Languishing Infrastructure – the Sunset industry?

A McKinsey report estimates a whopping $ 57 trillion is required to be invested in building and maintaining infrastructure around the globe. Currently the amount being spent is $ 2.7 trillion per year less than half of the required $ 6.4 trillion p.a. 

Where will the funds come from? Is there an overall crunch or no one is interested in the infrastructure market?

No one is interested in investing in the infrastructure market; it is a bit of sunset industry.

If we look at the private industry, it is driven by stock markets which are short to medium term oriented. For an average stock market investor, 3 years is long term and 5 years very long term. These markets are actually infested by day traders. If we look at Infrastructure from their point of view – it has long gestation periods and here is the missing silver lining - there is no golden pot at the end! The returns are low to medium – since falling into the public utility areas, they can not be priced at a premium. So now look at this from an investor’s point of view – long gestation periods but low returns. Only a sucker will buy into that. Compare this with the sunrise IT or knowledge industry – it requires negligible investment; people practically start outfits even in a garage or a backyard but the returns are great. The services industry requires even lower level of investment or gestation period – you almost earn as you go. No wonder it is a sunrise industry and a favorite of the markets.

What about public private partnerships? Well, that is how most projects are handled especially in the developing countries. But no one is willing to pay for infrastructure so the already low margins are squeezed even further. For instance, in India, where potholed roads are a common sight, private operators have built a few good quality toll roads. Now when they charge toll, there are huge protests. The toll booths are often vandalized. The logic of these protestors is that the private operator has already recovered his cost, now why we need to pay the toll. It is very hard to explain to these activists that no private investor is interested in “recovering costs and shut shop” kind of operation. Their idea is to earn some returns on it (which are not huge to begin with). So, the private sector soon smartens up to the sucker plot and stops investing in further projects.   

How about the governments invest in infrastructure? Well, that is the only viable way actually. But let us see the troubles there too. First let us start with democratic countries. How does a voter perceive the infrastructure provision especially in the developing countries where the requirement is the most? Last year I was watching a program on BBC where they were covering roads construction in upcountry areas in India. They asked a few poor people about its value to them. These people were just totally dismissive of it seeing it as rich people’s muse and having nothing to do with them. A lady was even livid about how government is doing nothing for them and called this road as utter non sense  - “ what this road is going to give us roti (bread) or what? Instead the government should do something productive”. Repeatedly it is also seen that chief ministers who invest a lot in infrastructure lose elections. For instance Chandrababu Naidu of TDP built great infrastructure in Andhra Pradesh and provided fairly clean governance. Despite Bangalore being an IT hub, iconic organization Microsoft chose to set shop there. But he lost the elections as most people saw it as a pro-rich and anti poor strategy. Not just the migrant labor kind of people but I once a heard an ‘MBA’ colleague in a corporate saying so (while vacationing in a luxury resort himself!!). Such examples abound.  When politicians come with instant freebees, they get the votes. Very few voters really value infrastructure creation which takes eons and also huge investments when those sums could instead have been spent in populist schemes.  

Now coming to the autocratic states? Surprisingly, great infrastructure is their huge strength. Be it UAE, China or even Saudi, autocratic states are able to invest in long term projects merrily because they don’t have to show any short term results to their people. The bosses decide this needs to be done and it gets done. So, long term thinking and management is their strength. Let us look at China which stole the spotlight in the new millennium. While “build and they will come” has been ascribed as their strategy, it is a bit of a retrospective force fit. None of them knew anyone would come so to speak. They modernized their infrastructure for something like three decades – starting about 1978. No one was talking about them then. Suddenly in the 2000s, to their and everyone’s surprise, their economy boomed. Then the story about “build and they’ll come” was invented, possibly by the Economist. Most of Chinese development was trial and error and they built the infrastructure because they thought that needed to be done. It is only later on everyone realized that is their key strength. But the point is that there are no elections to be won in autocracies – so if there is a progressive leadership at the top, infrastructure is the first thing they build. Often even when military rulers take over, they build these huge new cities and capitals. The lack of political will becomes an issue in democratic states because again long term nature of projects ensure its impact is not felt by the voters in a forceful manner akin to a freebee. 

So, there is no dearth of funds worldwide but political as well as private will is lacking for infrastructure creation. The only way around it perhaps educating the public that it is not a pro rich non sense and everything under the sun is “not free”! So they have to pay for public utilities. But the voters are too spoilt to understand that. So alternately, all infrastructure projects have to be marketed as employment generation projects – being done to create jobs for the common man and essential vehicles of employment generation. Then perhaps political mileage can be gained out of it. But it is a long shot.

As of the now the estimated $ 57 trillion requirement in infrastructure investment is but a pipe dream.