No Surprise On G20's Focus On Infrastructure

BMI View: The recent G20 meeting has once again seen infrastructure development being touted as a means of boosting economic activity, with a drive to increase private sector participation in infrastructure development central to that. This does not come as a surprise to us but we highlight that it remains to be seen if the G20's plans for driving infrastructure development will be implemented effectively.

The recent meeting between finance ministers and central bankers from 20 of the world's largest economies (or the G20) has once again seen infrastructure development being touted as a means of boosting economic activity. During the meeting, the G20 authorities agreed to boost their collective GDP by more than 2% over the next five years. To achieve this target, the G20 countries, with the assistance from a private sector taskforce (known as the B20), will formulate individual action plans, setting out concrete reforms across a variety of policy areas. The B20 taskforce is expected to provide recommendations to G20 leaders in July 2013, after which these plans will be finalised during the G20 summit in November 2014.

It comes as no surprise to us that infrastructure investment remains a favoured means to boost economic activity among the G20 members. Fixed asset investment remains one of the easiest ways to generate a satisfactory economic growth rate in the near term. While there has been a surge in infrastructure build-up in the years after the global financial crisis in 2008-09, many G20 economies, particularly the emerging economies, still suffer from sizeable infrastructure deficits.

Varying Deficits, Varying Priorities
G20 Countries - Quality Of Infrastructure*, Out of 148 Countries, 2013/14

BMI View: The recent G20 meeting has once again seen infrastructure development being touted as a means of boosting economic activity, with a drive to increase private sector participation in infrastructure development central to that. This does not come as a surprise to us but we highlight that it remains to be seen if the G20's plans for driving infrastructure development will be implemented effectively.

The recent meeting between finance ministers and central bankers from 20 of the world's largest economies (or the G20) has once again seen infrastructure development being touted as a means of boosting economic activity. During the meeting, the G20 authorities agreed to boost their collective GDP by more than 2% over the next five years. To achieve this target, the G20 countries, with the assistance from a private sector taskforce (known as the B20), will formulate individual action plans, setting out concrete reforms across a variety of policy areas. The B20 taskforce is expected to provide recommendations to G20 leaders in July 2013, after which these plans will be finalised during the G20 summit in November 2014.

It comes as no surprise to us that infrastructure investment remains a favoured means to boost economic activity among the G20 members. Fixed asset investment remains one of the easiest ways to generate a satisfactory economic growth rate in the near term. While there has been a surge in infrastructure build-up in the years after the global financial crisis in 2008-09, many G20 economies, particularly the emerging economies, still suffer from sizeable infrastructure deficits.

Varying Deficits, Varying Priorities
G20 Countries - Quality Of Infrastructure*, Out of 148 Countries, 2013/14

This focus on facilitating private sector investment into infrastructure is because the landscape for project financing has changed. The majority of the G20 countries are running historically high fiscal shortfalls and this inhibits their ability to boost public spending on infrastructure. In addition, banks, traditionally the main source of infrastructure financing, are set to face stricter capital controls over the coming years, with the Basel III framework already being implemented since January 1 2013 and to be fully implemented by March 31 2018.

According to the G20 communiqué, the reforms to increase private sector participation include 'removing constraints to private investment by establishing sound and predictable policy and regulatory frameworks and emphasising the role of market incentives and disciplines'. Greater standardisation in the infrastructure development process could encourage greater private sector investment through the creation of a consistent approach to assess the risks and rewards for infrastructure projects across the G20 nations.

Greater Debt Drives Privatisation
G20 Countries - Budget Balance, 2014 And 10-Year Historical Average (2004-2013), % of GDP

We have already noted a growing emphasis on attracting private investment into the infrastructure sector. Indeed, to push forward infrastructure development, several G20 governments have privatised public fixed assets to raise financing for their capital expenditure plans and/or utilised non-traditional business mechanisms to garner private sector investment. These mechanisms include the use of Islamic bonds, infrastructure funds, financial assistance schemes (such as takeout financing and viability gap funding) and new public-private partnerships frameworks that reduce project risks to private investors (such as an equity investment from the public sector).

Success Remains Uncertain

While we agree that encouraging private sector investment is crucial in driving infrastructure development over the coming years, it remains to be seen if the G20 initiative will be implemented effectively. We highlight that the proposal to lift economic activity by 2% over the next five years is not legally binding among the G20 members and there has been precedence for G20 initiatives to meet with failure due to diverging priorities among G20 members. For example, the group failed to reach a consensus regarding a fixed debt target for member countries during the 2010 summit. This time around, G20 members are also at different stages of the economic cycle, with certain members in need of greater stimulus spending to mitigate recessionary effects, while others are trying to rein in inflation.

Political and economic considerations could therefore prevent G20 members from delivering these reforms ( as seen in an Australian context, 'Economic Weakness Rather Than G-20 Accord To Push Domestic Reform Forward', February 25 2014) and at the moment, we do not see the initiative having a material impact on our outlook for the global infrastructure sector.

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Related sectors of this article: Infrastructure, Project Finance, Finance - Infrastructure
Geography: Global, Ukraine
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