​There are no trillion dollar infrastructure gaps

10 November 2015
Philipp Krause
Comment

Apparently, the world is desperately short of infrastructure. According to various estimates, sub-Saharan Africa has an infrastructure gap of $1.8 trillion, South Asia $4.2 trillion, Latin America $7.8 trillion and the whole world a whopping $57 trillion from 2013 to 2030. To put these numbers into context, global GDP was estimated at around $78 trillion in 2014.

 

The increasing talk of ‘infrastructure gaps’ certainly marks a new and powerful trend in international policy circles, where public investment has become fashionable again, especially in developing countries. While policymakers emphasised social spending and poverty reduction from the 1990s onwards, the pendulum is now swinging back towards more spending on infrastructure.

This isn’t just talk. As a percentage of GDP, recent years have actually seen a rise in spending on infrastructure in emerging economies and developing countries. And if governments take infrastructure gap estimates seriously, they’ll have to dedicate even more resources towards closing them.

Estimating funding gaps is simply unhelpful

But should they? Not necessarily. There are two reasons why framing the policy discussion over infrastructure investment in terms of gigantic funding gaps is unhelpful.

First, there is no objective way to determine how much of an infrastructure stock a country needs at any given point in time. Should every secondary city be connected by a road? A highway? High speed rail? A maglev train?

Even if there was an objective need, it would be constantly changing. In the 1960s, urban planners like Robert Moses in New York thought that the future would require ever more and wider highways to carry cars in and out of cities. Only a few years later it became clear to many that mass transit systems would be much better – more roads would do more harm than good.

Second, every other policy area has its own set of needs and requirements, as well as infrastructure. Just as there may be an infrastructure gap, there is also a health gap and an education gap. This is especially the case in development policy at the moment, where the soaring ambition of the Sustainable Development Goals is entirely unconstrained by available resources.

But from a budgeting perspective, perfectly estimated education, health or infrastructure goals are uninteresting, because none of them are affordable. The basic challenge of budgeting is to arbitrate between these competing claims and to decide what resources to allocate to each.

The problem isn’t money, it’s poor budgeting

The only meaningful articulation of a government’s priorities is not an assessment of needs, but the resources actually budgeted and spent.

Infrastructure gap assessments are often extrapolations from historical trends, but the priorities expressed in those trends are subject to change. The resulting policies may well be sub-optimal from a growth, equity or needs perspective, but such is the nature of government. Voters and policymakers may even decide to pay fewer taxes and let the infrastructure stock decay, as is evident in many OECD countries today.

Instead of working towards filling theoretical infrastructure gaps, governments in developing countries should focus on improving actual public spending. In many countries, capital budgets are actually chronically underspent. On the other hand infrastructure projects often go over budget, past deadlines, and are delivered in poor quality.

The causes of poor investment performance are complex and not always well understood. They stem from investment management systems, public finance institutions, and competing political interests.

In Nepal, 70% of capital budgets are only spent in the last four months of every budget year as a result of a disorganised budget calendar, leaving more than 20% of all capital allocations unspent per year. In Nigeria, 38% of funded projects are never started, in part because the funds don’t reach the entities in charge of building them. In Germany, Berlin’s new airport project spiralled out of control due to a combination of poor management, lack of  oversight and misguided political ambition – leading to a 300% cost overrun and four-year delay, with no new opening date in sight. This is just one of many expensive but pointless ‘white elephant’ projects.

All these are complex problems that will require hard work to solve. But a lack of funding certainly isn’t one of them.

Philipp Krause will speaking at the 2015 CAPE Conference on how governments can avoid the mistakes of past infrastructure booms. Sign up to watch online.

Philipp Krause