Infrastructure and economics

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Infrastructure (also known as "capital goods", or "fixed capital") is a platform for governance, commerce, and economic growth and is "a lifeline for modern societies". [1] It is the hallmark of economic development. [2]

Contents

It has been characterized as the mechanism that delivers the "..fundamental needs of society: food, water, energy, shelter, governance ... without infrastructure, societies disintegrate and people die." [3] Adam Smith argued that fixed asset spending was the "third rationale for the state, behind the provision of defense and justice." [4] Societies enjoy the use of "...highway, waterway, air, and rail systems that have allowed the unparalleled mobility of people and goods. Water-borne diseases are virtually nonexistent because of water and wastewater treatment, distribution, and collection systems. In addition, telecommunications and power systems have enabled our economic growth." [5]

This development happened over a period of several centuries. It represents a number of successes and failures in the past that were termed public works and even before that internal improvements. In the 21st century, this type of development is termed infrastructure. [6] Infrastructure can be described as tangible capital assets (income-earning assets), whether owned by private companies or the government. [7]

Ownership and financing of infrastructure

Infrastructure may be owned and managed by governments or by private companies, such as sole public utility or railway companies. Generally, most roads, major ports and airports, water distribution systems and sewage networks are publicly owned, whereas most energy and telecommunications networks are privately owned. Publicly owned infrastructure may be paid for from taxes, tolls, or metered user fees, whereas private infrastructure is generally paid for by metered user fees. [8] [9] Major investment projects are generally financed by the issuance of long-term bonds.

Hence, government owned and operated infrastructure may be developed and operated in the private sector or in public-private partnerships, in addition to in the public sector. In the United States, public spending on infrastructure has varied between 2.3% and 3.6% of GDP since 1950. [10] Many financial institutions invest in infrastructure.

Infrastructure debt

Infrastructure debt is a complex investment category reserved for highly sophisticated institutional investors who can gauge jurisdiction-specific risk parameters, assess a project’s long-term viability, understand transaction risks, conduct due diligence, negotiate (multi)creditors’ agreements, make timely decisions on consents and waivers, and analyze loan performance over time.

Research conducted by the World Pensions Council (WPC) suggests that most UK and European pensions wishing to gain a degree of exposure to infrastructure debt have done so indirectly, through investments made in infrastructure funds managed by specialised Canadian, US and Australian funds. [11]

On November 29, 2011, the British government unveiled an unprecedented plan to encourage large-scale pension investments in new roads, hospitals, airports, etc. across the UK. The plan is aimed at enticing 20 billion pounds ($30.97 billion) of investment in domestic infrastructure projects.

Infrastructure as a new asset class for pension funds and SWFs

Pension and sovereign wealth funds are major direct investors in infrastructure. [12] [13] Most pension funds have long-dated liabilities, with matching long-term investments. These large institutional investors need to protect the long-term value of their investments from inflationary debasement of currency and market fluctuations, and provide recurrent cash flows to pay for retiree benefits in the short-medium term: from that perspective, think-tanks such as the World Pensions Council (WPC) have argued that infrastructure is an ideal asset class that provides tangible advantages such as long duration (facilitating cash flow matching with long-term liabilities), protection against inflation and statistical diversification (low correlation with ‘traditional’ listed assets such as equity and fixed income investments), thus reducing overall portfolio volatility. [14] [12] Furthermore, in order to facilitate the investment of institutional investors in developing countries' infrastructure markets, it is necessary to design risk-allocation mechanisms more carefully, given the higher risks of developing countries' markets. [15]

Supranational and public co-investment with institutional asset owners

The notion of supranational and public co-investment in infrastructure projects jointly with private institutional asset owners has gained traction amongst IMF, World Bank and European Commission policy makers in recent years notably in the last months of 2014/early 2015: Annual Meetings of the International Monetary Fund and the World Bank Group (October 2014) and adoption of the €315 bn European Commission Investment Plan for Europe (December 2014). [16]

