Investing in the future after COVID-19

| September 5, 2020

COVID-19 is causing terrible human and economic damage. People are dying every minute and the global economy is operating well below capacity, thrusting many back into poverty. Governments are appropriately creating unprecedented debts to limit immediate damage. They also have an unprecedented opportunity to invest in the future — for example, by accelerating the massive investments needed to reduce greenhouse gas emissions to net zero by 2050.

At very low interest rates, governments and multilateral development banks can borrow large scale to finance the design and construction of economic infrastructure. These conditions will not last forever, so it remains essential to ensure that public spending on infrastructure is efficient and used as a catalyst for subsequent sustained private investment.

Investments in physical infrastructure will not operate efficiently unless they are backed by adequate investment in skills and institutional capacity. Huge gaps in economic infrastructure today cannot be fixed unless private investors — especially institutional investors — perceive investment in infrastructure as a sound long-term use of their savings. International transport, communications and energy networks all need to be backed by effective policy coordination and institutional connectivity.

The difficulties of attracting private investment in economic infrastructure and the disappointing experience with public–private partnerships are well documented. Economic infrastructure projects — such as transport and sanitation networks — often have a significant public goods component. And project risks are correctly seen to be high due to a combination of uncertainty about the policy environment of many economies, long lead times and difficulties predicting costs and demand.

The public goods element of many infrastructure projects means that some subsidies are justified during the design and construction phase. But recurrent subsidies should be avoided. To sustain investment, ongoing operations must be self-financing. Large-scale private investment cannot be expected until risks are reduced by evidence of efficient, sustainable, affordable and profitable operations.

Vast pools of private savings were built up after the global financial crisis of 2007. A lot more have been added due to the decline in demand and investment as a consequence of the COVID-19 shock. Institutional investors and potential purchasers of Environmental, Social and Governance (ESG) bonds are looking for opportunities to earn reliable long-term cash flows.

Once economic infrastructure — including projects which contribute to a better environment — are operating profitably, they can be expected to attract private investment. The proceeds from that investment can then release funds for future public investment.

It will not be easy to strike a balance between affordability and financial sustainability. Fortunately, there are successful precedents where governments have been willing to engage highly qualified professionals to take good ideas through each phase of the project development cycle.

Motivated by well-designed incentives, private firms can work with public authorities during the low-cost — but high-risk — origination and structuring phases, and then partner with other stakeholders to finance and execute the construction phases.

The Australian government is investing AU$5.3 billion (US$3.8 million) to construct Sydney’s second international airport by private contractors. Once it is operating successfully it is expected to be sold — at a profit — to private investors.

A similar strategy has also worked in developing economies. Infraco (Asia) and Infraco (Africa) are independent enterprises funded by the Private Infrastructure Development Group (PIDG) — a multi-donor organisation with members from seven countries and the World Bank Group.

Infraco operations have leveraged US$1.2 billion of PIDG capital to attract US$21 billion of private and international financial institution capital for infrastructure projects. Governments should build on such precedents to help revive economic growth while creating urgently needed infrastructure.

COVID-19 is the immediate problem, but global warming is an even more severe challenge to global civilisation. With the world headed for several years of depressed activity, governments and multilateral development banks can afford to accelerate investment to reduce emissions in all sectors of our economies. Trillions of dollars will be needed.

Economies in the Asia Pacific region have very different capacities for renewable energy generation. So it will be efficient to invest in international networks for generation and transmission. For example, Australia has vast potential to generate solar and wind energy, while other economies have substantive hydro-electric generation capacity. These can be combined to supply renewable energy to meet a progressively higher share of energy demand in Southeast Asia and perhaps beyond.

The technology to create a financially viable network already exists, taking advantage of rapidly falling costs of generation, storage and transmission. Several large private investments to supply renewable energy from Northwest Australia to Singapore already exist. But far more will be needed to construct a network that links Australia to Southeast Asia.

Right now, governments and development banks can participate, at low cost, in essential components of emerging investment in renewable energy. Perhaps even more importantly, they can significantly reduce project costs and risks by defining the policy and regulatory environment in the economies to be linked.

There are many more opportunities to restore confidence in the global economy by efficient investment in economic infrastructure. Cooperation among governments, including in the G20 and APEC, could generate coordinated public sector leadership. This will be crucial for seizing the even greater opportunity created by COVID-19 to meet urgent investment needs.

This article was published by the East Asia Forum.