World Economy

Infrastructure Investment Stimulates Economic Growth

Infrastructure Investment Stimulates Economic GrowthInfrastructure Investment Stimulates Economic Growth

As demand for infrastructure grows and economic growth slows down, governments, infrastructure investors, project owners and sponsors are being urged to rethink the value they receive from infrastructure investment.

Investment into infrastructure can stimulate economic growth. The reality, according to Netherlands’ KPMG International, is that infrastructure systems and economies are intricately intertwined, GlobalTrade reported.

Infrastructure can increase productivity, create jobs and stimulate trade–all of which are key enablers of economic growth.

On the other hand economic growth can also be a key enabler of increased funding and investment for infrastructure. Economies with strong growth prospects tend to attract more investment for infrastructure than those with poor or no growth prospects.

KPMG, which provides audit, tax and advisory services, helps its clients to mitigate risks and grasp opportunities. The company says that its experience suggests that the “casual relationship” between economic prosperity and investment into infrastructure is “poorly understood”.

Traditional cost/benefit methodologies have always viewed projects in isolation and are too narrowly focused on an asset’s financial viability. Fiscal constraints have now made this more of a challenge.

KPMG says that many countries are now faced with the challenge of delivering increased investment in an era of reduced fiscal capacity. As the demand for infrastructure is growing, in most markets the ability of governments to fund such infrastructure is dwindling. Governments are being forced to prioritize investment into infrastructure in favor of projects that can deliver increased economic growth, social benefits and resilience.

  Actual Economic Value

Achieving this is not as simple as drawing up a list of high profile projects, and very few governments are able to properly assess the actual economic value that their investment delivers, according to KPMG. It goes on to state that: “We believe that current infrastructure appraisal and prioritization methodologies are frequently nowhere near sophisticated enough to allow governments to make truly informed decisions about their investments.”

The company believes that identifying and prioritizing the projects that will deliver the greatest return will require new mechanisms to assess value, more robust business cases and appraisal methodologies, plus clear insight into the longer-term needs of society.

In an effort to help those looking for leading practices and guidance into developing their own assessment methodology, KPMG set out to research and assess current approaches around the world.

Entitled Assessing the True Value of Infrastructure Investment, the report focuses on case studies from the UK, South Africa, Brazil and India, as well as presenting a roundtable discussion on the subject. Highlights from the discussion looked at how improvements can be made in the way investment is assessed and prioritized in infrastructure projects.

  Gov’t Capacity and Ability  

Tomas Bruginski de Paula is a director with the Company for Partnerships in Brazil. He believes that one of the biggest challenges comes down to government’s capability and capacity to plan and assess projects properly. “We’ve had a long period of very unstable investment into infrastructure in Brazil,” he said, “and that often means that we don’t have a stable enough pipeline to maintain and improve those capabilities.”

Political influences can also play a significant role in infrastructure investment decisions. KPMG stated that many of the UK’s most controversial projects, with large costs or environmental impacts, have often been delayed to suit the political calendar.

KPMG staff in the UK and Australia say, “If everyone agrees that investment into infrastructure drives economic growth, then why are decisions being made without a view on the true economic value that those investments deliver?,” they asked.  “And, without these considerations, how is anyone effectively prioritizing their investments to ensure they are putting the right money in the right places to achieve their economic objectives?”

KPMG says that it hopes its report would prompt governments to reevaluate their current approaches to project appraisal and prioritization; as well as providing project owners and sponsors with valuable insights of how to demonstrate the true value of their projects to investors, governments and users.