The true value of infrastructure investment

25 July 2016

As demand for infrastructure grows and economic growth slows down, governments, infrastructure investors, project owners and sponsors are being urged to rethink the value they receive from infrastructure investment.

Investment into infrastructure can stimulate economic growth. The reality, according to KPMG International, is that infrastructure systems and economies are intricately intertwined. Infrastructure can increase productivity, create jobs and stimulate trade – all of which are key enablers of economic growth.

On the other hand economic growth can also be a key enabler of increased funding and investment for infrastructure. Economies with strong growth prospects tend to attract more investment for infrastructure than those with poor or no growth prospects.

KPMG, which provides audit, tax and advisory services, helps its clients to mitigate risks and grasp opportunities. The company says that its experience suggests that the “casual relationship” between economic prosperity and investment into infrastructure is “poorly understood”. Traditional cost/benefit methodologies have always viewed projects in isolation and are too narrowly focused on an asset’s financial viability. Fiscal constraints have now made this more of a challenge.

KPMG says that many countries are now faced with the challenge of delivering increased investment in an era of reduced fiscal capacity. As the demand for infrastructure is growing, in most markets the ability of governments to fund such infrastructure is dwindling. Governments are being forced to prioritise investment into infrastructure in favour of projects that can deliver increased economic growth, social benefits and resilience. Achieving this is not as simple as drawing up a list of high profile projects, and very few governments are able to properly assess the actual economic value that their investment delivers, according to KPMG. It goes on to state that: “We believe that current infrastructure appraisal and prioritisation methodologies are frequently nowhere near sophisticated enough to allow governments to make truly informed decisions about their investments.”

The company believes that identifying and prioritising the projects that will deliver the greatest return will require new mechanisms to assess value, more robust business cases and appraisal methodologies, plus clear insight into the longer-term needs of society.

Assessing investment

In an effort to help those looking for leading practices and guidance into developing their own assessment methodology, KPMG set out to research and assess current approaches around the world. It produced its finding in a report published in February 2016.

Entitled Assessing the True Value of Infrastructure Investment, the report focuses on case studies from the UK, South Africa, Brazil and India, as well as presenting a roundtable discussion on the subject. Highlights from the discussion looked at how improvements can be made in the way investment is assessed and prioritised in infrastructure projects.

Tomas Bruginski de Paula is a director with the Company for Partnerships in Brazil. He believes that one of the biggest challenges comes down to government capability and capacity to plan and assess projects properly. “We’ve had a long period of very unstable investment into infrastructure in Brazil,” he said, “and that often means that we don’t have a stable enough pipeline to maintain and improve those capabilities.”

Bridget Rosewell is a UK infrastructure advisor and commissioner for the National Infrastructure Commission.  “The UK has a fairly mature assessment process,” she says, “but what is not being well addressed, is the role that infrastructure plays in a changing economy. People seem to understand that infrastructure matters and that it contributes to growth in the economy. What we haven’t yet pinned down is how we rationalise decisions differently as a result.”

Political influences can also play a significant role in infrastructure investment decisions. KPMG stated that many of the UK’s most controversial projects, with large costs or environmental impacts, have often been delayed to suit the political calendar.

William Dachs is the Chief Operating Officer of the Gautrain Management Agency in South Africa and said that, even if you wanted to, you can’t take politics out of the equation.

“Any manager operating in the infrastructure space must have political support. But what needs to stop are the sudden changes that often come from a change of party or policy,” Dachs stated. “Once the planning has led to an investment decision, these decisions must be honoured in the same way as a contractual agreement and that’s not always the case when politics is involved.”

Tomas Bruginski de Paula is also in agreement: “Prioritising investments requires a view of what you want to offer the next generation and that’s a political decision. The problem comes when politics starts to interfere with the details. You need to focus on finding the best technical approach to the project, maybe make minor adjustments based on relevant political issues,  but the core decisions - including scope and financing - must be technical ones.”

“I actually believe we need to find a model where political engagement is more incorporated than it is today,” Rosewell concluded.

Time to rethink

Lewis Atter and Said Hirsh work for KPMG in the UK and Australia. “If everyone agrees that investment into infrastructure drives economic growth, then why are decisions being made without a view on the true economic value that those investments deliver?,” they asked.  “And, without these considerations, how is anyone effectively prioritising their investments to ensure they are putting the right money in the right places to achieve their economic objectives?”

KPMG says that it hoped its report would prompt governments to re-evaluate their current approaches to project appraisal and prioritisation; as well as providing project owners and sponsors with valuable insights of how to demonstrate the true value of their projects to investors, governments and users.

“It’s time to rethink the way we appraise and prioritise infrastructure,” Atter and Hirsh said, “and forge better links between decision making, growth and thus the revenues that ultimately pay for what is built.”



The full report Assessing the True Value of Infrastructure Investment was published by KPMG International in February 2016. Publication number: 133120-G.

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