The world faces the need to provide sound infrastructure for a growing population, especially millions of people moving from the countryside to cities with growing income and aspirations. In addition, in the light of ongoing climate change, infrastructure facilities should be planned and constructed so that they are resistant to extreme weather conditions and do not entail further negative effects for the climate and the environment. McKinsey analyses show that, taking into account the expected rate of global economic growth, infrastructure investments of USD3.7 trillion per year will be needed by 2035. Most of this amount should be spent in developing countries, where capital resources are more limited and where the construction of good quality infrastructure has to compete with more urgent development needs. Meanwhile, the outcome of the global fight against climate change and consequently, future generations’ quality of life, will largely depend on the quality of facilities to be built in the coming decade. Therefore, infrastructure determines a certain global development direction for the whole of humanity.
Principles of investing in good quality infrastructure
The issue of good quality infrastructure was the subject of discussions and agreements at major international meetings, including the OECD, G7 and G20. The principles adopted by the G20 focus on six main areas.
The first one is maximizing the positive impact of infrastructure to achieve sustainable growth and development. Good quality infrastructure means primarily the sustainable infrastructure, i.e. specifically designed and created in order to reduce economic, social and ecological risks and to generate benefits in these three areas. Infrastructure investments should support sustainable development and economic growth through creation of quality jobs, capacity building of national institutions and the transfer of know-how and expertise, especially to local communities. It is important to care for creating jobs while the facilities are still under construction and to use modern technologies. The infrastructure already in place should be accessible to everyone and offer benefits to all social groups. The growth in the value of land around a planned or executed investment should also benefit small owners and the weakest social groups.
The second one is raising economic efficiency in view of life-cycle cost. Infrastructure investment should be economically effective. To this end, the total cost of the investment at all its stages (planning, design, financing, construction, operation and maintenance, as well as potential disposal) should be compared with the economic, social and environmental benefits offered by the investment. It is important to undertake measures preventing delays and budget overruns and ensuring the financial sustainability and profitability of the project. Clear, transparent and competitive tendering procedures are also crucial.
The third one is integrating environmental considerations in infrastructure investments. A comprehensive analysis of the impact of investments on the environment, including ecosystems, biodiversity, climate, weather, use of natural resources, etc. should be carried out. It means not only thinking about ecology during the design and implementation of the investment but e.g. access to information on environmental aspects of the project and making the environmental impact assessment of the project available to all interested social groups. Infrastructure investments should foster the promotion of clean energy and contribute to reducing pollution and adverse climate change. Construction materials should be selected taking into account their environmental impact.
The fourth area is integrating social considerations in infrastructure investment. Infrastructure should be inclusive, implemented with respect for human rights and international labor standards. When planning and implementing infrastructure facilities, it is particularly necessary to take into account and respect the needs of women, children, displaced people, the disabled, indigenous population, marginalized and poor groups. All workers employed at the investment should be able to work in safe and healthy conditions. Particular consideration should be given to how infrastructure influences women’s economic empowerment, among others, through creating equal access to well-paying jobs and opportunities emerging in connection with the implementation of the investments. Access to the use of infrastructure facilities already in place should be open and non-discriminatory for all. This can be best achieved through consultation with stakeholders throughout the project life cycle and at all stages of the investment use.
The fifth is building resilience against natural disasters and other risks. Infrastructure should be safe and resilient to man-made natural disasters and climate change. Sound disaster risk management should be factored in when planning and designing investments. Their financing should be based on modern and adequately selected financial and insurance mechanisms. It is recommended to construct the facilities so that they can be easily and quickly repaired/reconstructed after a potential disaster.
The last but not least is strengthening infrastructure governance. All countries should have efficient institutions, adequate organizational and governance capacity as well as clear and transparent rules in the investment process. Access to adequate information and data in order to make rational investment decisions is essential. Measures should be taken to prevent the risk of corruption at all stages of the project life cycle. Furthermore, it is important to analyze the impact of public-funded infrastructure projects on the macroeconomic situation, including the country’s debt level. Such information should be available to the public. It is desirable to implement good practices developed by the private sector in the infrastructure sector, including the principles of responsible business.
Chinese BRI initiative
The promotion of principles relating to quality infrastructure is of particular importance in the context of the implementation of the One Belt One Road Initiative (BRI) promoted by China. This large-scale undertaking raises doubts concerning the quality of planned infrastructure investments, especially their impact on the economic and social development, the status of the environment and climate change. Arguments are raised that projects implemented within the framework of BRI are not sufficiently adapted to the national development strategies of individual countries, insufficient importance attached to the phase of operation and maintenance of the facilities, lack of transparency of financing and the corresponding risk of fraud and corruption as well as excessive debt of countries where the investment projects are carried out.
In the OECD report „2018 Business and Finance Outlook”, the great importance of BRI in ensuring global infrastructure needs is pointed out. The OECD experts simultaneously emphasize that infrastructure investments, especially cross-border projects, must respect global standards: projects must be properly selected, viable, cost-effective, especially in terms of the impact on the debt level of participating countries and often difficult conditions of pursuing business prevailing there. In addition, BRI needs to be implemented in closer association with other initiatives and actors and based on transparent rules equal for everyone.
It seems that the Chinese authorities attach increasing importance to the quality of investments implemented both in the country and under the “One Belt One Road Initiative”. A year ago, Chinese President, Xi Jinping announced his commitment to ensure the high quality of the infrastructure provided under the BRI.
Dilemmas and challenges
Infrastructure that does not meet efficiency, safety and environmental standards can be cheaper in the short term but entails much higher costs in the long term. At the same time, low quality infrastructure can be worse than no infrastructure at all. Companies and individuals can cope with the lack of infrastructure since it is a predictable situation which can be taken into account in business decisions.
Good quality infrastructure, despite higher initial costs, offers a number of benefits, including increased efficiency and safety, reduced environmental costs, more effective provision of public goods and services, etc. It contributes to job creation, attracting foreign investment and increasing tax revenues.
Infrastructure faces further challenges and, at the same time, opportunities related mainly to the development of modern technologies. They can cause that facilities constructed currently and in the nearest future will be more effective and disaster-resistant and will have less impact on the natural environment. The problem is that large facilities are designed and built for many years, sometimes even a decade. Meanwhile, technological changes progress much faster, thus the resulting facilities may turn out obsolete when the ribbon is symbolically cut.
So, how can it be ensured that the growing consensus concerning good quality infrastructure is translated into practical action at any latitude? Above all, it must be recognized that this is a crucial issue which must be addressed as a priority and in a coherent way by the whole public administration, also as part of the low carbon agenda. It is often necessary to create favorable macroeconomic conditions and implement structural reforms to ensure stable conditions for long-term infrastructure investments. Change must also comprise the public procurement sector; in this case, it is a question of moving away from the lowest price criterion to quality criteria. This, in turn, requires training of many people, amendments to the law and changes in mentality of officials as well as creation of a system of incentives for officials and companies to make them watch over the adopted standards and apply them. The tasks of international institutions include, to a large extent, promoting the principles of investing in good quality infrastructure and their application in political and financial decision-making. Poorer countries should be offered support to prepare good and viable projects.
Paweł Bagiński, PhD, is the economic advisor in the Foreign Department of Poland’s central bank, NBP.
The views expressed in this article are the private views of the author and are not an expression of the official position of the NBP.