OPINION: Better infrastructure, better growth: how to invest for a 21st Century world
We’ve built infrastructure before, but this time it’s different. The next wave of infrastructure must be responsive and resilient to the Megatrends reshaping the 21st Century. How can investors reduce risk and enhance resilience? How can we realise the full potential of infrastructure to deliver inclusive development and protect natural and social capital? Oliver Willmott from PwC’s Sustainability & Climate Change team investigates. See below for the full blog or click here for the original.
The world needs infrastructure, and it’s going to get a whole lot more of it. Across the developing world millions of people are moving to cities. Shifts in economic power are reshaping the global landscape and climate change poses serious risks to long term prosperity. To meet the challenge, governments, the private sector, and new multilateral investors like the Asia Infrastructure Investment Bank and the Green Climate Fund are gearing up to provide unprecedented levels of infrastructure finance. PwC estimates that the world will spend $78tr on infrastructure over the next 10 years.
We need to make sure this infrastructure lays the foundations for long-term prosperity. Infrastructure can be the key to securing long-term prosperity, laying the foundations (quite literally) for people to move around, turn the lights on, make stuff, buy and sell, and enjoy themselves. But if it isn’t done carefully, infrastructure development can damage the natural environment and social fabric on which human success relies.
The next wave of infrastructure must be responsive and resilient to the megatrends reshaping the 21st Century. We’ve built infrastructure before, but this time it’s different. Now, more than ever, investors and governments need to avoid lock-in to risky investments, and respond to the way the world is today, and what it will be in future. There is a lot at stake. There are huge amounts of time, effort and money involved. But, more importantly, it will shape the world that we and future generations will live in over the years to come.
The new 21st Century landscape poses new risks but unparalleled opportunities. Megatrends including climate, technological, demographic change and rapid urbanisation mean that a much broader set of impacts must be considered. If they’re not, infrastructure is increasingly likely to face conflicts, delays and regulation – all adding significant uncertainty and costs for companies and governments. Yet these same megatrends give us unparalleled opportunities for sustainable, inclusive growth – and dividends for the companies and governments who help deliver this.
So the question is: how can we realise the full potential of infrastructure? One approach would be to push for pure financial returns, looking at profitability alone, regardless of the environmental or social cost. But we know that this doesn’t always pay off. Another option would be to block any project with an adverse impact. But then we might miss real opportunities to improve people’s lives. More practically, it can often be difficult to compare different costs and benefits – we have dollars of economic benefit, kilograms of pollution and litres of water.
So how can we build the infrastructure we need to lift people out of poverty, maximising the benefits without it costing the earth? How can we resolve these trade-offs? Over the past few years, we have worked with both businesses and governments around the world to answer this question.
Three principles for sustainable infrastructure fit for the 21st Century:
1. Integration: Economic, social and environmental impacts should be considered alongside financial costs and benefits, not in their own silos.
A promising approach to the challenge of sustainable infrastructure is impact valuation – estimating environmental, social and economic costs and benefits in monetary terms. This emerging paradigm promises to provide a new lens – and set of practical tools – for those grappling with these issues. Compared with traditional, silo-based impact assessment, it lets us directly compare environmental, economic and social impacts with each other and with financial costs. Compared with narrower traditional economic analysis that often excludes important social and environmental impacts, it provides a broader view and shines new light on costs and benefits – and risks and opportunities – that are often hidden from sight.
It shows how to get the most benefit for the least cost, to avoid wasteful expenditure and channel it to where it has the greatest effect. It can also provide a rigorous and transparent basis for optimising and communicating their total impact with stakeholders to reduce risk, uncertainty and delay.
2. Duration: The full range of broader impacts should be assessed throughout appraisal, development and operation.
To get the most benefit from impact valuation, it should be applied throughout the appraisal of new projects, from strategy development through options appraisal to final investment decision. This means projects can be assessed and compared at each stage to ensure that resilience to the megatrends and potential for impact are fully accounted for and managed. But the principles should also be embedded in the development and operation of the project, providing management with information to ensure it operates not only on time and on budget, but also ‘on impact’.
3. Collaboration: The full range of stakeholders should be engaged in an informed debate around impact.
Making infrastructure fit for the 21st Century means thinking more broadly than before about impacts and resilience. Impact valuation provides an open and robust means for engaging with stakeholders around potential impacts and trade-offs throughout the planning, development and operation of new infrastructure, to help minimise costs and delays and ensure it creates long-term shared value. It provides a sound basis for businesses to engage with governments on how their projects fit with national development priorities, and for governments to engage business on how they can best contribute to national prosperity.
Sustainable infrastructure has the potential to unlock massive long-term shared value for society and business. Understanding and managing impact and resilience will be increasingly important to successful infrastructure investment and development in the 21st Century. And, given how long infrastructure lasts, first-movers stand to gain real advantages. Competitive advantage increasingly means investing to create long-term shared value for society, while closely managing costs. Businesses and governments need a clear and relevant understanding of that value if they are to capitalise on it.
For any questions or to continue to conversation, please contact Oliver Willmott Office: +44 (0)20 7213 4253 | Mobile: +44 (0)7753 458 797 | Email: email@example.com