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28 Sep 17 12:37

Robust new infrastructure drives growth and progress, but it doesn't come cheap.

Most Americans know that many of their roads, bridges and other transport systems are in dire need of repair and/or replacement. According to Swiss Re's publication, "Underwriting the US infrastructure gap". US infrastructure investment has long fallen behind what’s needed to maintain a state of good repair for existing assets, let alone power the economy of the 21st century.

The American Society of Civil Engineers (ASCE) cites investment needs of USD 125 billion per year over the coming decade to maintain and repair the existing surface transportation system. And the problem is not just confined to the US. A recent report by the McKinsey Global Institute puts the global shortfall in infrastructure investment at around USD 350 billion per year, not even taking account of maintenance backlogs. This figure jumps threefold if current investment levels are set against what would be necessary to meet the UN's Sustainable Investment Goals.

FAVOURABLE SIGNS
A crumb of comfort, I suppose, is that the current US Administration has announced its intention to initiate a massive investment programme in the nation's infrastructure. Moreover, it is welcomed that governments are realising the importance of infrastructure spending as a driver of growth – and that they are ready to initiate the bold action necessary to unlock the trillions of dollars necessary to make this a reality.

Perhaps the most dramatic and exciting of such moves is China's One Belt, One Road Initiative (OBOR). The aim of this gigantic programme is to build a network of infrastructure facilities and expand trade routes across China and Eurasia. Lack of infrastructure has held back development in many OBOR countries, with most of the shortages in the areas of power, transport, water, sanitation and telecommunications. In its China's One Belt, One Road Initiative report, our experts estimate that the total investment needed to construct the infrastructure in the OBOR region will be around USD 20 trillion up to 2030. Many OBOR country governments have existing plans to upgrade their infrastructure facilities to improve growth potential. Consequently, the OBOR programme is likely to underpin such aspirations, and help more efficient coordination and financing of related construction projects.

Another major infrastructure accomplishment is the London Crossrail project due to be completed towards the end of 2019. This new railway line, costing GBP 14.8 billion, will straddle London from east to west. This project is a major enhancement of the city's transport infrastructure that will strengthen the economic resilience of one of the world's largest urban centres. Given that Swiss Re has long drawn attention to how infrastructure investment drives growth, it should come as no surprise to learn that we have a leading role in providing insurance coverage for this project.

WHERE WE STAND
Let me put the topic of infrastructure investment into a big-picture context by echoing remarks made by Christian Mummenthaler, Swiss Re's Group CEO, at this year's WEF meeting. He pointed out that roads, railways, ports and energy infrastructure have to be constructed – or retro-fitted – also to withstand natural disasters. In earthquake-prone Japan, this was already happening. But resilient infrastructure requires investment. As governments struggle with high debt burdens, the funding gap for this purpose – currently estimated at $50-70 trillion through 2030 – continues to widen. Bridging that gap is particularly important for emerging markets, where infrastructure needs are the greatest. The $27 trillion in capital managed by long-term investors such as reinsurers might do the trick here. But despite their long-dated liabilities and consequent long-term appetite for infrastructure debt investment, the process remained problematic.

BREAKING THE LOG JAM
Therefore what we need to break the log jam in long-term investors' funds is the introduction of a standardised infrastructure asset class. Swiss Re is joining forces to develop an infrastructure tradability indicator, designed to help investors and policy-makers bring infrastructure debt closer to becoming a standardised and hence tradable asset class. Ultimately, the free flow of funds to infrastructure will create jobs, provide access to food, water and energy, and lift people out of poverty. With the world population growing, the concentration of economic and social assets in metropolitan areas is set to increase. Consequently, the impact of natural catastrophes will rise even more if we don't act now.


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Location: Zürich, Switzerland


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