Infrastructure: How much is too much?

As the UK faces the prospect of increasingly congested roads and airports, and the risk of power shortfalls, it might seem perverse to ask “how much infrastructure does a country really need?” But this is a key question for the UK and other European economies as they grapple with the implications of a relatively low growth future and a large, legacy infrastructure base.

In rapidly developing countries the questions of prioritisation are even more acute: is it the industrial base or the social infrastructure that needs to be dealt with as a priority?

Insights into these challenges are revealed in research published by EC Harris’ parent company Arcadis this week in its annual Global Asset Performance Index, which considers the contribution of built assets in all of their forms to the world economy.

You will be proud to know that the fruits of our industry’s labours – built assets associated with cities, infrastructure and industry across the entire world – contribute 40% of the $27 trillion (£16 trillion) GDP of the 30 countries studied. Behind the headline numbers, however, there are some intriguing differences in performance.

Take Mexico, for example. Boston Consulting Group recently identified it as the world’s most competitive manufacturing location. 60% of Mexico’s GDP can be attributed to built assets, pointing to not only a competitive wage structure, but big advantages in physical infrastructure such as transport too.

Europe also has good infrastructure but the research suggests that it is possible to have too much of a good thing – France, Germany and Spain all have 30% more built asset wealth than the UK but don’t get a premium return on the investment. Those campaigning for greater investment in the UK will be worried by the notion it is possible to have too much investment.

There are three aspects to this equation that are particularly relevant to investment decisions in the UK. The first concerns the allocation of finite levels of investment. There is a tension between the big bang effect of concentrating investment to drive an economic transformation, and the drip feed of a more incremental pattern of expenditure.

The public sector in Spain and Greece is likely to find itself saddled with big liabilities for future operational costs as a result of over-ambitious planning and expansion in advance of the Eurozone crisis

This issue should be at the heart of the HS2 debate, and insights from the research show how critical it is to ensure that the full scale of potential economic benefits from such a large investment are secured through commitment to delivery of the wider transformation.

The waste of resources involved in the delivery of the $50bn (£29bn) Sochi Winter Olympics in infrastructure-starved Russia is an extreme example of poor investment allocation in an economy that is crying out for good investment planning.

The second component is that assets need to be sweated – something that the UK has been very good at through the privatised and regulated utilities model. The research shows that the UK gets a 30% greater contribution to GDP from our assets compared to our European peers – compensating for the fact that our asset base is 30% smaller on a per capita basis. The problem with a high utilisation model is that the sweating can only go on for so long – and that proper investment in maintenance and replacement is needed to “keep the rain out”.

This is, of course, a lot easier if the infrastructure is the right scale and the funding model is in place. In contrast to the UK the public sector in Spain and Greece is likely to find itself saddled with big liabilities for future operational costs as a result of over-ambitious planning and expansion in advance of the Eurozone crisis.

The final piece of the jigsaw is return on investment. The research suggests that a much higher share of GDP can be attributed to built assets in countries like Mexico, Turkey and Poland than in the UK or other Eurozone countries. This is partly a reflection of low wages in these economies as well as evidence of the impact that modern, efficient infrastructure can have on emerging economies’ performance.

Having a high share of income creates the headroom to allocate an attractive return to investors – potentially making these countries better locations for large, long-term bets on infrastructure development and compensating in part for some of the risks involved. Balancing the delivery of affordable infrastructure for the user and attractive returns for the investor is fast becoming the critical issue for constructors and asset operators, and although private investors might be thought of as the main beneficiary of affordable infrastructure, ironically it is the public sector that is leading the charge in the UK, driving, for example, the performance targets in the 2025 Industrial Strategy.

So, in answer to the question, “how much infrastructure does a country need?” in the case of mature economies like the UK, the answer is probably less than our industry aspires to, but still more than we as taxpayers are prepared to pay for. In this context, the planning and cost effective delivery of the UK’s next generation of infrastructure is as much a global challenge and opportunity as it
is a local preoccupation.

Simon Rawlinson is head of strategic research and insight at EC Harris