Thomas Piketty brilliantly illustrates in "Capital in the Twenty-First Century" how our contemporary situation closely mirrors Europe before World War I. Excess savings, expressed as a multiple of GDP, sitting on the sidelines of the global economy awaiting stable and long term opportunities. With limited investment opportunities offering what investors seek as return on capital, investors pursue opportunities that potentially offer higher returns. And so we again face the risk of creating financial bubbles while simultaneously excluding capital-poor populations from the benefits of growth.
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Wesley Clark
Nowhere is this more evident than in the gap between pools of capital and the need for essential infrastructure investments. The need for infrastructure development and modernization has never been more obvious: it is necessary to sustain economic growth and also to drive the transition to low carbon economies in the developed world; and to reduce poverty, encourage growth and improve resilience in the developing world. Despite the clear need, projects with sound economic and social justifications are still having difficulty in attracting financing.
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The fundamental challenge we face today is reallocating these savings to productive investments, in particular in the context of ageing economies, while preserving financial stability. In other words, how do we put capital at work to the benefit of all? To meet this critical challenge, governments need to be able to engage with an infrastructure investment industry voice. The primary roadblock to these projects is not a lack of available funding, but rather the ability of governments, project developers and markets to prepare and structure projects in a way that effectively incentivizes investors.
This week marks the launch of the Long-Term Infrastructure Investors Association (LTIIA), whose mission will bridge the gaps between necessary infrastructure projects and the capital to finance those projects. The role of LTIIA beyond the benchmark is to be an industry counterpart for governments by ensuring the private sector is fully engaged and committed. And the association will not just limit its focus to fill financing gaps. A central focus will be on how to do so in a forward-looking, sustainable way, both from a financial and Environmental, Social and Corporate Governance (ESG) point of view.
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From a financial standpoint, the main objective will be to develop a benchmark, an "infrastructure index," that will inform financial regulators and investors of the risks associated with making long term investments in infrastructure. Given the growing appetite of institutional investors for infrastructure, whose allocations in this area are expected to jump to 3 percent from 1 percent, according to research and consulting firm Preqin, close to $2 trillion of additional funds are estimated to flow into this asset class in the coming years. This may eventually prove a key ingredient for global financial stability.
As the IMF recently noted, the relationship between infrastructure, competitiveness and job creation is critical to long-term economic growth. That's why this effort will also be incorporated into the G20 agenda for long-‐term development. From an ESG standpoint, this means ensuring that the investments being made effectively address local needs, create local jobs, do not have adverse effects on communities, and are environmentally responsible.
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Without productive, stable, and well-planned investment options, savings-rich economies where productive investment is reaching historic lows run a risk similar to that posed by the Dutch disease in oil-rich countries. Chronic financial instability and productive areas of the economy like manufacturing could falter. The LTIIA will work to prevent this by helping our economies to navigate the complex challenges of the 21st century and build tomorrow's infrastructure.
Commentary by retired General Wesley K. Clark and Thierry Déau. Clark, the former supreme commander of NATO, led alliance military forces in the Kosovo war in 1999. He is a senior fellow at the Burkle Center for International Relations at UCLA and author, most recently, of "Don't Wait for the Next War: A Strategy for American Growth and Global Leadership." Follow him on Twitter @generalclark.
Thierry Déau, the founding partner and chief executive officer of Meridiam Infrastructure. Meridiam's recent PPP projects include the PortMiami Tunnel, The Long Beach Courthouse, California, the North Tarrant Expressway, Texas, and the Eagle Expressway, Helsinki.