Welcome to Finance and Fury, The Furious Friday Edition

 

Today – SDG9 – How infrastructure spending helps an economy –

Anyone who knows basic economic and GDP has learnt that Infrastructure spending leads to GDP growth – so the theory says – Very hard to measure benefits/gains – Direct through spending in GDP equation – flow on effects

Go through Economic theory backing this – stimulus spending for GDP growth –

First – estimates Research provided from McKinsey and UN – MK established the Global Infrastructure Initiative (GII) in 2012

  1. MK Two reports – 2015 to 2016 – World spent $9.5trn (14% GDP) $9.6trn follow year
    1. Transport, power, water, telcom – $2.5trn, Social infrastructure, oil and gas, mining – $2.4trn, Real estate – $4.65trn
  2. Spending trajectory points to a shortfall of about $350 billion a year to what we are told we need –
    1. but triples when including funds needed to meet the UN Sustainable Development Goals
    2. Report states – meeting is critical for the future of under supplied regions such as Africa – remember Africa
    3. Emerging economies account for some 60% of that need
  3. Projects – no idea – broken into categories – power, water, etc – but on what, who knows – Have programs going – but go to each and it is just another rabbit hole trying to find each individual thing
  4. This ep – Focus of policy and recommendations to provide grease to the wheels of bureaucracy:
    1. Helping Financial System out through Governments
    2. Talk about the theory as justification and also the

 

Governments hand in this –

Regulations/Legislation – Basel III, Solvency II, pension fund allocation rules

  1. Basel III and Solvency II mandate classifying infrastructure as high-risk capital allocations
    1. Also – pension funds have allocation rules that specifically limit their exposure to asset classes and countries
    2. Recognising infrastructure as an asset class with a lower risk profile – Infrastructure can be low or high risk
      1. Low upon completion and proof of profitability – In developing – high risk – many infrastructure projects don’t meet forecasts – known as ‘white elephants’
  2. To avoid low return investments – governments need more oversight and analysis before a decision in made –
    1. More regulations for infrastructure works –
      1. Question: If there was a special equation to perfectly predict profitability – Gov wouldn’t be ones who have it
      2. Sadly – no tool exists – only outcome from involvement in assessment is higher costs and more delays due to layers of legislation and checklists before approval

 

Governments will also take an active role beyond changing the laws – Want to make money back off it

  1. Road pricing and other fees
    1. toll roads, bridges, and tunnels are increasingly common around the world.
    2. Taxes and fees – Cities including London have introduced congestion pricing on urban roads.
  2. Property value capture – Governments acquire land around an infrastructure project – profit once the project is completed through lease or sale – using the resulting funds for new infrastructure investment – Spain added this to its constitution.
    1. Other methods – more traditional – increase general or specific property taxes and fees from owners/developers
  3. Changes in public accounting and budgeting frameworks
    1. Treating infrastructure as an asset on a public balance sheet and depreciating it over time rather than adding the entire cost of a project to the fiscal deficit up front
      1. mirrors corporate accounting practice – helpful to Gov – gets around limits on deficits and debt.
    2. Example – 3y $6bn project is being constructed and will take 6 years – one payment upfront now and one in 3 years
      1. Current – Adds $6bn onto deficit now – although the government is actually paying money only in years one and three, it books spending of $2 billion in each of the three years. However, the roads will be operational for the next 20 years. It would make just as much sense for the government to book an expense of $300 million every year for 20 years as the public asset is consumed.
      2. But many public assets, unlike private assets, do not have corresponding revenue streams attached to them – no accountability – as a new office block will have a life of who knows – 40, 50 y – hides real spending onto future books
    3. Socioeconomic rates of return on public investment is meant to exceed the government’s cost of capital—and substantially increase the future tax base in a way that makes the project self-funding over the long run
      1. important caveat is that this accounting approach could undermine the productivity of public investment
      2. Report notes – risk that government leaders, freed from the responsibility of having projects appear in their fiscal expenses during their tenure, might decide to spend ineffectually –
        1. Very politically useful in the short term – spend away on your voting demographic — boosting particular constituencies such as construction workers and the unemployed—costs passed to future generations.
        2. Why they want to introduce a powerful oversight body –
    4. Issue is that a Government doesn’t run itself like a company – if it did – transparency and getting willing transfer of cash rather than by force- fine – but if they keep GDP measurements the same – instant bonus compared to depreciation costs
      1. A great deal of infrastructure development fails at the outset – Corporate accepts risks – Gov just take and don’t let you know
        1. Report states – Many issues – Land rights may need to be obtained from many owners, political support and funding may need to be secured from multiple jurisdictions, or business models may depend on a large number of co-investors for ancillary revenue generation

What will it cost?

