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We Need to Take a Long-Term View in Infrastructure

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Infrastructure is a hot topic at the moment and hit the headlines again today when Ken Livingston rejected the idea of a new airport for London in the Thames estuary.

Livingston's view on this particular project is another example of the single-mindedness of politicians across the world. It is a widely-held belief that the banks hold the golden ticket to global economic recovery - the discourse is all focused there, with the bigger picture, infrastructure included, a second-order priority.

Perhaps they expect banks to atone for their mistakes. Or perhaps they only think in immediate, and political, terms.

I have long-championed the importance of infrastructure not just for providing valuable services, but also as a source of economic growth and employment.

This week I am hosting the CG/LA Global Infrastructure Leadership Forum in London, and this event has only compounded this view. What has been abundantly clear to all attending is the huge demand for infrastructure projects across the world - estimated at $7.5 trillion - being met by a staggering shortfall in funding of $3.5 trillion.

It doesn't take an economist to point out that these are huge numbers, and a serious underinvestment in infrastructure globally.

So why do many in both the private and public sector think of infrastructure as such an unattractive investment? An especially valid question when you consider it is a much less risky venture than many other areas of investment currently being pursued.

Giulio Boccalett, Partner at McKinsey, hit the nail on the head yesterday when he argued that a major deterrent is productivity, or a lack thereof.

Making a comparison to retail banking where lost productivity is typically around the 5% mark, in infrastructure and construction this is more likely to be 20%. For an investor, this could spell the difference between profit and loss.

The Chancellor, George Osborne, made clear in his Autumn Statement that he wants infrastructure to act as a stimulus for economic growth, announcing $46bn of infrastructure projects. A month later High Speed 2 was approved, marking the beginning of the biggest investment project in the UK.

Good news all round? Not quite.

Another deterrent to investment is time. In a culture obsessed with short-term returns, nobody wants to invest in a project that won't even begin to yield returns for 20+ years (the second phase of HS2 is due for completion in 2032). Whilst HS2 looks set to get off the ground - many other projects fall by the wayside.

We certainly need a cultural shift in that regard, but more importantly we need an industry shift whereby projects are completed to much tighter deadlines.

As McKinsey highlighted at the Forum, this is by no means impossible. But if infrastructure investment is going to increase to the levels required to ensure supply meets demand, the industry - construction, engineering, transport, energy, telecoms and finance, to name a few - need to make this cultural shift.

Only then will governments around the world have the confidence to ambitiously expand their investment.