80 The Commonwealth Finance Ministers Meeting 2011

Infrastructure for Development

The economic benefits of infrastructureInfrastructure is widely recognised as important to a country’s economic growth. Because transport,telecommunications and energy networks make theconnection between goods, ideas and labour, they arecritical to the competitiveness of a country’s economy.Infrastructure can raise productivity, reduce the costs ofprivate production and accessing markets, and facilitateagglomeration economies. Enhancement of infrastructureassets can directly increase GDP per capita by as much as10 per cent. In the United States, the return on projectsdesigned to maintain the average conditions on thecountry’s highway system could be as high as 30 to 40per cent. Air transport capacity improvement has similarsubstantial benefits on economic growth.Infrastructure deficiency can hold back the economy.For example, in the United States, congestion createsUS$78 billion annual drain on the economy, 4.2 billionlost hours of work, and 2.9 billion wasted gallons of fuel.

A recent study shows that a failure to make adequateinvestment in US infrastructure could result in US$3.1trillion in lost economic growth, US$430 billion inadditional transport costs for business, a drop inhousehold income by more than US$7,000, and aUS$28 billion decline in exports by 2020.

The main benefits of improved infrastructure,particularly for transport, are: a reduction in costs,which helps the flow of people and goods; and theconnection of living areas, markets, production andoffice places, which shapes the agglomeration of cityareas. Improved infrastructure also fosters clustering,

diversification and specialisation, increases the exchangeand dissemination of ideas and knowledge and enhancescompetition and innovation, lowers production costsand therefore consumer goods prices, and improves theproductivity and quality of life for all. When a country develops, its economy often moves up the value chain, which is reinforced by

The pressing needfor infrastructureinvestment

Xing Quan Zhang, Chief, Urban Economy and Social

Development Branch, UN-HABITAT

Although the benefits of infrastructure improvements are clear in improving economicdevelopment and quality of life, the investment is hard to come by. Many governments do not

put infrastructure investment on the top of their funding agendas, due to lack of immediate returns.The private sector lacks sufficient interest in investing in infrastructure because of perceived highrisks and the long-term nature of the investment. The reluctance of both the public and privatesectors to fund infrastructure improvements results in a huge gap in meeting infrastructure needs.Unless we act now the infrastructure deficit will hinder long-term economic development and theprospects of global economic recovery from the current financial and economic crisis.

Enhancement of infrastructure assets can directly increase GDP per capita by as much as 10 per cent.

Infrastructure deficiency can hold back the economy. Lower costs, higher growth

Decreased transport costs by road, air and sea can stimulatetrade growth. For example, about three-quarters of tradeexpansion in India can be attributed to the declining costs oftrade since the 1990s. Research shows that lowering tradecosts by 10 per cent through infrastructure improvement canincrease exports by more than 20 per cent. The return oninvestment in infrastructure averages 30-40 per cent fortelecommunications, more than 40 per cent for electricity and80 per cent for roads.

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Infrastructure for Development

infrastructure improvement. When the US economygrew in the 1950s, it was strengthened by infrastructureinvestment. The investment in the interstate highwaysystem increased from US$25 million in 1952 toUS$175 million in 1954; in 1956, the governmentauthorised US$25 billion on interstate highwayconstruction. By 1973, the United States hadconstructed 852,862 miles of highways. Theseinfrastructure improvements formed the modernconnections within the nation and made it theeconomic powerhouse of the world.

The state of the infrastructure impacts on operatingcosts, and is the major factor in determining the locationof business. In a recent Economist Intelligence Unit(EIU) survey of the executives of global companies, 90per cent confirmed the importance of infrastructure intheir decisions to locate and expand their business. Forexample, improvements in South African infrastructuremade it possible for Coca-Cola’s Africa groupheadquarters to move there from the UK in 2006.Infrastructure can also have major positive impacts onimproving the quality of life for the poor. TheMillennium Development Goals (MDGs) emphasise thecatalytic role of infrastructure in poverty reduction.Poverty eradication is the first of the eight MDG goals.Increased investment in infrastructure can stimulateeconomic growth and improve the capacity of the poorto benefit from the growth process. Infrastructurecontributes to poverty reduction and quality of life inseveral ways:

• Reducing water-related illnesses

• Improving access to education and health services

• Creating infrastructure-related employment opportunities

• Boosting economic growth, causing trickle-downbenefits to the poor

• Providing more opportunities for the poor to engagein productive activities, with improved access totransportation, telecommunications and energy.

The benefits of infrastructure investment tend to behigher in low-income countries than those withmiddle- and high-income. Infrastructure improvementscontributed to over half of Africa’s improved growthperformance between 1990 and 2005, and have thepotential to contribute even more in the future, giventhe rapid spread of telecommunication services. Incontrast, the deterioration of power services over thesame period – more than half of African countries faceregular power shortages – has reduced growth.

