$57 Trillion for Infrastructure? No Problem, McKinsey Says

It’s hard to decide which conclusion from the McKinsey Global Institute’s recent research on infrastructure financing is more mind-boggling.

The calculation that the world will need to spend nearly $57 trillion over the next 15 years to meet its burgeoning infrastructure requirements.

Or the part where McKinsey projects that it won’t be too difficult to raise the capital.

“That’s an enormous sum, but contrary to popular belief, there is no shortage of capital,” wrote analysts Tyler Duvall, Alastair Green, and Mike Kerlin in a blog post earlier this summer. “In fact, there will be more than enough as both governments and investors increase their focus on infrastructure.”

More Cash is in Play

With a wide mix of investors recognizing infrastructure as an asset class in its own right, McKinsey calculates that there is more than enough money to go around. “The pool of capital available is deep,” the analysts write. “Across infrastructure funds, institutional investors, public treasuries, development banks, commercial banks, corporations, and even retail investors, we estimate that more than $5 trillion a year is available for infrastructure investment.”

Raw dollars won’t be enough to get the job done. “The money has to be focused on the right projects and then spent judiciously,” they say. But have no fear: McKinsey has five principles to guide the decisions ahead, and user charges figure prominently in the analysis.

Taking a Cue from Telecommunications

The first of the five principles is the need for realistic revenue streams to encourage private financing. User charges like tolls will be more important in future infrastructure deals, but to apply that principle in “difficult-to-finance areas such as roads and water,” McKinsey says infrastructure operators should take their cues from the telecommunications industry.

“This sector manages to attract investors even in capital-poor countries because it offers a clear return on investment and predictable cash flows,” the analysts note. “In many cases, particularly in developing countries, people have become accustomed to paying little or nothing for water or roads. But they do, of course, derive benefits, economic and otherwise, from such projects; moreover, there needs to be a way to pay for maintenance.”

Pushing Past the Challenges

The post acknowledges the difficulties that can accompany appropriate road pricing, from revenue diversions to public protest.  And that’s where the availability of capital may not be enough in itself to resolve the infrastructure financing crisis.

“Because of these factors, we expect around half of all proposed road projects to go unfinanced and thus unbuilt in the years ahead,” the analysts state. “That adds costs with respect to congestion and the difficulty of moving goods.”

Yet McKinsey calls for strategies—realizing value from cash-generating assets, or taking greater advantage of public-private partnerships—that connect the dots right back to the advantages of toll-financed investments. In a global infrastructure market already valued at $48 trillion, the analysts write, “many governments, particularly in developing markets, are missing the chance to tap a viable source of cash in the form of generating value from existing assets.”

Thinking Big

But when all is said and done, $57 trillion is still the number that jumps out of McKinsey’s analysis. The tolling industry defines a megaproject as anything worth $1 billion or more—and for all the hurdles that IBTTA members are so adept at clearing to get major corridors built or rebuilt, it’s interesting to think that capital may be more readily available than we might have thought.