Georg Inderst, Independent Adviser, Inderst Advisory
Since the financial crisis, infrastructure investment has moved up the political agenda in most countries – now also including the USA. Asia is often seen as the world’s infrastructure laboratory, with massive construction of transport and energy projects.
Japan and China have spent 5% and over 8% of GDP, respectively, on infrastructure over the last 20 years while the Western developed world has been trending down to about 2.5% of GDP. The impact is clearly visible, especially in East Asia. At the same time, the “old world” is struggling even to maintain existing infrastructure.
Is there an “Asian model” of infrastructure finance? It is worth taking a closer look before jumping to conclusions, as argued in our recent working paper for the ADBI.
The first thing to note is that the picture is not uniform across the Asian continent. South Asia (4%) and South-East Asia (2-3%) invest well below the required levels of 6-7% of GDP.
Secondly, Asia’s infrastructure investment and finance is primarily driven by the state. The ratio of public to private finance is 2:1 to 3:1 or higher, compared to a ratio of roughly 1:2 in Europe and North America. The private sector still plays a subdued role, often supported by substantial government subsidies and guarantees. Both privatizations and public-private partnerships (PPPs) are below the global average.
Thirdly, Asia’s project finance is very dependent on bank loans, especially from state-owned banks and development institutions. There is scope for more securitization in this field. The use of project bonds or US-style revenue bonds is still tiny overall, although interest is rising in some places.
A fourth point is of growing interest: institutional investors are traditionally not much involved in infrastructure. Faced with budgetary and banking problems, many Asian governments are now trying to find new sources of infrastructure finance. However, the local investor scene is rather concentrated, with a predominance of public reserve funds, social security funds and sovereign wealth funds (SWF). The Asian private pension systems are comparatively small.
Most Asian investors traditionally run very conservative investment policies with a high allocation to domestic government bonds and deposits. Investor regulation tends to keep insurers and pension funds away from riskier and less liquid assets such as infrastructure debt and equity. However, some change is underway. For example, the world’s largest pension scheme, Japan’s Government Pension Investment Fund, started to move into infrastructure in 2015.
But higher commitments to real assets do not necessarily mean more finance for Asian infrastructure. Singaporean and Chinese SWFs, for example, have been very active in European real estate and infrastructure markets in recent years, and so has the Korean National Pensions Service, in line with many other large Asian funds.
Finally, Asia’s attractiveness has so far been sub-par for international investors. There are widespread restrictions on foreign direct investment in infrastructure sectors not only in China but also in most ASEAN and South Asian countries. Other factors that make life difficult for potential foreign investors include cryptic regulations and land laws, bureaucracy, and judicial processes.
In summary, there are certain commonalities across Asia but is there an “Asian model”? If any, it would apply to East Asia’s massive public expenditure programs from abundant state budgets on the back of strong export revenues. This also drives the construction, engineering, and related industries to the extent they can be exported worldwide. It is also remarkable that, at the same time, China has managed to become the largest producer of renewable energies. But not many countries are in such a position.
Nor should other countries necessarily follow the “East Asian model”, at least not fully. Japan ended up with expensive overcapacities and a massive debt burden. Even China is trying to change its reliance on heavy state spending at all levels and on easy credit from domestic public banks and local government financing vehicles. Public money is eventually limited everywhere.
Asia can build on the existing diversity of “infrastructure financing cultures”. Different approaches work in different places. Korea, Taiwan, Singapore and Hong Kong, for example, are following a more open model with capital markets that attract private and international investors. India has seen substantial domestic private activity in project finance, PPP and private equity funds. Corporate bonds have been widely used in Thailand and elsewhere. Malaysia has developed the world’s biggest market for sukuk, including Islamic infrastructure bonds. Indonesia and the Philippines have been experimenting with new PPP institutions to “crowd in” more private capital.
Furthermore, in terms of institutional investor involvement, it is worth looking across the Pacific to places like Australia, New Zealand and Canada. Good long-term savings institution can help rebalance the wide maturity mismatch between short-term bank deposits and long-term project financing.
So, what lessons can be learned from Asia? There is probably more to learn about political determination than about infrastructure finance or setting the framework for private investment. Political leadership and consensus-building are most needed for cross-border projects such as intercontinental railway, or large distribution networks for energy, water, and communication.
