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A recent report by PwC on the outlook for global infrastructure spending predicts that by 2020, annual global infrastructure spending will reach $5.3 trillion, up from an estimated $4.3 trillion in 2015. This represents a global spending growth of 5% per annum doubling the low rates of growth of just 2% expected this year.
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To better understand the forecast for global infrastructure spending, PwC worked with Oxford Economics to analyze global capital projects and infrastructure environment for the next five years. We looked at two possible scenarios: one, based on current economic conditions and expectations, and the second, assuming a hard landing in China.
Under the first scenario, capital project and infrastructure spending (CP&I) will likely reach about 5% growth in 2020. The improvement would be driven mainly by higher oil prices, which will serve to buoy energy sector development projects and help fill government coffers, freeing up some money for infrastructure efforts. That said, at 5% growth, infrastructure spending growth would still be well below its double-digit levels before the global financial crisis.
Under the second scenario, if China falters, the landscape for CP&I spending will worsen considerably. Assuming a hard landing in which the yuan depreciates by as much as 10%, housing sales and prices would slump sharply, consumers would postpone new purchases and wage growth would declines. CP&I spending between 2015 and 2020 would decrease from US$28.2 trillion to US$27.1 trillion.
Over 60% of the decline in infrastructure spending would occur in Asia Pacific, in large part because of China’s economic dominance of the region. Transportation and utilities projects, which account for about half of Asian Pacific CP&I expenditures, would be impacted most. This region, though, is not a major commodities producer so it would be spared the cost of the sharp decline in Chinese demand for oil, steel and other commodities. Instead, the shortfall would affect regions like Latin America and the Middle East and countries like Russia, whose economies are heavily invested in exports of oil and other extracted products. Without the full measure of commodity and resource revenue streams, investments in PPP projects in these countries would sharply decline.
Given these forecasts, one would expect the PPP environment to dampen spending in capital projects in both the public and private sector. However, even under financial constraints; especially when these projects are undertaken in a coordinated, strategic and coherent fashion, investors are standing by with substantial capital to help fund them.
For example, China recently released new directives governing PPP investments that became the foundation to launch more than 1,000 PPP projects worth US$317.75 billion. This includes the ambitious ‘One Belt and One Road’ program to encourage investment in countries along the ‘Silk Road Economic Belt’ and the ‘21st Century Maritime Silk Road’. The initiative is slated to provide investments in transport, energy, telecommunications and natural resource, connecting more than 50 countries along corridors in Asia, Africa and Europe.
Similarly, Japanese Prime Minister Shinzo Abe announced the Japan International Cooperation Agency, along with the Asian Development Bank, would back PPPs for the region’s infrastructure projects.
. These agencies can help develop strong project pipelines, assist in capacity building and create standardized processes and documentation to reduce transaction costs. In addition, they can help emerging market governments build the skillsets that enable them to manage large infrastructure projects and help them make better development choices. Prioritizing is essential in this environment; every dollar must be spent wisely.
Beyond providing financial and technical assistance, development banks can encourage more private financing by providing expertise and insurance against political and other risks through their financial involvement, and act as intermediaries when necessary. Governments and private investors should seek out representatives from these institutions to determine what kinds of support they can offer.
There is well over $100 billion in private investor money available for infrastructure projects that has not yet been earmarked, reflecting increasing interest on the part of institutional investors as infrastructure is becoming a recognized investment asset class globally. And in order for these projects to be viable, they need solid revenue streams or repayment structures as well as contractual and regulatory conditions that provide investors with confidence about long-term returns and government commitments.
To read a full copy of the PwC report, go to www.pwc.com/cpi-outlook.