BOSTON, February 26, 2013—Infrastructure investment around the world is lagging demand by approximately $1trillion to $1.5 trillion annually, creating a potentially significant headwind to economic growth. To close the gap, governments must find new ways to spur infrastructure investment. One particularly promising move is to link up with private-sector companies through public-private partnerships (PPPs), according to a new report by The Boston Consulting Group. The report, Bridging the Gap: Meeting the Infrastructure Challenge with Public-Private Partnerships, is being released today.
The need for significant infrastructure investment is impossible to ignore. In emerging markets, population growth, urbanization, and rising per capita incomes are converging to create demand for everything from new roads to larger airports to additional schools. In the developed world, meanwhile, aging infrastructure is in dire need of improvement. But tough budget realities are making it difficult for governments to find the necessary funding for these improvements.
The Price of the Infrastructure Gap
The gap between actual infrastructure investment and demand has serious ramifications. In many countries, bottlenecks are already apparent in the form of ports that cannot handle increased traffic and manufacturing hubs that suffer from crippling power outages. Such problems inevitably diminish a country's competitiveness and dampen economic growth.
"Infrastructure has proven to be a high-return investment that boosts a country's economic growth," says Philipp Gerbert, a BCG senior partner and a coauthor of the report. "But we need to overcome the current stumbling blocks to unleash that potential."
A key mechanism for addressing the shortfall in infrastructure investment is to form public-private partnerships. These arrangements, under which the private sector builds, controls, and operates projects with strict government oversight, bring private-sector financing and expertise to the public sector’s mission of infrastructure modernization.
Landmines That Threaten the Success of PPPs
While public-private partnerships hold great potential, they harbor potential landmines as well. Many high-profile PPPs have come under criticism. In some cases, for example, they have been said to grant overly generous terms to private firms. In others, private-sector companies have been burned when governments suddenly change the rules concerning how much revenue they can generate from the projects. That is why it is critical for both public- and private-sector companies to adopt proven best practices that allow fair outcomes for both sides.
"Many PPPs involve contracts of 20 years or more," says Jeffrey Chua, a BCG partner and a coauthor of the report. "As a result, they need to be designed in a spirit of partnership and include mechanisms to adjust to the demand and cost uncertainties that are inevitable over such a long time frame. A lot of experience has been gained over the years to get this right—but it needs to be put into action."
The steps to success for the public sector are well known: start with an overall infrastructure plan, select a project that is suitable for a PPP, and manage the project’s life cycle efficiently. However, few countries execute these steps well. Infrastructure planning is too often driven by short-term political agendas, while business cases and traffic forecasts for projects are frequently weak. And it is not uncommon for regulatory models to apportion risk unevenly and to be unreliable over the long term.
For private-sector companies, the potential rewards of PPPs come with significant risks. Many companies do not take a hard look at those risks across their entire portfolio of projects or take sufficient action to mitigate them.
This new report is part of BCG’s Game-Changing Program to help leaders and their companies capitalize on the opportunities created by the seismic shifts in the global economy. It highlights the best practices that both the public and the private sector need to employ to execute PPPs successfully and help close the infrastructure gap.
To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or firstname.lastname@example.org.
The BCG Game-Changing Program
We are living in an age of accelerating change. The old ways are rapidly becoming obsolete and new opportunities are opening up. It is clear that the game is changing. At The Boston Consulting Group, we are optimistic: we think that the fundamental drivers of growth are stronger than they have ever been before. But to capitalize on this trend, leaders need to be proactive, to challenge the status quo, to make bold moves– they need to change the game, too. The decisions they make now, and over the next ten years, will have an extraordinary and enduring impact on their own fortunes as well as on those of their organizations, the global economy, and society at large. To help leaders, and to mark our fiftieth anniversary, BCG is pulling together the best ideas, insights, and ways to win—to own the future. This publication is part of that endeavor.