8 minute read 14 May 2020
sunset city skyscraper

Repairing the damage from COVID-19: How infrastructure spending can help economies return to full strength

Authors

Ferga Kane

EY Ireland Strategy and Transactions Partner

Ferga focuses on clients in the infrastructure market, including Government; Public Sector Agencies and Semi-States; infrastructure financiers and infrastructure developers.

Shane MacSweeney

EY Ireland Strategy and Transactions Partner and Head of Government & Infrastructure

Commercial, financial and economic advisory services provider. Proficient at project management.

8 minute read 14 May 2020

As governments grapple with the health care challenges associated with the COVID-19 pandemic, the economic toll must also be considered. What is the best way to get economies back on track after this historically unique crisis? This is a central question preoccupying government as rescue packages amounting to trillions of dollars are announced around the world. As government formation talks continue in Ireland and the shape of our new government is discussed and policies developed, what steps should the parties consider?

One critical step government can take is to earmark part of the stimulus spending for infrastructure. During a crisis of near unprecedented scale, paying people’s wages, supporting the most vulnerable and keeping businesses afloat are important priorities in the immediate term. But these measures alone will not bring long-lasting results. By contrast, investment in new infrastructure, such as hospitals, schools, renewable energy and digital networks, will create jobs and deliver tangible assets that will fuel long-term economic growth.

Why infrastructure?

As we have seen in the past, infrastructure spending is one of the key levers that government can pull to stimulate the economy. Spending on concrete and steel, when well directed, boosts both short-term demand and long-term productivity, especially in a time of economic crisis. According to a 2014 study by the IMF, an unanticipated increase in capital spending of 1.0% of GDP leads to a 0.4% uplift in output that same year, and a 1.5% rise four years later¹

This economic dividend occurs because building new infrastructure lays the groundwork for future economic growth, whether that’s an improved transport network to move goods, a digital backbone to power a new economy or education facilities to train a skilled workforce for the future. Moreover, countries that spend on new capital stock tend to attract more private investment – as we have seen time and again, the availability of reliable underlying infrastructure boosts productive capacity and enables sustained economic activity.

  • What can we learn from the global financial crisis?

    Infrastructure spending as part of stimulus is not a new idea. Indeed, after the global financial crisis (GFC) of 2008 – 09 many governments created large-scale, ambitious infrastructure programs. Not all these programs achieved success, however. So, what can we learn?

    For starters, today’s stimulus must get the money out of the door fast – which is often hard to do with projects of the size and scale typically associated with infrastructure. Launched with much fanfare, some of the GFC bailout programs failed to get the money flowing quickly enough to achieve the intended impact². The problem in the economy is now – not three years from now.

    While this is clearly a lesson to be learned and something to guard against during the current crisis, it is also important to realise that speed of spend is not the sole consideration. As with any infrastructure project, the underlying relative need must still be assessed to ensure value for money – as observed by the World Bank, “the dash for shovel-ready projects can undermine the selection process.”³

    And finally, government investment must be truly new, not simply rebadging of existing commitments. Another issue to emerge from the GFC experience is that, at times, the injections of cash from central government had the unintended consequence of crowding out local funding4. This effectively neutralised the projected benefits and made the programs fall short of expectations.

(Chapter breaker)
1

Chapter 1

What should government do?

COVID-19 demands a stimulus response, and infrastructure spending can play an important role.

COVID-19 demands a stimulus response, and infrastructure spending can play an important role. But policy makers need to learn the lessons from stimulus of the past and frame their response across three distinct timeframes: now, next and beyond.

While the crisis is ongoing, government should remain committed to current infrastructure spending plans, such as those set out in Project Ireland 2040, where this can be safely accommodated while, at the same time, balancing the needs of a struggling local tourism industry, retail footfall reductions, lost jobs and all of the other economic costs associated with social distancing and community lockdowns. Turning off construction activity altogether can significantly damage the economy, both now and in the future.

To demonstrate this point, EY analysed the impact of a shutdown across different economic regions in response to various virus containment strategies. As highlighted, the estimated impact of stopping construction activity during the crisis in all countries examined will have significant, adverse economic costs. Specifically, such policies will amplify the economic harm of the public health crisis, given the deep linkages that construction activity has throughout modern economies, as well as the sheer number of workers involved. Conversely, when economic restrictions are eventually lifted across the globe, preserving construction activity, coupled with accelerating infrastructure investment, spills over to the broader economy and boosts recovery.

Of course, the health and safety of workers must remain the priority. But wherever possible, construction activity should be maintained, even if at reduced levels to accommodate health protection measures related to social distancing. The depth of the economic hardship and the speed of economic recovery can be better managed by preserving construction activity where this is practicable. 

Once lockdowns are phased out and normality begins to return, over the first 6 to 12 months, infrastructure investment can be structured to play an important role. Learning from the GFC, this spending must be incremental to existing capital plans and cannot replace or crowd out existing commitments. Just as importantly, “shovel-ready” is often an incomplete perspective. Rather, to get things moving quickly, government should adopt a view that “small is beautiful.