With the “Belt and Road” initiative, the $40bn Silk Road Fund, the fast establishment of the Asian Infrastructure Investment Bank, the construction of ports and railways in Africa and elsewhere, and by pushing green energy, China has marched forward in in impressive way.
Finding more private finance and attracting more long-term investors to Asian infrastructure is a new and different challenge. The focus needs to shift towards increasing efficiency and quality of infrastructure. Private and social returns need to be properly assessed. Environmental, social and health considerations will feature more prominently in the future, also in emerging markets. The OECD with other organizations can surely help in enhancing governance standards and international collaboration.
Pension Fund Investment in Infrastructure: A Comparison Between Australia and Canada Georg Inderst, Raffaele Della Croce OECD Working Papers on Finance, Insurance and Private Pensions
 Inderst, G., Infrastructure Investment, Private Finance, and Institutional Investors: Asia from a Global Perspective, ADBI Working Paper Series, No. 555, January 2016
Central America has an important opportunity over the next few years to build inclusive and sustainable development through deepening regional economic integration, both to further the development of its internal market at sufficient scale, and to present the region as more attractive for investment. At the Secretariat for Central American Economic Integration (SIECA), we view coordinated regional integration as crucial to the implementation of the 2030 Agenda for Sustainable Development and its Sustainable Development Goals (SDGs). Key priorities are facilitating trade, promoting sustainable, resilient infrastructure and ensuring the integration of small-scale enterprises into value chains and markets (SDG 9), as well as promoting gender equality through women’s economic empowerment (SDG 5).
Regional action to support trade
Central America has made considerable progress in fostering trade openness and economic integration. The majority of trade within the region is now conducted under a free trade regime – tariffs apply to only 1.8 percent of originating products. Because of this progress, intraregional trade went from accounting for 16 percent of total exports in 1960 to 32 percent in 2015.
However, the World Bank estimates that around 12 percent of the value of consumer goods in Central American countries is still associated with the burdensome procedures and out-dated infrastructure in borders. It also takes an average of 13 days to export and 14 days to import products, and freight moves at an average speed of only 17 km per hour. Costs associated with road transportation are particularly high in the region. In advanced economies, freight transport prices are as low as 2-5 US cents per ton-kilometre, but they average 17 US cents per ton-kilometre on main Central American routes; prices stand out even against other developing economies. This is why trade facilitation has become one of the region’s priorities.
In addition to taking part in the implementation of the World Trade Organization (WTO)’s Trade Facilitation Agreement (TFA) – El Salvador, Honduras, Nicaragua and Panama have already notified the WTO of its ratification, and the rest of countries are in the process of doing so –, Central America adopted its Strategy for Trade Facilitation and Competitiveness (STFC) in October 2015. The Strategy will involve the implementation of five short-term measures to streamline border management procedures, and a medium and long term plan to consolidate a Coordinated Border Management (CBM) system in Central America, following the guidelines and best practices from the World Customs Organization (WCO). Successful implementation of the Strategy could enable an increase of between 1.4 and 3 percent in the region’s GNP and a surge in exports between 4.2 and 11.9 percent, according to the UN Economic Commission for Latin America and the Caribbean (ECLAC). The STFC, moreover, is conceived only as a step towards deeper economic integration. A roadmap to be implemented from now to 2024 has also been approved with the aim of establishing a Central American Customs Union (CACU).
Besides trade and integration, Central America is seeking to improve its infrastructure. Panama is the most ambitious; having recently invested US$5.58 billion in the expansion of the Panama Canal; they’re also creating a second metro line, and have already announced a third one valued in US$2300 million. Meanwhile, Honduras has focused in infrastructure supportive of trade facilitation, and Guatemala and El Salvador have devoted resources to energy-related projects.
Despite this the region still faces a sizeable investment gap. According to ECLAC estimates, Latin America needs to spend some 6.2 percent of GDP per year on average to fund infrastructure investment needs in transport, energy, telecommunications, and drinking water and sanitation, but spending is currently below 3 percent of GDP in Central America. The region also needs to revamp its existing infrastructure, building resilience to the effects of climate change, and improving adaptive capacity to face climate-related hazards and natural disasters, reflecting the targets under SDG 13 on climate change.