– Just on economic – Transport, power, water, telco – the $2.5trn current spent criteria

  1. Will require $3.3 trillion annually through 2030 without SDG – but with well over $4 to $5trn

Where will the money come from?

  1. Financial System – Hard to attract investors – barriers and lack of interest from most investors
    1. Recs to help – governments need to develop their project pipelines, remove regulatory and structural barriers, and build stronger markets for infrastructure spending
  2. Public-private partnerships have assumed a greater role in infrastructure, although there is continued controversy about whether they deliver higher efficiency and lower costs.
  3. Govs have eyes on financial system Funding – number of sources – combined have $120trn under management by institutional investors
    1. Banks and insurance – $66trn, Investment companies, private equity Special development banks – $40trn
    2. Super funds and pensions – $11trn
      1. Early 2019 – World Pensions council – had meetings with G20 –
      2. executives and board members confirmed they were in the process of adopting or developing SDG-informed investment processes, with more ambitious investment governance requirements – notably when it comes to Climate Action, Gender Equity and Social Fairness – okay?
    3. Capital stewardship is expected to play a crucial part in the progressive advancement of the SDG agenda:
      1. “pension fund trustees have started to exercise more forcefully their governance prerogatives across the boardrooms, coming together through the establishment of engaged pressure groups […] to shift the [whole economic] system towards sustainable investment” – by using the SDG framework across all asset classes
    4. In the end – mostly comes from us – ep last week – robin hood
      1. Private and institutional investors (mostly your money) – have $120trn under management
        1. 60% or $73trn from America and EU – want to get down to 50% and use other nations
        2. 87% of funds in High income countries – demand in middle to low income countries
        3. Mostly come from us – Similar to last week with Comparative advantage
      2. Policy aims to match these investors with projects – but requires solid cross border investment principles

 

Financial – Standardisation of terms and risk categories, risk-return reviews, development of indexes

  1. Project pooling. Another way to reduce transaction costs for investors is by pooling projects, including the development of respective funds, indexes, and securitisation vehicles.
  2. Development of securities exchanges. Governments can significantly increase private investment in infrastructure assets by adding liquidity to securities exchanges.
    1. Gov issue equity and debt on government-owned infrastructure projects and infrastructure operators to encourage private investment. Governments should play the role of market maker and encourage multilateral development banks to sell their investments as individual or bundled assets to increase liquidity.
  3. Development banks – special financial pools to accept funding and lend out money for project financing
    1. Aus – Quote “The Asian Development Bank has signalled it will inject more cash into high-quality projects aimed at dealing with climate change and tourism and less on infrastructure “white elephants” as it battles pressure to counter the growing influence of China across the Pacific”
    2. China – Asian Infrastructure Investment Bank – US major supporter – last year $22 billion worth of loans and grants to projects across the region, with another $14 billion leveraged from the private sector
      1. Pushing framework for us to join – allow “Australia to lead the region in mobilising the trillions of dollars required to respond to specific strategic challenges that threaten to push vast numbers of people back into poverty, such as climate adaptation across the Asia Pacific”, Flow – estimated (in 2017) at up to $429 billion annually needed by 2050.
      2. Approach to climate finance is in keeping with the Australian Government’s 2017 Foreign Policy White Paper, which has named climate diplomacy as an essential strand – Recommendation – allow Australia to leverage investment from multiple sources to achieve the SDGs – mostly pooling funds from super accounts and investment funds

 

Will it help? – Estimates – more spending could add about 0.6% to global GDP.

