Navigating infrastructure planning and investment | KPMG | GLOBAL

Navigating infrastructure planning and investment

Navigating infrastructure planning and investment

John Kjorstad, Associate Director with KPMG explores how governments and investors should use new tools to make better decisions.

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The G20’s Global Infrastructure Hub has created a number of online tools to support better planning and investment in infrastructure.

John Kjorstad, an associate director with KPMG’s Global Infrastructure team, explores how governments and investors should use these tools to make better decisions.

Sailing on open seas without navigation is, at best, aimless and at worst, reckless. The tools of navigation that maritime professionals have used throughout history have changed dramatically. Yet, the core tenets of understanding position, direction and destination have not. Effective infrastructure planning requires a similar compass. While not inherently bad, developing and operating infrastructure in silos is imperfect and leaves society exposed to projects promoted through self-interest (be it individual, departmental, political or financial). The lack of influential governance and holistic planning equates to drifting without navigation for executive leadership in the public sector. 

If a city, region or country’s strategy is not clear, or the paths to achieve it are uncharted, then public servants risk investing billions in infrastructure without fully achieving the benefits citizens expect.This leads to inflated budgets, ‘white elephants’ (infrastructure that is expensive to maintain and difficult to justify even after completed) or worse yet, abandoned unfinished projects that tarnish a country’s reputation. Public leaders love to cut ribbons, but no one wants to leave behind a decaying monument to poor leadership and reckless public spending. 

It doesn’t have to be this way. There are relevant examples of countries of different population sizes all over the world developing holistic, cross-sector strategies that improve internal policy frameworks and enhance delivery capabilities beyond disruptive political cycles. There are organizations, such as the OECD and the World Economic Forum, that are collecting data, measuring efficiency and promoting international best practices. The challenge, until recently, was knowing where to look for relevant benchmarks, recognizing performance beyond a single data point and understanding the nuances of the varied sources that exist.

Launched by the G20, the Australia- based Global Infrastructure Hub (GIHub) is mandated to grow the global pipeline of quality, bankable infrastructure projects and navigate governments and investors. By facilitating knowledge sharing, highlighting reform opportunities and connecting the public and private sectors, GIHub aims to increase the flow and quality of opportunities for private and public infrastructure investments.

InfraCompass is one of GIHub’s insightful navigation tools, helping governments and investors better understand their position, direction and destination when planning infrastructure investment. 

The experience can be enlightening as well as informative. Last summer, I used the InfraCompass in a presentation to the office of the Deputy Prime Minister’s Office for Investments and Informatization of the Slovak Republic. While they were already well aware of their infrastructure challenges, the GIHub’s findings provided a constructive framework for a deeper discussion around indicators where the country scored well and others that might require some attention. It also allowed us to compare Slovakia to its peers and reflect on why different countries are apart in specific areas.

“Being an EU member state and enjoying the benefits of the single market mean every day benchmarking, whether we like it or not. Inevitably, our citizens compare our infrastructure with that of Austria, Germany, France or with our regional peers, the Czech Republic, Hungary and Poland,” said Peter Pellegrini, Deputy Prime Minister of the Slovak Republic for Investments and Informatization. “This works the other way around as well. Foreigners coming to Slovakia compare what they can see here with what they have seen in other countries. Benchmarking can help us with setting the right direction for future infrastructure development.”

"Another aspect of benchmarking is linked to private investment in infrastructure. Slovakia is the member of the Eurozone. Fiscal discipline in the euro area imposes certain limits on budgetary spending. It is in our interest to make the projects attractive to private investors. In addition, the private sector is a driving force of innovation, efficiency, effectiveness and transparency.”

 

Funding not financing, governance not project preparation

There are two great myths in global infrastructure development. The first is that there is a shortage of capital available to address the needs and gaps identified to support economic growth and the United Nation’s Sustainable Development Goals. While the needs and gaps are certainly real, as outlined by another GIHub initiative, the Global Infrastructure Outlook forecasting tool, the bigger problem is knowing how projects will ultimately be paid for. This is funding, not financing — and a well governed society has to prioritize spending and know its limits.

The second great myth relates to project preparation. It is often suggested, particularly by those who say the problem is funding, not financing, that there are not enough bankable, well-prepared projects to invest in. Yet, there has never been more international support earmarked for project preparation than there is now. Tools such as the Sustainable Infrastructure Foundation’s and hundreds, if not thousands, of willing development- minded global experts, have enormous reach and resources supporting project preparation wherever the lack of capacity and expertise within governments presents itself as a prickly issue.

In reality, international investors are primarily concerned about capital preservation and a long- term return on investment.The apprehension they may feel venturing beyond  traditionally vanilla and privately financed infrastructure markets is driven primarily by long-term confidence in a country’s governance. This includes the rule of law that enforces contracts, insolvency recovery and, critically, assurance that society will pay for the projects that governments fund for the duration agreed. 

Confidence is measured independently by credit ratings and is far more important in the eyes of investors than ticking boxes to establish an individual project’s readiness. That is not to say that financing and project preparation are not important. It’s to say that this industry spends too much time talking about these two issues, whereas if proper funding and long-term governance are in place, financing and project preparation will take care of themselves.

Measuring progress, acting on insight

Countries seeking to chart a way forward for economic and social development might have a destination in mind, but do their governments truly understand where they are relative to where they want to be? 

Policy makers, particularly those in dedicated infrastructure units or finance departments, have been encouraged to use the InfraCompass to identify where improvements and reforms are needed. InfraCompass transparently combines multiple independent and publically available data sets in one convenient measure. Governments can dissect a country’s performance in six key areas: governance, regulation, permitting, planning, procurement and delivery.

Each area can be drilled deeper for greater insight, so if a country is noted for having below average governance, the compass user might find that indicators on rule of law, control of corruption and lack of an infrastructure agency are three reasons why. Similarly, they might find that infrastructure quality and the lack of project finance activity has lowered a country’s delivery capabilities. In total, 49 countries are profiled and  benchmarked against developed or emerging country averages through the InfraCompass platform’s interactive visualisation of data. In addition, countries can be compared to up to six other countries as the GIHub tool helps people understand each country’s market and points directly to where improvement is needed in relation to global best practices. 

Emerging economies are catching up with developed countries in terms of the quality of their infrastructure. The list of top improvers over the past decade is dominated by emerging countries. Central to this strong performance is that many of these countries have seen rapid policy development, including better governance (through lowering corruption levels and enhancing the rule of law), improved regulatory quality and simplifying permit procedures and land administration.

Across economies, there are few stronger drivers of investment than the rule of law. Upstream enabling environment reforms are key to unlocking quality infrastructure in over 20 of the countries analyzed.

Who else should use the InfraCompass?

The compass is not only for governments. Bilateral and multilateral development banks, aid organizations, export trade and investment promotion agencies, private consultants, international investors, EPC contractors and suppliers — essentially anyone with a vested interest in global infrastructure development — will  find it helpful.

Advisors can use it to support clients with strategic planning and technical assistance in both the public and private sector. This includes helping individual governments identify their infrastructure policy priorities or advising international investors on the markets that are best aligned to serve their preferred investment criteria.

Investors and contractors can also use the compass as an additional triangulation point and validation source in their investment due diligence process. Promotion agencies might use the InfraCompass to underline areas where their market performs well (or is improving) to attract more inwards investment. Export trade banks and international aid organizations might use it to see where their support will have the greatest impact for development and their domestic infrastructure businesses.

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