Just as crucial is investment in boosting micro, small and medium enterprises (MSMEs). Around 96 percent of Central America’s companies are MSMEs, which support 54 percent of employment and contribute to 34 percent of the region’s GDP. It is thus crucial to harness the potential of the regional market – which is large, with similar cultural background and a shared language – to offer small firms the opportunity to engage in international trade. SIECA has intervened to bolster MSME participation in value chains for key export products, including bovine meat, natural honey, foliage, cardamom, tilapia and shrimp, through the Regional Programme for Quality Support of Sanitary and Phytosanitary Measures in Central America (PRACAMS), which operates with funds from the European Union.
Moving forward, the region is looking to support MSMEs in other sectors of industry, creating a path for entrepreneurs to join the formal economy, create better jobs, and – because 46 percent of micro enterprises are owned by women – boost women’s participation in regional and global value chains and their economic empowerment. A recent SIECA study shows that the sectors with the most potential for participation in value chains include food preparations, vegetables, cardamom, coffee, and cattle.
Addressing financing gaps
All these efforts require a substantial amount of support. Overall, SIECA managed US$9.3 million in cooperation funds in 2014 and US$11.7 million in 2015, including for the work on MSMEs and GVCs above. As the sustainable development agenda moves forward, however, regional efforts will also require improved monitoring and evaluation mechanisms to ensure effective allocation of funds and an overarching strategy that ensures resources are aligned with the region’s own development goals.
Preventing overlaps or contradictions between each countries’ fund allocation will be crucial. To achieve this, the Council of Ministers of Economic Integration is expected to soon approve the Central American Aid for Trade Programme (AfTP), and later submit it to the Summit of Presidents for its adoption, a systematic investment plan to address regional trade-related investment needs in a coordinated way.
In SIECA’s experience, aid is more effective when there is a close collaboration between countries and donors. Clear communication and feedback mechanisms have helped us enhance the effectiveness of our collective actions. We’ve also learned the importance of coordinating the execution of projects at the regional level, to avoid redundancies and ensure regional efforts are coherent. Instruments to assist leaders in identifying financing gaps and seek investment and funds to cover them are also crucial. Applying these lessons will be crucial for success as Central America moves ahead with the implementation of the 2030 Agenda.
William Topaz McGonagall is universally acknowledged as the worst poet who ever wrote in the English language, but that didn’t stop him having an intuitive grasp of the economics of infrastructure investment. As he argued in “The Newport Railway” published to celebrate the Tay Bridge and the trains it carried to Dundee, “the thrifty housewives of Newport/To Dundee will often resort/Which will be to them profit and sport/By bringing cheap tea, bread, and jam/And also some of Lipton’s ham/Which will make their hearts feel light and gay/And cause them to bless the opening day/Of the Newport Railway. It was a win-win for people on both sides: And if the people of Dundee/Should feel inclined to have a spree/I am sure ’twill fill their hearts with glee/By crossing o’er to Newport/And there they can have excellent sport”.
At the OECD, we’re more into free verse than rhyming, so we talk about investing “to meet social needs and support more rapid economic growth”. The social needs and benefits can be vast in developing countries in particular. Take sanitation for example. In many urban areas, infrastructure hasn’t expanded as much as population, leaving millions of citizens with no access to piped water and modern sanitation, or forced to live near open sewers carrying household and industrial waste. Water-related diseases kill more than 3.4 million people every year, making this the leading cause of disease and death around the world according to the WHO.
According to the OECD’s Fostering Investment in Infrastructure, it’s going to cost a lot to keep the thrifty housewives across the globe happy over the next 15 years: $71 trillion, or about 3.5% of annual world GDP from 2007 to 2030 for transport, electricity, water, and telecommunications. The Newport railway was privately financed, as was practically all railway construction in Britain at the time, but in the 20th century, governments gradually took the leading role in infrastructure projects. In the 21st century, given the massive sums involved and the state of public finances after the crisis, the only way to get the trillions needed is to call on private funds.
There are several advantages to attracting private capital for governments, apart from the money. Knowledgeable investors bring skills and experience in designing, building and running projects. But will fund managers be willing to commit to investments with long life cycles when their shareholders are demanding quick returns and high yields?
