Infrastructure maintenance and Asset replacement

If clouds really have silver linings and as they deepen over the world economy it is hard to see any silver in sight. Yet in thinking of how to emerge from this economic downturn, it is important not just to dissipate today’s clouds but also to turn crisis into opportunity and lay the foundations for tomorrow’s cloudless growth.

Policymakers have not always followed this prescription. During previous financial crisis, infrastructure investments suffered. In Latin America and the Caribbean, for instance, half of government fiscal adjustments in the 1990s (in response to falling tax receipts) came through reductions in public infrastructure spending. A similar investment shortfall during the Asian crisis led to the same kind of cuts in infrastructure financing.

This turned out to be a short-sighted solution, making it all the more difficult for Latin American and Asian countries to emerge from recession. Undermining this engine for growth was the wrong policy move.

The reasons why are clear: access to infrastructure services is crucial for economic growth and poverty reduction. Energy to drive industry and create jobs, water to support agricultural production, and roads and ports to transport products to the market are critical to any country at any time but especially so in an economic downturn. Infrastructure projects, however, often take years to prepare. Postponing them has a drastic knock-on effect for medium-term growth.

The precipitous declines in infrastructure spending during the Asian crisis, for example, saw long-gestation projects postponed in many countries. This significantly retarded economic growth and led to what is called the ‘lost decade’ for those same countries. We now appreciate better the vital need to maintain public spending on infrastructure maintenance and asset replacement, keeping in mind that these investments must achieve economic, social and environmental objectives in tandem.

Many countries today, from the United States to Russia to China, plan to accelerate infrastructure spending to respond to the crisis. China demonstrated 10 years ago that wisely chosen infrastructure projects can create jobs while building a foundation for productivity, growth and poverty reduction.

Policy makers know that improvements in basic physical infrastructure can help reduce disparities between regions and communities and promote inclusions, particularly among the most vulnerable. The right infrastructure financing can also open doorways to the ‘green economy’ of the future that many nations are examining with interest and hope.

In India, the need for infrastructure investment is widely recognized as a critical priority for ensuring more and more inclusive growth. Inadequate power supply, for instance, remains a key constraint, with people, businesses and factories in many areas hampered by inadequate electricity supply.

The national and state highway networks have failed to keep pace with the tremendous growth in demand for road transport: only about 30% of state highways are two-lane, more than 50% are in poor condition, and the average travel speed is about 30-40 km/h. One analysis estimates that the economic losses incurred on account of congestion and poor roads alone run as high as $6 billion a year.

Antiquated urban infrastructure is a severe constraint to the expansion of key growth centers and the enhancement of living standards. With 40% of India’s population expected to live in urban areas by 2021 and expected to create about 65% of the nation’s GDP, it is urgent to ensure that modern water supply, public transportation, sanitation and solid waste management are in place to support this growth.

The World Bank Group is fast-tracking commitments under the International Development Association, while also making more funds available for lending globally, with a particular attention to investments that protect or produce jobs and support growth.

The World Bank has responded to requests for help from India by supporting government efforts to shore up long-term financing at reasonable rates for infrastructure projects. Recently, there have been two major lending operations. The bank is providing a $1.2 billion loan of credit to the Indian Infrastructure Finance Company Limited, a wholly government owned institution to help it catalyse long-term debt for infrastructure projects built on public private partnerships. It is also providing about $1 billion to the Power Grid Corporation so that it can expand its interstate transmission networks.