Foreign ownership of 'public assets'

Some experts have warned against the risk of "infrastructure nationalism", insisting that steady investment flows from foreign pension and sovereign funds were key for the long-term success of the asset class- notably in large European jurisdictions such as France and the UK [17]

Comparison of private versus public investment

An interesting comparison between privatisation versus government-sponsored public works involves high-speed rail (HSR) projects in East Asia. In 1998, the Taiwan government awarded the Taiwan High Speed Rail Corporation, a private organisation, to construct the 345 km line from Taipei to Kaohsiung in a 35-year concession contract. Conversely, in 2004 the South Korean government charged the Korean High Speed Rail Construction Authority, a public entity, to construct its high-speed rail line, 412 km from Seoul to Busan, in two phases. While different implementation strategies, Taiwan successfully delivered the HSR project in terms of project management (time, cost, and quality), whereas South Korea successfully delivered its HSR project in terms of product success (meeting owners' and users' needs, particularly in ridership). Additionally, South Korea successfully created a technology transfer of high-speed rail technology from French engineers, essentially creating an industry of HSR manufacturing capable of exporting knowledge, equipment, and parts worldwide. [18]

Planning and management of infrastructure

Infrastructure asset management

The method of infrastructure asset management is based upon the definition of a Standard of service (SoS) that describes how an asset will perform in objective and measurable terms. The SoS includes the definition of a minimum condition grade, which is established by considering the consequences of a failure of the infrastructure asset.

The key components of infrastructure asset management are:

After completing asset management, official conclusions are made. The American Society of Civil Engineers gave the United States a "D+" on its 2017 infrastructure report card. [19]

Engineering

The Berlin Brandenburg Airport under construction. BBI 2010-07-23 5.JPG
The Berlin Brandenburg Airport under construction.

Most infrastructure is designed by civil engineers or architects. [20] Generally road and rail transport networks, as well as water and waste management infrastructure are designed by civil engineers, electrical power and lighting networks are designed by power engineers and electrical engineers, and telecommunications, computing and monitoring networks are designed by systems engineers.

In the case of urban infrastructure, the general layout of roads, sidewalks and public places may sometimes be developed at a conceptual level by urban planners or architects, although the detailed design will still be performed by civil engineers. Depending upon the height of the building, it may be designed by an architect or for tall buildings,a structural engineer, and if an industrial or processing plant is required, the structures and foundation work will still be done by civil engineers, but the process equipment and piping may be designed by industrial engineer or a process engineer.

In terms of engineering tasks, the design and construction management process usually follows these steps:

Planning and Preliminary Engineering Studies

In general, infrastructure is planned by urban planners or civil engineers [21] at a high level for transportation, water/waste water, electrical, urban zones, parks and other public and private systems. These plans typically analyze policy decisions and impacts of trade offs for alternatives. In addition, planners may lead or assist with environmental review that are commonly required to construct infrastructure. Colloquially this process is referred to as Infrastructure Planning. These activities are usually performed in preparation for preliminary engineering or conceptual design that is led by civil engineers or architects.

Preliminary studies may also be performed and may include steps such as:

Detailed Survey
Detailed Engineering
Authorisation
Tendering
Construction Supervision

File:BBI 2010-07-23 5.JPG|thumb|right|The Berlin Brandenburg Airport under construction.

Economic, social and environmental impacts of infrastructure

Impact on economic development

Investment in infrastructure is part of the capital accumulation required for economic development and may affect socioeconomic measures of welfare. [22] The causality of infrastructure and economic growth has always been in debate. Generally, infrastructure plays a critical role in expanding national production capacity, which leads to increase in a country's wealth. [23] In developing nations, expansions in electric grids, roadways, and railways show marked growth in economic development. However, the relationship does not remain in advanced nations who witness ever lower rates of return on such infrastructure investments.