The opportunities are there, but the infrastructure sector presents specific risks to private investors, and since private participation in infrastructure delivery is relatively recent in many countries, governments do not necessarily have the experience and capacity needed to effectively manage these risks. Fostering Investment in Infrastructure brings together the lessons (both positive and negative) learned from the OECD’s Investment Policy Review series, and lists the most useful policy takeaways for the various components of the investment environment, such as regulation or restrictions on foreign ownership, based on the actual experiences of a wide range of countries.
Some of the advice sounds like no more than common sense, but given the difficulties many infrastructure projects get into, it seems that many governments fail to take what the report calls a “holistic” view before signing deals. For example, the report warns governments to make sure that arbitration procedures are clear and coherent so that disputes that can be settled quickly and don’t end up as lengthy, costly cases before international tribunals.
Likewise, given that most infrastructures are built on or under land, you’d think it wasn’t necessary to insist on having a “clear and well-implemented land policy”. Experience shows otherwise. For example, the US newspaper The Oklahoman describes how in its home state plans to develop wind farms met opposition from the oil and gas industry over access to the surface in the early 2000s, and that now, as development moves closer to suburban areas, there are calls for tighter regulation from property owners.
As the OECD report points out, investors are going to be unwilling to commit funds if they think policy regarding the basics is likely to change over the life-cycle of the project, and even less willing when policy changes within the term of a single administration.
Apart from the discussion on core conditions, there is a detailed look at investing in low-carbon infrastructure, such as wind farms. It makes sense to look at this separately because the business model of the sector is so different from traditional energy production and distribution. For electricity generation for instance, highly centralised power stations serving a wide area are replaced by small-scale distributed generators that may only serve a single building. Feed-in tariffs are a popular means of encouraging low-carbon renewables – paying producers for extra energy they feed into the main grid via a Power Purchasing Agreement (PPA). But awarding PPA purely on a least-cost criterion can tip the balance away from renewables in favour of incumbent producers, as happened in Tanzania.
The lessons then are a mix of useful checklist and interesting insights. In a poem written not long after the one quoted above, our man McGonagall describes how if you get it wrong, you may not live to regret it: “the cry rang out all o’er the town/Good Heavens! the Tay Bridge is blown down”.
Today’s post is from Xavier Leflaive of the OECD Environment Directorate
If you’ve just visited the room with no windows and enjoyed the effortless push of the “deposit disposal button” followed by a stream of fresh, clean tap water to wash your hands, you could well be in an OECD city. Count your blessings too if your basement or street has avoided flooding from heavy rain or if your lawn and plants are still in vibrant colour because they are well hydrated during the dry summer. This urban providence doesn’t mean you’re not exposed to the risk of flooding, water scarcity or pollution. It probably means that your city is rolling up its sleeves and getting equipped to manage these risks and minimise their consequences in a way that you and your fellow city slickers can afford.
Water security is providential: globally 1 billion people have no clean drinking water (that’s double the population of the EU) and 2.5 billion lack access to basic sanitation. 20 million people in the São Paulo region don’t know if they’ll have a reliable water supply in the coming months. The number of people at risk from floods is projected to rise from 1.2 billion today to around 1.6 billion in 2050 (nearly 20% of the world’s population). The economic value of assets at risk is expected to be around $45 trillion by 2050, a growth of over 340% from 2010. From a global perspective, the level of water risk protection that OECD city dwellers enjoy is remarkable. The question is, can it last?
Water infrastructure (particularly piping) in our cities is old, cracking and needs to be upgraded. In some cities, leakage from distribution networks is as much as 40%. This is not only a waste of water, but a monumental waste of energy in pumping, treating and channelling this water. It also represents lost opportunities for economic development and equity as this water could have been put to more valuable uses, depriving others of this vital resource.
Deteriorating water quality and increasing competition among water users indicates that many cities in OECD countries have outgrown their water supplies. We are witnessing an unprecedented rate of urbanisation: 86% of the OECD population will be living in urban areas by 2050 with a concentration in cities with over 1 million inhabitants. Climate change generates more uncertainty on how much water will be available and when. It puts cities in coastal zones at greater risk as sea level rises. It gets one asking “does my city have a viable plan to ensure a sustainable water future?”
