Asset recycling can help fund infrastructure more transparently

There needs to be much more consideration of infrastructure recycling as a means of attracting private investment, while recognising public fears over public-private partnerships, argues Simon Rubinsohn.

The huge need for infrastructure spend around the world over the next couple of decades has been well documented in a number of recent reports. These include the McKinsey Global Institute’s Bridging Global Infrastructure Gaps (2016) and Oxford Economics’ Global Infrastructure Outlook (2017) which was produced as part of an initiative led by the G20 (the world's 20 leading industrialised and emerging economies). 

Although there is inevitably some justification for caution about any estimates over such a lengthy period of time, the suggestion in these studies that the likely infrastructure requirement could exceed a mind-boggling $90 trillion is certainly helpful in providing some ballpark parameters to frame the discussion.

More significant than the actual number itself is the recognition of the importance of future infrastructure spend as a means of addressing a key challenge facing policymakers today; the delivery of strong, sustainable and more inclusive growth. 

This is a theme that has been repeatedly highlighted by Christine Lagarde in her work at the IMF but also runs through the thinking of the OECD and it’s How’s Life report published last autumn as well as the WEFs just updated Inclusive Development Index. As these publications reflect, well-functioning infrastructure is not only central to both economic development and quality of life but is also critical in addressing the very basic needs of power, sanitation and clean water. 

The huge estimates as to the potential global infrastructure spend over the coming decades continues to fuel a debate as to how best to meet requirement for funding the projects. Private finance has been playing a role in providing the cash to support these programmes in many parts of the world for the last 20 or so years but its record is not without blemish with concerns raised, amongst other things, about pricing, risk transfer and communication. At the same time, it is unrealistic to assume that heavily overburdened governments have either the borrowing capacity or the desire to take a primary role in delivering infrastructure on the scale required although some are clearly better placed than others to do so.

It is against this backdrop that the report Recycling our Infrastructure for Future Generations, launched at Davos this week, makes for such interesting reading. Let me be clear, I don’t believe there is a single approach that will provide all the answers to this big issue but in the current environment, working alongside existing mechanisms including government funding, the ideas highlighted in this study are certainly worthy of attention. 

Critically, the report starts by acknowledging the challenge resulting from a mismatch in expectations between government and the private sector and arguably, just as importantly, the growing level of distrust from populations surrounding these ‘partnerships’.

However, where the asset recycling approach has the scope to differentiate itself from other vehicles that secure private sector funding for infrastructure programmes is the very clear linkage between the divestment of existing assets and the reinvestment of the proceeds into other critical projects. Underpinning this mechanism, the report set out nine key principles which help to establish a mechanism that focuses not just on delivery but also on the protection of the public interest with the establishment of a trust fund and better communication with all stakeholders. 

There is, I stress, no single approach that will alone provide the capacity to deliver the infrastructure spend that is going to be required across the globe over the coming years. Governments have a role to play but it is implausible, amongst all the other demands being placed on them, that they can take this on alone. 

Against such a backdrop, the asset recycling approach to delivery provides the opportunity to build on existing strategies that encourage private funding into the infrastructure space but do so in a more transparent way to create the conditions that genuinely help facilitate more inclusive growth over the medium term.

Simon Rubinsohn is chief economist at the Royal Institution of Chartered Surveyors.

Click here to download the report, Recycling our Infrastructure for Future Generations.