Nevertheless, infrastructure yields indirect benefits through the supply chain, land values, small business growth, consumer sales, and social benefits of community development and access to opportunity. The American Society of Civil Engineers cite the many transformative projects that have shaped the growth of the United States including the Transcontinental Railroad that connected major cities from the Atlantic to Pacific coast; the Panama Canal that revolutionised shipment in connected the two oceans in the Western hemisphere; the Interstate Highway System that spawned the mobility of the masses; and still others that include the Hoover Dam, Trans-Alaskan pipeline, and many bridges (the Golden Gate, Brooklyn, and San Francisco–Oakland Bay Bridge). [24] All these efforts are testimony to the infrastructure and economic development correlation.

European and Asian development economists have also argued that the existence of modern rail infrastructure is a significant indicator of a country’s economic advancement: this perspective is illustrated notably through the Basic Rail Transportation Infrastructure Index (known as BRTI Index) [25]

Use as economic stimulus

During the Great Depression of the 1930s, many governments undertook public works projects in order to create jobs and stimulate the economy. The economist John Maynard Keynes provided a theoretical justification for this policy in The General Theory of Employment, Interest and Money , [26] published in 1936. Following the global financial crisis of 2008–2009, some again proposed investing in infrastructure as a means of stimulating the economy (see the American Recovery and Reinvestment Act of 2009).

Environmental impacts

While infrastructure development may initially be damaging to the natural environment, justifying the need to assess environmental impacts, it may contribute in mitigating the "perfect storm" of environmental and energy sustainability, particularly in the role transportation plays in modern society. [27] Offshore wind power in England and Denmark may cause issues to local ecosystems but are incubators to clean energy technology for the surrounding regions. Ethanol production may overuse available farmland in Brazil but have propelled the country to energy independence. High-speed rail may cause noise and wide swathes of rights-of-way through countrysides and urban communities but have helped China, Spain, France, Germany, Japan, and other nations deal with concurrent issues of economic competitiveness, climate change, energy use, and built environment sustainability.

See also

Related Research Articles

<span class="mw-page-title-main">Civil engineering</span> Engineering discipline focused on physical infrastructure

Civil engineering is a professional engineering discipline that deals with the design, construction, and maintenance of the physical and naturally built environment, including public works such as roads, bridges, canals, dams, airports, sewage systems, pipelines, structural components of buildings, and railways.

Public capital is the aggregate body of government-owned assets that are used as a means for productivity. Such assets span a wide range including: large components such as highways, airports, roads, transit systems, and railways; local, municipal components such as public education, public hospitals, police and fire protection, prisons, and courts; and critical components including water and sewer systems, public electric and gas utilities, and telecommunications. Often, public capital is defined as government outlay, in terms of money, and as physical stock, in terms of infrastructure.

<span class="mw-page-title-main">Transportation engineering</span> Academic discipline and occupational field

Transportation engineering or transport engineering is a sub discipline of Civil engineering specialized in the application of technology and scientific principles to the planning, functional design, operation and management of facilities for any mode of transportation in order to provide for infrastructure for safe, efficient, rapid, comfortable, convenient, economical, and environmentally compatible movement of people and goods transport.

<span class="mw-page-title-main">Infrastructure</span> Facilities and systems serving society

Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and private physical structures such as roads, railways, bridges, tunnels, water supply, sewers, electrical grids, and telecommunications. In general, infrastructure has been defined as "the physical components of interrelated systems providing commodities and services essential to enable, sustain, or enhance societal living conditions" and maintain the surrounding environment.

<span class="mw-page-title-main">Public–private partnership</span> Government/private company partnership

A public–private partnership is a long-term arrangement between a government and private sector institutions. Typically, it involves private capital financing government projects and services up-front, and then drawing revenues from taxpayers and/or users for profit over the course of the PPP contract. Public–private partnerships have been implemented in multiple countries and are primarily used for infrastructure projects. Although they are not necessary, PPPs have been employed for building, equipping, operating and maintaining schools, hospitals, transport systems, and water and sewerage systems.