The upcoming OECD report “Water and Cities: Ensuring Sustainable Futures” warns that managing urban water in the future will need to combine new perspectives on financing, the diffusion of innovative techniques and practices, co-operation between cities and their rural environment, and governance.
Cities in developing countries need to build new infrastructures to secure access and protect against water risks.
Cities in OECD countries face a distinctive challenge: how to renew existing infrastructures and adapt them to a new context, characterised by more variable rain, declining consumption in city centres, and new expectations from city dwellers? This requires additional finance to upgrade existing infrastructures.
We need to explore ways to jumpstart and leverage private investment from groups like financiers, property developers, as well as small entrepreneurs. In France, a new urban water tax is raising revenue that contributes to long-term urban rainwater management by incentivising property owners to manage rainwater close to the source to limit stormwater run-off.
Beyond financing, we are seeing new methods in managing change and retrofitting maladapted infrastructures, architectures and business models. Combining a long-term strategy with a pragmatic approach to renewing the stock of buildings and assets can prove worthwhile. In Tokyo and San Francisco, water recycling is reducing dependence on surface water as well as raising public awareness of the importance of saving water.
Civil society can’t tackle future water challenges on its own. Smart partnerships and better governance can contribute to sustainable urban water management. The “Greenways” programme in Auckland aligns city council actions and investment across a range of policy and operational units, with the aim of delivering multiple freshwater, biodiversity, transport, urban design and stormwater-related outcomes from the same investment. Future water management in OECD cities will also largely depend on the capacities of different tiers of government to work together along a coherent pathway, as well as engage with, and make the best use of, initiatives by local entrepreneurs and stakeholders.
You may now be able to better appreciate the “privilege” of sporting clean hands and dry feet. The OECD is helping governments get their hands dirty in the transition from an era of exploiting existing infrastructures to one of building new assets and retrofitting infrastructure to adapt to changing future conditions. This action is both critical and pressing, to ensure city slickers’ health, economy and environment remain intact.
Today’s post is by Bill Below of the OECD Directorate for Public Governance and Territorial Development
Think back to a time when your purse or wallet was stolen, or your laptop with all your files in it lifted from your bag, or any other possession taken from you. What did you feel? Probably outrage, anger and even despair, perhaps with a surprising sense of helplessness. When corruption occurs, intense emotions rarely, if ever, result (unless you count the joys of mounds of illicitly acquired cash or the agony of incarceration). When corruption swindles the public good, the effect isn’t immediate but muted, diluted across the population, producing a signal so feeble few can feel it—directly. And this may be just what the corruptors, the skimmers, the influence peddlers, the brown-envelopers and breeders of white elephants count on.
The Integrity Forum at the OECD – “Curbing Corruption – Investing in Growth” – will expose corruption in its myriad forms, in both the public and private sectors, as part of the OECD CleanGovBiz initiative, supporting governments, business and civil society to build integrity and fight corruption.
In 2013, OECD countries spent close to USD 1.35 trillion in public investment, representing 3.1% of OECD GDP and 15.6% of total investment (public and private). Sub-national governments undertook more than 60% of this investment. Wherever there is money—particularly huge sums of it—the risk of corruption runs high. This is strongest in the case of government-led mega projects on infrastructure. The cost of corruption and mismanagement, already estimated to contribute to 10-30% of large infrastructure budgets, could prove explosive over the years to come. Indicators point to a wide gap between available infrastructure and growing needs. The investment required just to keep up with projected global GDP growth has been evaluated at 57 trillion USD between 2013 and 2030.
Corruption exerts a direct, detrimental effect on public investment while cheating the public out of money and value that is rightfully theirs. Corruption puts the brakes on growth by potentially denying certain multiplier effects while reducing the productivity and long-term returns on public investment. Given today’s context of anaemic public expenditures, investment efficiency couldn’t be more crucial. But corrupt practices also skew budgets away from essential services such as health and education (already diminished) and result in poor quality infrastructure or infrastructure that is a plain waste of public funds—the proverbial white elephants. Knock-on effects such as higher maintenance for shoddy construction, shorter operational lifetimes, higher prices to cover inflated costs and even injury and death add to the disparaging picture.
