be tackled rather than financing, i.e., the issue is not who lends the money but who pays it back. There is “plenty of capital” available to finance bankable projects, including: direct public borrowing; tax-exempt bonds raised by the public sector; covenanted bonds issued by regulated utilities; traditional loans taken by concessionaires; and subsidised loans granted by development banks.
Fitch underlines the point that financing is not the problem with reference to the US, which faces a large infrastructure gap but which has buoyant capital markets.
The outlook for private financing, the study indicates, is not encouraging. It says that policy makers “increasingly consider” that involving the private sector is “inefficient and costly” as a “result of some negative experiences with a few poorly designed PPPs that reflect badly on the whole sector”.
It also says that bankable projects are in short supply, with a risk that weaker projects will attract financing (given strong capital supply) and ultimately tarnish PPPs further.