The need for infrastructure investmentThe lack of enough infrastructure to meet the demandsfor businesses and daily life remains one of the majorbottlenecks to economic growth. Business leaders oftenconsider adequate infrastructure as one of the mostimportant factors in their investment decisions. Despitethe universally recognised importance of infrastructureto economic growth and quality of life, infrastructureinvestment is lacking. People around the world face anotable infrastructure deficit every day. The EIU’s globalsurvey indicates that more than three-quarters ofbusiness leaders expressed concern with inadequateinfrastructure, most acutely in Asia, Africa and EasternEurope. Evidence of the large and growing gap betweeninfrastructure needs and available resources can be seeneverywhere: congested roads and bridges, poorlymaintained hospitals, schools, water and sanitationfacilities, and an energy deficit.

There is a huge gap in infrastructure investment, notjust in developing countries but throughout the world,including the most developed nations. In Canada,Ontario alone has an infrastructure maintenanceinvestment deficit of about US$60 billion. About 59 percent of its infrastructure is now more than 50 years old.It is estimated that the infrastructure investment gap isaround US$180 billion a year for the Asia Pacific region,US$24 billion a year for Latin America; and more thanUS$93 billion a year for Africa. For fragile African states,more than 37 per cent of GDP needs to be invested ininfrastructure. OECD estimates that the global need forinfrastructure investment ranges from US$30 trillion toUS$40 trillion in the next two decades.

The infrastructure challenge facing developingcountries is particularly severe. A very large proportion ofthe population lacks access to basic infrastructure. TheWorld Bank estimates that 1.1 billion people live withouta safe water supply, 1.6 billion people without electricity,2.4 billion people without sanitation services, and morethan 1 billion people do not have access to basic roads.Zimbabwe needs US$16 billion to rehabilitate and

Increased investment in infrastructure can stimulate economic growth and improve the capacity of the poor to benefit from the growth process.

The benefits of infrastructure investment tend to be higher in low-income countries than those with middle- and high-income.

There is a huge gap in infrastructureinvestment, not just in developing countries but throughout the world, including the most developed nations.

82 The Commonwealth Finance Ministers Meeting 2011

Infrastructure for Development

develop infrastructure in order to achieve its economicrecovery and growth targets, which do not includeinfrastructure accessible to the poor. In South Asia, theinfrastructure investment need is 7.5 per cent of GDP.With a deficit of US$60 billion, India is investing lessthan one-third of what it needs in this sector. In manycases, the economic and social benefits of pastinfrastructure investment have not been fully captured,due to poor policies and limited governance capacity.

Financing infrastructureFinance is a key constraint that holds back investmentfrom keeping pace with growing needs. Many countriesrigorously promote decentralisation and channel theresponsibility for infrastructure provision to cities andlocal governments. Cities are the engines of economicgrowth and account for 80 per cent of global GDP, butlarge-scale finance is needed to address the huge gapbetween their infrastructure needs and the current levelof investment.

Cities are economically powerful, but many municipalgovernments remain poor. For many countries, the rateof urbanisation is much higher than the financingcapacity of municipal governments to provide adequateinfrastructure in cities. Municipal governments oftenlack the power to raise revenue and to control their ownfinancial resources. As a result, they may be heavilydependent on intergovernmental transfers and grantswhich are neither stable nor timely.

In many cases, the borrowing power of municipalgovernments to finance infrastructure is legallyconstrained by regulations and complex legislativedecisions. Private sector investors participating as a sourceof capital, technical assistance and managementcapabilities is limited, due to perceived high risks thatdemand sovereign guarantees and risk sharingmechanisms. Participation of other main actors, such asNGOs, civic institutions, individual citizens, academiaand interest groups, in financing infrastructure andcapital intensive projects, is still limited and constrained

by inflexible governance structures and the weak powerof local municipal governments in raising and usingfunds. Historical trends do not suggest that there ismuch prospect of increasing the funding share fromcentral government. Many countries face a seriousgovernment debt cr isis. It is unrealistic to rely oncentral government to make any substantial increase ininfrastructure investment, particularly at a time of globaleconomic stress.

Increasingly governments are turning to the privatesector for financing, design, construction andoperation of infrastructure projects. Public-privatepartnerships have become one of the most importantinstruments to meet the increasing needs forinfrastructure. It is equally important to promotefunctional divisions and shared responsibility betweencentral governments and local governments infinancing adequate infrastructure for different servicesand at different levels. Financial decentralisation canallow local governments to raise more investment forinfrastructure. Closing the gap requires the combinedefforts of central governments, local governments, thepr ivate sector and financial institutions. Theimprovement of governance and market-or ientedpolicies can help governments at all levels to accessfunds from financial institutions and at the capitalmarkets to meet infrastructure funding needs.

Xing Quan Zhang is Chief of the Urban Economy andSocial Development Branch at UN-HABITAT. He is theUN-HABITAT focal point for financial mechanisms. He haspublished about 70 papers and edited 30 books.

UN-HABITAT, the UN Human Settlements Programme, isthe UN agency for human settlements. It is mandated by theUN General Assembly to promote socially and environmentallysustainable towns and cities with the goal of providing adequateshelter for all.

UN-HABITATPO Box 30030 Nairobi 00100KenyaTel: +254 20 762 4659Email: xing-quan.zhang@unhabitat.orgWebsite: www.unhabitat.org

The rate of urbanisation is much higher than the financing capacity

of municipal governments.

The improvement of governance and market-oriented policies can help

governments at all levels to access funds.

Historical trends do not suggest that there is much prospect of increasing thefunding share from central government.