The importance of infrastructure

The importance that infrastructure plays in people’s everyday lives is often taken for granted though it is one of the biggest issues that governments across the globe need to address in their public policies. Infrastructure investment in the development of communications, IT, roads, schools, ports and hospitals is important to both economic development and quality of life. Failure to invest means a failure to sustain and develop our social and economic wellbeing.

Delmon, an infrastructure specialist with the World Bank, wrote the following: “Poor infrastructure impedes a nation’s economic growth and international competitiveness (The World Bank 2006). Insufficient infrastructure also represents a major cause of loss of quality of life, illness and death (Willoughby 2004). This raises [the importance of] infrastructure services from [a] good investment to a moral and economic imperative.”

The above statement highlights that, as well as being a necessity, in many respects, infrastructure has a bearing on a country’s attractiveness to foreign investors and on its ability to compete with other jurisdictions. It includes the basic services and facilities required for businesses to compete and grow. Business requires infrastructure; therefore, business growth can be limited by poor infrastructure development. Surveys by The World Bank reveal investors citing reliable infrastructure as an important consideration in their investment decisions.

Infrastructure is a key measure of a country’s position on the global stage; it is the second pillar that is assessed by the World Economic Forum when determining the competitiveness of a nation (institutions, being the first). Imagine the competitive positioning of Cayman in the financial services sector if, for example, communications with the rest of the world were unreliable. The same could be said for tourism if access to, between and around the Islands was restricted by inefficient ports and airports and substandard road networks.

A critical issue facing many governments today is the limited funding available to embark on infrastructure projects. Cayman is no exception. With governments under budgetary pressure, infrastructure investment is often cut back or shelved for a later date. Interestingly, various studies have shown that infrastructure investment has a clear link to increased economic activity and productivity, so cutting back can be counter productive.

Infrastructure investments can be funded by the public or private sectors, or a combination of the two. This is determined, to an extent, by the type of investment or infrastructure being considered. Governments can influence this by putting in place the appropriate measures to promote private sector investment, such as setting out a long-term vision in terms of planning, fostering political and regulatory certainty, and supporting the vision with financial concessions. Private investors will require comfort on the Government’s plans over the next 30 plus years if they are to invest in long-term assets. In Cayman, examples of private sector involvement are evident in proposed projects involving the landfill site, the sewerage network, the port and the establishment of medical tourism and a Special Economic Zone.

The way that Cayman tackles infrastructure will impact its residents for generations to come. The challenge to develop our infrastructure can be facilitated by a review and a subsequent plan to establish and identify the investments that are needed, and how to prioritise them. A good plan would provide information on the state of Cayman’s existing infrastructure. It should also act as a framework for the infrastructure requirements of Cayman going forward and facilitate their development and maintenance.

Infrastructure projects have economic, social and environmental impacts that need to be taken into consideration when evaluating whether they should be pursued. Some projects will contribute more to the economy and/or to society than others. Cayman, in looking at the potential infrastructure options that are considered to be worthwhile or necessary, needs to determine what investments should be prioritised – this is more of a policy issue and should be in line with the long-term strategy of the Islands.

The US Department of the Treasury with the Council of Economic Advisers released a paper at the end of last year stating the following: “Research has shown that well designed infrastructure investments can raise economic growth, productivity and land values, while also providing significant positive spillover to areas such as economic development, energy efficiency, public health…” It goes without saying that poorly planned, non-strategic, infrastructure investments are not only a waste of resources, but can negatively impact future economic growth. With limited funding available, it is important to select investments that will provide the greatest return, be it economic or social.

It is important to assess the costs versus the expected benefit of an infrastructure project. There is a risk of overinvestment in a project, or pursuing investments with lower returns than others when funds are limited. It is important to keep in mind that continued investment in certain areas will reach a point of diminishing return. Overinvestment equates to unnecessary increases in taxes or fees that are ultimately passed back to the general public or to those that use the infrastructure.

Investment in infrastructure is an ongoing process. Changes in technology, the business environment and the economy will drive new needs and with the passing of time existing infrastructure assets will need to be maintained, updated or replaced.

The government, in consultation with the public that it serves, needs to continue to examine the infrastructure needs and opportunities in Cayman and evaluate how these projects fit with the mid to long-term strategy for Cayman’s growth and development. With this, a plan can be developed to address Cayman’s existing and future infrastructure requirements in the most socially and economically efficient manner.

Tully Cornick
Head of Corporate Finance
KPMG in the Caymans Islands
 

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