  1. infrastructure construction immediately creates jobs – Report estimate – one percentage point of GDP could generate an additional 3.4m potential jobs in India, 1.5m in the United States, 1.3m in Brazil, and 700,000 in Indonesia
  2. Forget that spending has to come from somewhere – expense of future growth in economy – stimulate now for the comedown later –
    1. In Australia – we are a large country – infrastructure lacking – why city planners like concentrations/urbanisation
      1. Create further urbanisation – cities grow while rural shrink (% of population) –
    2. Other side of Growth – Governmental policy
      1. population growth from immigration
      2. Also helping to fuel growth through marginal increases in consumption
  3. UNs publications talk about how manufacturing and industrialisation increases incomes, stimulates growth through increased production and consumption – greater supply, cheaper goods, more people spend – true – But only evidence of this working long term is with free market deciding – Every example of Gov trying mass reindustrialisation’s in 20th century didn’t end so well – Governments were responsible for the deaths of 250m in that time period through ‘miss management’ – Uni of Hawaii – not including wars –
    1. Don’t have a lot of faith in Gov ability to match plans – Especially if accounting methods change –
    2. Beyond this – Issue with current state of financial system – too much debt already – stimulus – like stimulant -less effective the more that it is used – Gives gov less bang for buck
    3. Obama’s economic experiment of Keynesian economics on steroids was a failure – stimulus plan, bailouts, ObamaCare, tax hikes, minimum-wage hikes and regulations – doubled national debt in eight years
      1. In 2015, the Joint Economic Committee of Congress found that compared to the eight previous post-recession events, “the Obama recovery was the weakest on record.”
    4. Why? Too much debt already – doesn’t continue to grow through stimulus once debts hit thresholds
      1. World indebted – then lower than forecasts growth very likely
      2. Been trying to get out of debt – govs have a lot
    1. Helping out developing nations is a noble thing to do – but access to infrastructure will increase CO2 emissions – even renewables – developing the 3rd worlds has opposite outcomes to CO2 reductions – consumption etc leads to more – especially in process – no way to get energy needed clean under current tech
    2. Also – Aus – we have one of highest emissions PP in world in Aus – Due to our lifestyles – cars, large houses, lighting and inability to adopt nuclear or thorium power– also export a lot of our LNG –
      1. rely on coal or renewables – which are costly to run compared to coal measured in Kw/pHr
      2. So if they really wanted to lower our emissions in the name of climate as one of the biggest culprits –
      3. Spend $30bn and put in 4 nuc plants to power the nation –
  4. Solution has been to get inflation out of the money flow increase – IMF needs spending though and not happening – needs inflation back – mass infrastructure spending is the next ditch effort to restart the economy – climate change is the reason to have people want it
  5. In short – don’t expect to see a lot of thing money being spent to boost our struggling economy –
    1. Hard enough to get a Coal mine in QLD, let alone a dam or large scale infrastructure (E/W tunnel)
    2. Wont see our CO2 go down from the infrasturcutre spend – as it is in the name of climate but done for growth

Thanks for listening, if you want to get in contact you can do so here.

 

Resources to check out:

https://www.mckinsey.com/~/media/McKinsey/Industries/Capital%20Projects%20and%20Infrastructure/Our%20Insights/Bridging%20global%20infrastructure%20gaps/Bridging-Global-Infrastructure-Gaps-Full-report-June-2016.ashx

https://www.mckinsey.com/~/media/mckinsey/industries/capital%20projects%20and%20infrastructure/our%20insights/improving%20the%20delivery%20of%20road%20infrastructure%20across%20the%20world/a-better-road-to-the-future-web-final.ashx

https://www.mckinsey.com/~/media/mckinsey/industries/capital%20projects%20and%20infrastructure/our%20insights/bridging%20infrastructure%20gaps%20has%20the%20world%20made%20progress/bridging%20infrastructure%20gaps%20how%20has%20the%20world%20made%20progress%20v2/mgi-bridging-infrastructure-gaps-discussion-paper.ashx

https://sustainabledevelopment.un.org/content/documents/2537IDR2018_FULL_REPORT_1.pdf

 

 

 

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