<span class="mw-page-title-main">California High-Speed Rail</span> Under-construction passenger rail system

California High-Speed Rail is a publicly funded high-speed rail system being developed in the U.S. state of California. It is anticipated that it will be able to put about 1/3 of Phase 1, a 171-mile (275 km) segment, into operation by the end of 2030. The trains would be the highest speed trains operating in the US at 220 mph (350 km/h).

An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked companies, insurers, pension funds, sovereign wealth funds, charities, hedge funds, REITs, investment advisors, endowments, and mutual funds. Operating companies which invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments. In 2019, the world's top 500 asset managers collectively managed $104.4 trillion in Assets under Management (AuM).

<span class="mw-page-title-main">Caisse de dépôt et placement du Québec</span> Canadian institutional investment company

The Caisse de dépôt et placement du Québec is an institutional investor that manages several public and parapublic pension plans and insurance programs in Quebec. It was established in 1965 by an act of the National Assembly, under the government of Jean Lesage, as part of the Quiet Revolution, a period of social and political change in Quebec. It is the second-largest pension fund in Canada, after the Canada Pension Plan Investment Board. It was created to manage the funds of the newly created Quebec Pension Plan, a public pension plan that aimed to provide financial security for Quebecers in retirement. The CDPQ’s mandate was to invest the funds prudently and profitably, while also contributing to Quebec’s economic development. As of June 30, 2023, CDPQ managed assets of C$424 billion, invested in Canada and elsewhere. CDPQ is headquartered in Quebec City at the Price building and has its main business office in Montreal at Édifice Jacques-Parizeau.

Asset management is a systematic approach to the governance and realization of all value for which a group or entity is responsible. It may apply both to tangible assets and to intangible assets. Asset management is a systematic process of developing, operating, maintaining, upgrading, and disposing of assets in the most cost-effective manner.

<span class="mw-page-title-main">Alternative investment</span> Investments other than stocks, bonds and cash

An alternative investment, also known as an alternative asset or alternative investment fund (AIF), is an investment in any asset class excluding capital stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as precious metals, collectibles and some financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, exchange funds, carbon credits, venture capital, film production, financial derivatives, cryptocurrencies, non-fungible tokens, and Tax Receivable Agreements. Investments in real estate, forestry and shipping are also often termed "alternative" despite the ancient use of such real assets to enhance and preserve wealth. Alternative investments are to be contrasted with traditional investments.

<span class="mw-page-title-main">Caisse des dépôts et consignations</span> French public-sector financial institution

The Caisse des dépôts et consignations is a French public sector financial institution created in 1816, and part of the government institutions under the control of the Parliament. Often described as the "investment arm" of the French State, it is defined in the French Monetary and Financial Code as a "public group serving the public interest" and a "long-term investor". Since 2017, Éric Lombard has served as its CEO. As of 2022, it is considered the largest sovereign wealth fund in the world by total assets.

Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". At its core, impact investing is about an alignment of an investor's beliefs and values with the allocation of capital to address social and/or environmental issues.

<span class="mw-page-title-main">Infrastructure asset management</span> Maintenance of public infrastructure assets

Infrastructure asset management is the integrated, multidisciplinary set of strategies in sustaining public infrastructure assets such as water treatment facilities, sewer lines, roads, utility grids, bridges, and railways. Generally, the process focuses on the later stages of a facility's life cycle, specifically maintenance, rehabilitation, and replacement. Asset management specifically uses software tools to organize and implement these strategies with the fundamental goal to preserve and extend the service life of long-term infrastructure assets which are vital underlying components in maintaining the quality of life in society and efficiency in the economy. In the 21st century, climate change adaptation has become an important part of infrastructure asset management competence.

The World Pensions & Investments Forum is a research and policy oriented conference organised by M. Nicolas Firzli, founder of the World Pensions Council (WPC), in partnership with regional and supranational organisations, large public and private institutional investors from G10 countries, the emerging nations of Eastern Europe, Latin America, Asia and the MENA area.

