Private investors are keen to invest in infrastructure – in general it’s seen as safe investment and is particularly attractive to deep-pocketed institutions, such as pension funds. But how should investors pick what to invest in? Return-on-investment (ROI) metrics can provide this. Understanding how a project is generating value, and what kind of shareholder returns can be expected, is essential in gaining the confidence of investors. For instance, it might be easy for investors to understand the value of a private toll road. Making the case for private investment in a bridge without toll gates may be less clear.
ROI metrics also need to take into account other externalities that direct return on profit. EY worked with the city of Kochi in India to help modernize its transport infrastructure. In that instance, ROI metrics didn’t just take into account the direct effects of the project in reducing congestion, but also how improved transport links connected local businesses. We even helped develop a card that customers can use on both transport and for shopping, helping to create a seamless experience between the use of transport and the purpose for which the transport was being used.
Value doesn’t just mean how much money an asset returns, as boards are beginning to realize. Long-term value goes beyond the balance sheet and can include things as diverse community cohesion, communications, civic pride and environmental sustainability.
Developing models that can capture the whole economic impact of development initiatives will be a key step in fully unleashing the dynamism of private-sector investment, and then building products to further encourage these trends.
Political priorities and competing demands
There could also be adverse regulatory and legislative head winds – despite public commitments, including President Trump’s $1 trillion investment pledge, populist anti-globalization trends could complicate the ability of developers to source the necessary materials, goods and labor needed for infrastructure projects – construction, in particular, is a sector facing major global skills shortages.
On top of this, citizens, particularly in democratic societies, have the power to derail projects through protest and activism, or to delay them through petitions to local government. The concept of the NIMBY protestor (“Not in my back yard”) is most common in the US and UK, but the type of opposition – not against the need for the development but with the location – is familiar in most countries.
Reconciling the interests of all stakeholders is crucial when developing large-scale infrastructure projects, such as dams or pipelines, which can have significant ecological and property impacts. For instance, the development of the third runway of Heathrow Airport in London has generated lots of controversy, as historically important local villages will need to be demolished to create the necessary space. China’s Three Gorges Dam, meanwhile, entailed the relocation of 1.24 million people.