The $3.6 trillion annual global infrastructure market is one of the most important, complex, challenging and potentially rewarding markets in the world. It is also deeply in crisis from the Coronavirus epidemic.
Those are the conclusions that I draw from the World Bank’s Annual Report on Global Economic Prospects (released June 8th), which shows developed economy GDP declining by 7% this year, with overall global GDP declining 5.5%.
Recovery to 2019 levels is pushed out through 2022 in the best of cases, and to the end of the decade for the hardest hit, weakest, countries.
That is the problem, and it is a big one – it is also an enormous opportunity for emerging markets to move to get the infrastructure right. For the last couple of years, firms like McKinsey have held out an enormous carrot in terms of the value of the market nearly $50 trillion by 2030! while the quality of the market has declined dramatically.
Three big reasons why prior to Coronavirus the market was in horrific disarray. First, corruption is rampant, with most citizens associating the word “infrastructure” synonymously with “corruption.” Second, the dominant western model, Public-Private Partnerships, is an increasingly irrelevant player in troubled Latin America, for example, in the entire region, eight projects reached financial close in 2019.
Finally, the Chinese Belt & Road Initiative (BRI) played havoc with market economics from Kazakhstan to Kenya, to Colombia, providing enormous resources to large projects while excluding western business, and seeming to leave out local needs, while piling enormous debt onto weak projects.
Tragically, most legitimate engineering and construction firms no longer work in emerging markets. As one Spanish CEO told me: “we won’t even look at projects in those countries,” highlighting both corruption and the trappings of the BRI.
Opportunity & Danger Fix It Now!
The global infrastructure market presents a clear test of global will – and a challenge to our imaginations. At a time of acute need, how can we address the extraordinary demand for infrastructure investment in emerging markets – in terms of both basic needs, and assets fundamental for productivity and digital transformation? We like to think in the idioms of business, but this is right now a moral imperative. We have the responsibility of recognizing and fixing something that matters for all of us, and that is broken.
At the same time, there is a strong element of self-interest – the velocity with which the global market recovers will directly impact recovery in the U.S. and the EU. U.S. recovery is most vulnerable, given that as a region Latin America will decline by 7% or more this year – and that 14% of U.S. GDP comes from exports.
Here are four immediate actions that will turbocharge global infrastructure markets – creating a business opportunity and economic recovery:
- Sell What the Client Wants. Our surveys show that the market wants “health” and “mobility,” and not what delivers the highest IRR at the lowest risk. Use technology to bring users into the discussion, and focus on quickly satisfying the deficits in water, wastewater, health care and transportation. Create a Benefits Index, as my firm is doing with our strategic partner Dalberg, and choose projects based on short and long term benefit scores.
- Create a Compelling Model. The U.S., Japan and Australia have launched the Blue Dot Network, to create a LEED-type certification for infrastructure projects. To the extent a project is designed according to market principals it receives a certification of quality, access to expertise and international support. It is exactly this kind of creative reframing that leads to new solutions, partnerships and reduced risk – around project design, funding sources and transparency. As the world redesigns its approach to infrastructure, this model incentivizes a race to the top. Just think back to the previously unimagined magic of Elon Musk’s booster rocket return to the launching pad!
- Bring the Right Money. For some time in Brazil, it has seemed that the only competitors for major projects were either Canadian pension funds or BRI-backed firms. That is, long-term conservative money successfully stood toe to toe with state-backed capital. The nascent impact investment community is based on this idea – we need to quickly come up with better ways to attract the right capital by providing much better project investment opportunities for those funds, and by mitigating key risks – through super-sovereign guarantees for the immediate future, to speed up the process.
- Enable the Might of Public Leadership. In the wake of the Coronavirus crisis, trust in government is the highest that it has been in twenty years. This fact needs to be quickly harnessed, with the public sector (World Bank, federal governments) embracing leadership – and shedding the insecurities that have rendered them junior players in infrastructure initiatives. We need strong public leadership, partners with – not antagonists to – the private sector. Strategic projects, and ambitious programs, come together best when engineering/construction companies, finance entities and the public sector create a cluster of excellence.
The Mighty Narrative. As Einstein remarked, “The definition of insanity is doing the same thing over and over again, but expecting different results.” Let’s make an effort to create a new paradigm, one that works for the people on our planet. This crisis forces us to recognise something important that is broken, and it presents us with the opportunity to fix it, period.
Let’s get on with it. The global infrastructure market can either be a festering wound on the global economy, and on our moral imaginations, or it can be an example as it should and must be – of how our guiding institutions, and the vitality of the market economy, together can be made to create prosperity for our world.