Infrastructure-based economic development, also called infrastructure-driven development, combines key policy characteristics inherited from the Rooseveltian progressive tradition and neo-Keynesian economics in the United States, France's Gaullist and neo-Colbertist centralized economic planning, Scandinavian social democracy as well as Singaporean and Chinese state capitalism: it holds that a substantial proportion of a nation’s resources must be systematically directed towards long term assets such as transportation, energy and social infrastructure in the name of long term economic efficiency and social equity.

Pension investment in private equity refers to an important component of the Endowment Model, pension funds may invest directly in private companies, or indirectly via private equity funds. This is a departure of the classic "70-30 Model" where a pension fund would invest 30% of its assets in publicly-listed stock. The perceived benefits of investing in private companies include the improved ability to diversify by region, industry, and sector, in addition to being able to invest in a greater selection of companies. A perceived drawback is the lack of liquidity of such private investments.

The European Commission’s Investment Plan for Europe known as the “Juncker Plan” or the “EU Infrastructure Investment Plan” is an ambitious infrastructure investment programme first announced by European Commission President Jean-Claude Juncker in November 2014: it aims at unlocking public and private investments in the “real economy” of at least € 315 billion over a three years fiscal period.

The study of Engineering Economics in Civil Engineering, also known generally as engineering economics, or alternatively engineering economy, is a subset of economics, more specifically, microeconomics. It is defined as a "guide for the economic selection among technically feasible alternatives for the purpose of a rational allocation of scarce resources." Its goal is to guide entities, private or public, that are confronted with the fundamental problem of economics.

Private market assets refer to investments in equity (shares) and debt issued by privately owned companies – as opposed to ‘public’ (listed) corporations. These markets include private equity (PE) and venture capital (VC); real estate (property); infrastructure; farmland and forestry.