A report by BMZ, the German Federal Ministry for Economic Cooperation and Development, provides a striking example. In 2009 the City Archive of Cologne collapsed, killing two people and destroying or damaging numerous historical manuscripts. Restoration of the documents that were saved is estimated to cost 350 million euros. The state attorney found that the building collapsed because of corruption during construction work in the subway that ran underneath it. Only every second or third steel frame was embedded after several tons of steel frames were sold to a scrap dealer, and the Kölner Verkehrsbetriebe (public transport authority) found that 80% of the reinforcements were missing.
Corruption can also create general distrust, both on the part of citizens who see their hard-earned wages wasted in corrupt, state-sponsored endeavours, and by creating an environment inhospitable to investment.
For anyone with corrupt intentions, the public investment cycle presents plenty of entry points. From the initial investment decision through to project selection, implementation and post-project maintenance and evaluation, each phase offers unique opportunities for the unethically minded. How these weak points are exploited depends on the profile of the actor(s) involved. The usual suspects: elected and non-elected public officials, lobbyists, civil society organizations, regulators, contractors, engineers, suppliers, auditors and more. If you think this sounds like a who’s who of total project participants, you’re right—which underlines the massive scale of the challenge. What’s more, fewer than half of building professionals are able (or willing?) to evaluate the annual costs of fraud or corruption to their organization according to one report. On the other hand, global construction industry losses due to construction mismanagement, inefficiency and fraud could reach 2.5 trillion USD by 2020.
How much investment will be captured by corruption depends on whether countries, and corporations, will have the necessary safeguards in place. The Checklist to Curb Corruption in Public Investment is a new OECD tool that will assist governments in mitigating corruption risks in public investment. The checklist identifies corruption entry points over the entire investment cycle and provides real life guidance on how to prevent corruption.
For each shadowy form of corruption there seems to exist a corollary in the world of legitimate business. The enviable position of having “connections in high places” is a nuance away from influence peddling; “informed market information” is a close cousin to insider trading; a company’s “aggressive” efforts to court client loyalty might be bribery by any other name; ambitious targets could easily morph into an “ends-justify-the-means” approach to hitting year-end numbers. While those guilty of corruption may be systematic offenders operating in a corrupt environment, they are just as likely to be first-time offenders, men or women who consider themselves to be “as honest as the next person” (where one places that cursor certainly matters). Corruption can start with a minor moral compromise then crescendo into a long-term scheme for ripping off the public, as graft tends to engender follow-on ethical breaches. The enabling psychology providing the tipping point can be personal or interpersonal. It can exist in isolated pockets within an organization, permeate whole divisions or entities, and even exist on a countrywide level. “Business-as-usual” can take on many different meanings within the ethical spectrum.
Ethical compliance is preferable to enforcement and the heavy burden it places on both private and public organizations. But in reality both are needed if trust and its enabling effect on investment are to be established. Also, the risk of non-compliance must be fully assimilated by an organization. Increasingly, non-compliance represents a substantial risk to organizations, quickly sanctioned by markets, shareholders, stakeholders and citizens. Organizations ignore this at their own peril.
The harsh reality may be that human nature isn’t about to change anytime soon. Research has shown that past behaviour, whether an individual’s or a corporation’s, is a poor predictor of future behaviour. In the fight against corruption, perhaps that’s both the good news and the bad news.
Make a difference! Join us at the OECD Integrity Forum, “Curbing Corruption – Investing in Growth” OECD, Paris, 25-26 March 2015.
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In my view: The OECD must take charge of promoting long-term investment in developing country infrastructure
Today’s post from Sony Kapoor, Managing Director, Re-Define International Think Tank, is one in a series of ‘In my view’ pieces written by prominent authors on issues covered in the Development Co-operation Report 2014: Mobilising resources for sustainable development.
The world of investment faces two major problems.
Problem one is the scarcity – in large swathes of the developing world – of capital in general, and of money for infrastructure investments in particular. Poor infrastructure holds back development, reduces growth potential and imposes additional costs, in particular for the poor who lack access to energy, water, sanitation and transport.
Problem two is the sclerotic, even negative rate of return on listed bonds and equities in many OECD economies. The concentration of the portfolios of many long-term investors in such listed securities also exposes them to high levels of systemic – often hidden – risk.
