The G20 infrastructure agenda cites an OECD prediction the global infrastructure gap will be worth $US70 trillion by 2030. It is predicting this gap will grow.
Yet it’s difficult to assess the credibility of this claim. It is even more difficult to determine what infrastructure projects they include. Any assessment of a gap should only include projects that add more to society than their opportunity cost. However, debate around infrastructure needs is invariably clouded by politics and opaque decision-making.
There have been a number of recent global infrastructure initiatives. These include China’s Asian Infrastructure Investment Bank and the proposed G20 infrastructure hub.
Even with these initiatives, funds compared to projects are still limited. Governments and investors must clearly analyse the benefits and costs of different options to maximise the potential of these funds.
Selecting the best projects to pursue
Good economic management requires assessing different investment options to select those with the highest returns. It involves a number of steps.
First, articulate the key problem the proposed infrastructure investment is to solve. Often the investment is part of a comprehensive vision of planned developments for a city or region over time. This vision may require active government input and community consultation.
The second step is to assess the options that best meet these needs. For example, providing cost-effective transport may involve considering: road pricing and congestion charges; how public transport interplays with private transport; and whether to build new roads or widen old ones. Other factors may need to be considered such as the burden on other infrastructure including water and electricity.
Who should make the investment?
The private sector can provide some infrastructure services such as utilities. In these areas, governments need to establish a decision-making environment where private sector interests are aligned with the best use of limited national resources.
Where infrastructure services have high costs of exclusion or where equal access is important, government investment is likely to be the default option. This may include road, health and education infrastructure.
In areas where government policy is a major source of uncertainty, government may have to make the initial investment in the project. It may aim to transfer the project to the private sector at a later time.
The third step is to undertake a benefit-cost assessment. This is important for government-funded infrastructure investments and large projects above $50 million. The assessment compares the potential benefits to society with the opportunity costs of allocating resources to the project compared to other parts of the economy. The analysis should be transparent, open to scrutiny and made public.
Invariably, knowledge about the value of key benefits and costs will be imperfect. Sensitivity analysis should be performed to show the effects of different assumptions and to appraise the robustness of the assessment.
Only those infrastructure investments with a benefit-cost ratio greater than one fit the description of an infrastructure gap. That is, they would add more to society welfare than their opportunity cost. Where available funds are limited, the priority listing of projects would be ranked by the benefit-cost ratio.
Fourth, undertake a comprehensive appraisal in terms of long-term government budget projections. This appraisal can include analysis of government and private funds for the investment, returns from the sale of the infrastructure services, the impact on tax revenues and operating costs.
This set of processes places scrutiny on the priority of projects. It increases the likelihood of further funding if investors can be confident that projects have been well chosen and thought through. Transparency also adds to politicians' credibility and increases investor confidence that any change of government will not impact the investment decision.
An important fifth step is to monitor and evaluate the progress and outcomes of each project. Past experience can then be used in adjusting the planning, selection and management of future projects.
The relative benefits and costs of infrastructure options have to be assessed if countries are to derive the best for their citizens. Too often government-funded infrastructure projects are chosen for short-term political reasons without appropriate analysis. What is needed is a formal and publicly available assessment of all available infrastructure options.
John Freebairn does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.
This article was originally published on The Conversation.