Smaller projects relating to maintenance backlogs, minor repairs, and asset improvements or enhancements should be the focus. Almost every department head in every government around the world has a list of capital items that they never quite get to in the annual budgeting process because, in any given year, they are easy to defer. These projects typically also have the benefit of attracting small and medium-sized contractors, which tend to be locally based. With benchmarks in hand, many of these projects can also awarded on an accelerated basis, given that governments tend to have reasonable understanding of what the cost should be. Taken together, this can promote agile investment delivery and local economic stimulus.

Using an example from Australia, EY analysis demonstrates the positive impact that spending on infrastructure has on overall employment, with every direct job in the sector creating two or more across the economy. Maintenance, in particular, is a key driver of employment activity with each direct job creating up to 3.5 more across the economy. This form of investment is labour-intensive, involves ready-made works programs where crews can mobilise quickly, and supports the most critical infrastructure networks. The retrofitting programme set out in the Climate Action Plan, is another example of smaller scale projects which could be accelerated quickly. Further, this spending can enable stimulus to be targeted at specific regional areas that are most in need of help. Getting these projects started in the first few weeks following the lifting of economic restrictions will quickly stimulate much-needed economic activity. Importantly, these maintenance programs need to be planned out as a priority, so that they can be delivered when economies spring back to life – with most of the population staying inside, some of this could even start today.

While small is indeed beautiful to get funds flowing in the early days of recovery, it’s the big projects that will carry the momentum. Prioritisng and procuring infrastructure projects can be a centerpiece of the post-crisis, long-term stimulus approach. But again, they must be new initiatives that were not already planned and committed. “Business as usual” capital spending, as set out in the National Development Plan, must continue once things get back to normal. As EY analysis clearly demonstrates, spending on infrastructure as part of a long-term stimulus program can have a material impact on post-pandemic GDP growth next year. 

This creates a unique opportunity for those who start working on it today. Every government has a list of strategically important but hard-to-fund projects. Maybe it’s a new pipeline. Or a state-of-the-art hospital. Or the backbone of a 5G network. Or a greenfield freight rail project. Or a renewable power plant. The common denominator? These are the projects that are value adding, even if hard to fund during the typical long-term capital planning process.

Even at the best of times, these projects take time to identify, plan and procure. Working in parallel with the short-term spending, now is the moment to get moving with these projects. Government should already be working to determine priorities, cut through political and regulatory barriers, and expedite decision-making so that contracts can be let within 6 – 12 months of the economy reopening. To get the true benefit of infrastructure stimulus as we embark on the long march toward economic recovery, government should create and commit to a program that has incremental investment contracted within 24 months and spent within 6 years. And, just as importantly, government should leverage AI, robotic process automation and all the other technology-driven tools to better manage program oversight and spending to ensure true value is added to the economy.

(Chapter breaker)
2

Chapter 2

But will it be business as usual?

The pandemic has changed the way we work and the way we live.

The pandemic has changed the way we work and the way we live. Communities around the globe have come together to flatten the curve to alleviate the strain on local health care – this same principle could be applied to the rest of our infrastructure. For example, policies that stagger the start and end times of the day could flatten travel peaks, which, in turn, could enable better optimisation of our transportation backbone. Working from home has become the new normal during this period. As the world becomes more digital, investments enabling “InfraTech” may well be more valuable than those in concrete and steel.

Now is also a good time for government to contemplate the role it can play in affecting climate change with its infrastructure spending. As the world stayed indoors, the canals in Venice cleared and the Himalayas can once again be seen from parts of India. Building environmentally sustainable and resilient infrastructure will be a priority out of necessity at some point in the future – so why not now? Enabling operational efficiency gains to reduce asset usage, investments in new technologies to reduce carbon emissions, creating greener cities: these are all areas where targeted, differentiated infrastructure spending as part of an overall COVID-19 stimulus response can have a lasting impact on not just the economy, but also the environment.

Infrastructure can help economies recover

If properly structured, infrastructure spending will help countries recover from this pandemic-induced shock. Learning lessons from GFC-era stimulus programs, a three-pronged approach implemented in parallel is critical to achieving the full benefit as intended. Keeping construction activity ongoing during the crisis (where safe to do so), getting ready to spend on smaller, easy to procure projects and, finally, planning for net new and strategically important infrastructure will help ensure investments are made – quickly, appropriately, and with both short- and long-term benefit. Paradoxically, COVID-19 also presents an opportunity to change the nature of infrastructure investment – government can use the crisis to refocus its capital expenditure for greater good. 

EY has a dedicated global infrastructure advisory team with a defined approach to analyzing and assessing infrastructure projects and investment. With global scale and connectivity, we help governments navigate complexity to build a better working world.

Summary

COVID-19 demands a stimulus response, and infrastructure spending can play an important role. But policy makers need to learn the lessons from stimulus of the past and frame their response across three distinct timeframes: now, next and beyond.

About this article

Authors

Ferga Kane

EY Ireland Strategy and Transactions Partner

Ferga focuses on clients in the infrastructure market, including Government; Public Sector Agencies and Semi-States; infrastructure financiers and infrastructure developers.

Shane MacSweeney

EY Ireland Strategy and Transactions Partner and Head of Government & Infrastructure

Commercial, financial and economic advisory services provider. Proficient at project management.