Most long-term investors would readily buy up chunks of portfolios of infrastructure assets in non-OECD countries to benefit from the significantly higher rate of return over the long term, and to diversify their investments. At the same time, developing economies, where neither governments nor private domestic markets have the capacity and depth to fill the long-term funding gap, are hungry for such capital.
So what’s stopping these investments?
Financial risks in developing countries are well known and often assumed to be much higher than in OECD economies. Also, investing in infrastructure means that investors will find it hard to pull their money out on short notice, and therefore such investments pose liquidity risks.
Despite these easy answers, however, there are three significant caveats:
First, the events of the past few years have demonstrated that on average, political risk and policy uncertainty in developing countries as a whole have fallen, especially in the emerging economies.
Second, OECD economies are also exposed to serious risk factors, such as high levels of indebtedness and demographic decline. As the financial crisis demonstrated, they are also likely to face other “hidden” systemic risks not captured by commonly used risk models and measures.
Third, the kind of risks that dominate in developing countries, such as liquidity risks, may not be real risks for long-term investors (e.g. insurers or sovereign wealth funds). Given that the present portfolios of these investors are dominated by OECD-country investments, any new investments in the developing world may look more attractive and may actually offer a reduction of risk at the portfolio level.
So I ask again: Why aren’t long-term investors investing in developing country infrastructure in a big way?
The biggest constraint is the absence of well-diversified portfolios of infrastructure projects and the fact that no single investor has the financial or operational capacity to develop these. Direct infrastructure investment, particularly in developing countries, is a resource-intensive process.
The G20, together with the OECD and other multilateral institutions such as the World Bank, can facilitate the development of a diversified project pipeline on the one hand, together with mechanisms to ease the participation of long-term investors on the other. This work will involve challenges of co-ordination, more than commitments of scarce public funds.
In my view, the OECD – which uniquely houses financial, development, infrastructure and environmental expertise under one roof – must take charge.
The Millennium Bug was a great disappointment to me. While everybody else drunkenly counted down the seconds separating 1999 from 2000, I froze in patient greed at an ATM waiting for it to start spitting banknotes into my waiting bag. It didn’t happen, and none of the other celebrations we’d been promised materialised either. Air traffic stayed controlled, life support systems went on supporting life, and even lifts went on lifting.
Still, the verified reports of Y2K incidents did show how dependent we’ve become on technology. In the most serious case, slot machines at a racetrack in Delaware stopped working, forcing gamblers to give their money to the bookies directly.
But what if the world’s electronic systems really did get seriously damaged? This year’s annual meeting of the American Association for the Advancement of Science had a session called Space Weather: The Next Big Solar Storm Could Be a Global Katrina. Space weather could affect a surprising range of activities. Anything using a satellite, obviously, but that includes a load of things that aren’t so obvious. For example, those ATM machines and many other credit card devices rely on spaceborne communications networks to interrogate your bank.
The OECD’s Future Global Shocks project looks at these issues in a new study on geomagnetic storms. The most powerful storms ever recorded were during the Carrington Event in 1859 (named after the amateur astronomer who recorded the solar outburst). The only important electrical infrastructures at that time were the telegraph networks. In some cases, operators could disconnect their batteries and continue sending messages using current generated by the storms, but the storms also caused outages.
If a storm similar to the Carrington ones happened today, the costs would be enormous. In 2009, the US House Homeland Security Committee heard that: “The impacts could persist for multiple years with the potential of significant societal impacts; in addition the economic costs could be measured in the several trillion dollars per year range and could pose the risk of the largest natural disaster that could affect the United States.”
At the AAAS meeting, Sir John Beddington, the UK government’s chief scientist, put the bill at a more modest $2 trillion and warned that the potential vulnerability of our systems has increased dramatically.
On Tuesday of this week, a storm brushed the Earth provoking spectacular displays in the northern night sky, but the China Meteorological Administration reported that the solar flare also caused “sudden ionospheric disturbances” and jammed shortwave radio communications in the southern part of the country.
The space weather forecast isn’t great. We’re enjoying a calm period in the 11-year solar cycle just now, but it’s coming to an end, so hold on to your hat in 2013.