“The government should pay people to dig holes in the ground and then fill them up.” – John Maynard Keynes
When its completed, London’s Crossrail project will stretch from the country of Berkshire, west of London, through the capital and out into Essex in the east. Initially scheduled to open in late 2018 the project has faced numerous delays and is now expected to open for passengers “as soon as practically possible” in 2022.
It’s not unusual for large scale infrastructure projects to go badly off course – both in timing and budget. Meanwhile, much like the ghost cities in China, one wonders whether the Crossrail project will turn into a massive white elephant when it does open. Built in the expectation of a surge in commuters, the world the rail project might open to in 2022 may be very different if WFH catches on and shaving 20 minute off the commute becomes irrelevant for most people. Therein lies the risk that faces infrastructure planners – trying to anticipate demands many years into the future.
With government borrowing costs near zero (or even below) for every developed country and many emerging economies, concerns about future white elephants will be pushed aside, to worry about for another day. For now, both the OECD and the IMF are pushing governments to put aside thoughts of renewed austerity, and spend, spend, spend to get the economy moving again.
And the benefits could be large, and relatively quick to see. According to the IMF, a simultaneous increase in high-quality infrastructure spending could result in significant cross-border spillover effects, magnifying the impact of individual countries acting alone:
“If economies with room to spend were to increase infrastructure investment spending simultaneously by ½ percent of GDP in 2021, raise it to 1 percent of GDP in 2022, and keep it at that level until 2025, and economies with less fiscal space spend about one third of that amount over the same period, global output could increase by close to 2 percent by 2025 (dashed black line). About a third of that impact would come from cross-border spillovers.”
Even putting aside the impact on demand for those commodities required for the infrastructure build-out, the boost to overall GDP is likely to support demand for other commodities as well – including oil, gas and other energy commodities.
Infrastructure spending is likely to take two forms. First, governments are fast-tracking funds for maintenance and upgrades. According to the infrastructure chief at France’s finance ministry, one-fifth of his country’s €100bn infrastructure plan aims to make buildings energy-efficient and revamp transport links. Maintenance spending has the advantage of being shovel-ready, i.e. it can start much quicker than new physical infrastructure that requires large-scale public consultation.
The second form of infrastructure spending is on ensuring the economy is ready for new capabilities. The pandemic has of course accelerated the trend towards the digitisation of the economy, but this has meant that the physical infrastructure supporting that growth has been found lacking. According to McKinsey, spending on data-centres and the like must rise by 6-11 per cent annually over the next decade to match growing usage.
This could be just the start. The Global Infrastructure Hub estimates the world faces a $15 trillion gap between projected investment in infrastructure and the amount needed to adequately support infrastructure by 2040.
To avoid the risk of digging hole’s and filling them up for the sake of it, infrastructure spending needs to be focused on actual needs. In December 2020, the Brookings Institution published a two-part analysis that, among many things, stresses the need to reshape the discourse around US infrastructure needs and investments. The report states: “No one needs a highway—they need to get to work or school. Re-centering conversations around needs, outcomes, and services rather than projects or assets—especially in this time of rapidly changing needs—is an essential first step.”
With the cost of borrowing so cheap, and governments under pressure to spend it on infrastructure asap, the risk is that this ‘discourse’ doesn’t happen.
Related article: It’s time to build: Here’s what that might mean for commodities
Even with some favourable tailwinds, infrastructure spending could succumb to longstanding stumbling blocks: politics (including the diversion of funds to manage the COVID fallout), poor execution and precarious funding. Many investors in infrastructure companies will have been burnt in recent years from these very real obstacles. Instead of investing in infrastructure companies, investors should focus on gaining exposure to the commodities that infrastructure companies will need to build. Therein lies the asymmetric payoff – whether the money is spent wisely, or not.