References

  1. ↑ Esmaeili, Behzad, et al. "Inclusion of an Introduction to Infrastructure Course in a Civil and Environmental Engineering Curriculum." Journal of Professional Issues in Engineering Education and Practice (2016): 04016020
  2. ↑ Goldsmith, H. (2015). Actors and innovations in the evolution of infrastructure services. The Economics of Infrastructure Provisioning, 23-94.
  3. ↑ Hart, Steven D., et al. "Infrastructure and the Operational Art:A Handbook for Understanding, Visualizing, and Describing Infrastructure Systems" US Army Engineer Research and Development Center, (2014)
  4. ↑ Tatom, J. A. (1991). Should government spending on capital goods be raised?. Federal Reserve Bank of St. Louis Review, 73(3), 3-15. Tatom was citing Smith (1937), Book V. part 3, especially p. 682.
  5. ↑ ASCE Critical Infrastructure Guidance Task Committee. "Guiding principles for the nation's critical infrastructure." American Society of Civil Engineers,2009.
  6. ↑ Hart, Steven D., J. Ledlie Klosky, and Scott Katalenich. "Conceptual models for infrastructure leadership." Journal of Management in Engineering 30.3 (2013): 04014003.
  7. ↑ Kliesen, K. L., & Smith, D. C. (2009). Digging into the infrastructure debate. The Regional Economies, 4-9. Accessed at . The article emphasized the distinction between capital assets or capital stocks and capital flows. The latter is the annual or quarterly change in the capital stock, otherwise known as fixed investment, which is part of Gross Domestic Product (GDP). This article focused on capital stocks.
  8. ↑ "Business models for transport infrastructure assets? Some experiences in Europe. In The decision-making process for infrastructural investment choices". FrancoAngeli. 2020.
  9. ↑ Cardenas, I.; Voordijk, H; Geert, D. (2018). "Beyond project governance. Enhancing funding and enabling financing for infrastructure in transport. Findings from the importance analysis approach". European Journal of Transport and Infrastructure Research. 18 (4). doi: 10.18757/ejtir.2018.18.4.3261 .
  10. ↑ "Money for Public Projects", The New York Times, November 19, 2008
  11. ↑ M. Nicolas Firzli quoted by Myles Neligan and Sinead Cruise (November 28, 2011). "British Infrastructure Finance Plan No Silver Bullet". Reuters. . Retrieved 28 November 2011.
  12. 1 2 WPC Conference Committee (9 February 2012). "Infrastructure As A New Asset Class for Pensions and SWFs" (PDF). 2nd Annual World Pensions Forum, Roundtable led by Arbejdsmarkedets TillægsPension (ATP), Denmark’s National Supplementary Pension. Retrieved 17 August 2017.
  13. ↑ "SWFI Trend Report: Sovereign Wealth Fund Direct Infrastructure Investments, 2003-2014". Sovereign Wealth Fund Institute. Retrieved 25 February 2015.
  14. ↑ M. Nicolas J. Firzli quoted by Mark Cobley (Feb 20, 2012). "Infrastructure Funds Fail to Bridge the Gap". Financial News. . Retrieved 14 March 2012.
  15. ↑ Koh, Jae Myong (2018) Green Infrastructure Financing: Institutional Investors, PPPs and Bankable Projects, Palgrave Macmillan.
  16. ↑ M. Nicolas J. Firzli : ‘2014 LTI Rome Conference: Infrastructure-Driven Development to Conjure Away the EU Malaise?’, Revue Analyse Financière, Q1 2015 – Issue N°54
  17. ↑ Mark Cobley (7 Nov 2013). "Investors Warn against 'Infrastructure Nationalism'". Financial News report on 3rd annual World Pensions Council (WPC) forum. Retrieved Dec 12, 2013.
  18. ↑ Kao, T., Yung-Cheng, L, and Shih, M. (2010). Privatization Versus Public Works for High Speed Rail Projects. Transportation Research Record: Journal of the Transportation Research Board. Issue: 2159. Pp. 18-26.
  19. ↑ "Infrastructure | ASCE". www.asce.org. Retrieved 2017-11-28.
  20. ↑ Amekudzi, A. A., and S. McNeil. "Infrastructure reporting and asset management: Best practices and opportunities (Transportation & Development Institute (American Society of Civil Engineers). Infrastructure Systems Committee., Trans.)." Reston, Va.: American Society of Civil Engineers (2008). page 2
  21. ↑ American Society of Civil Engineers (ASCE), Policy Statement 131 - Growth and Development-The Civil Engineer's role is to plan, design and implement the built environment in service to society.
  22. ↑ Luis Flores Ballesteros. "How Lack and Poor Infrastructure Shapes Inequality and Poverty" 54 Pesos Sep. 2010:54 Pesos 9 September 2010 Archived 3 October 2011 at the Wayback Machine
  23. ↑ Koh, Jae Myong (2018) Green Infrastructure Financing: Institutional Investors, PPPs and Bankable Projects, Palgrave Macmillan, pp.12-51.
  24. ↑ Griggs, F. E. (2003). Perspectives in Civil Engineering. 1852-2002: 150 Years in Civil Engineering in the United States. American Society of Civil Engineers. Edited by Jeffrey S. Russell. Pp. 111-122.
  25. ↑ Firzli, M. Nicolas J. (1 July 2013). "Transportation Infrastructure and Country Attractiveness". Revue Analyse Financière. Paris. Retrieved 26 April 2014.
  26. ↑ Keynes, John Maynard (2007) [1936]. The General Theory of Employment, Interest and Money. Basingstoke, Hampshire: Palgrave Macmillan. ISBN   0-230-00476-8 "The Keynesian Revolution: Contents". Archived from the original on 2009-03-16. Retrieved 2015-03-21..
  27. ↑ Puentes, R. (2008). A Bridge to Somewhere: Rethinking American Transportation for the 21st Century. Brookings Institution Metropolitan Policy Report: Blueprint for American Prosperity series report.

Bibliography

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