Built Infrastructure as an investment?

In May 2004, the Copenhagen Consensus Conference brought together eight of the world’s leading economists, including 4 Nobel Laureates and 30 of the world’s top specialists to answer the question “What would be the best ways of advancing global welfare, and the welfare of developing countries, supposing that an additional $50 billion of resources were at governments’ disposal?” The panel was to base their decisions on real, feasible, cost benefit solutions to confront ten of the great global challenges including poverty, malnutrition, communicable diseases, and climate change.

Travelling to Sudan year upon year I witness the increasingly frequent electricity power cuts, the corroded asphalt on the roads, the isolated storm water drainage that floods with just a few mm of rain and general deterioration of roads and service infrastructure. I feel an ever growing moral obligation to improve the standard of living in the neighbourhood and I would often question the reasons behind the visible impoverishment. I was surprised to find some of the answers in my day job.

I was fortunate to have worked with one of the largest construction companies in Sudan. I had the responsibility of reviewing the construction of underground sanitation systems, police departments and preparing the bid for the construction of the Khartoum’s first advanced hospital (one that had an MRI scan). The last responsibility meant undertaking a financial review of the company’s completed projects which meant examining cash flow records, manpower quantities, materials, machinery and capital resources in relation to the projects costs. The company was debt free and had been awarded many of its contracts through government.

I noticed that the majority of the previous projects were not financially rewarding as typically the costs of materials, petrol and general operations swelled mid-project and reduced the already low profit margins the company was forecasting on. The completion of the restoration of the open sewerage network channels in project, also known as Khors, added little financial benefit to the balance sheet.

What I realised was that the financial rewards were not to be made by the initial completion of the Khors but the longer term prospect of winning future contracts as people and businesses began to migrate to a cleaner and healthier living environment. The bidding to build Khartoum’s first technically advanced modern hospital had much better returns for the contractor, however the bidding itself could not have taken place without ensuring the hospital site had good road links, access to the electrical grid and telecommunications services and accessible underground services such as clean water and wastewater pipelines that could deal with hospital waste.

The beauty of the cost-benefit analysis (CBA) done by the Copenhagen Consensus was that it analysed pro-poor/ infrastructure projects strictly from a financial perspective. The end product of the CBA is essentially initial cost of the venture against the end return of investment (ROI). The positive social outcomes that result from pro-poor projects, such as decrease in deaths related to malaria or improvements in literacy rates were also taken through the filtration process and judged solely on their ability to return a suitable return of investment.

CBA is often used by governments and private institutions to evaluate the desirability of policies and projects. The simplification of this form of analyses gives it many critics for obvious reasons; however it is still the preferred choice for investors and those with financial ambitions.

Giving numbers to words the Cost-Benefit-Analysis carried out by eight of the world’s leading economists, including 4 Nobel Laureates determined that every $1 spent in combatting malaria would yield a $39 benefit, every $1 spent tackling AIDs would yield $43 benefit, and every $1 spent in providing clean water and sanitation would yield $5 in the long term.

The private sector has always been reluctant to approach such projects as the short term return of investment was either too small or non-existent in comparison to high flyers- such as the luxury real estate and hotel investments. The findings from Copenhagen shed light on the misconceptions of pro-poor projects as being strictly philanthropic and only executed under absolute necessity by governments.

Considering the average return of investment from banks using compound interest is much less, around 1:2.6 (10% interest charge over 10 year saving period) infrastructure projects actually demonstrated better return prospects.

So if you have $10,000 and want to maximise the financial gain after 10 years and you are undecided whether to keep your money safe in a bank account and profit from the interest gain or invest in pro-poor project. The first option, Option A that most investors hurry towards, is the bank. On average banks will offer you 10% annual compound interest returning you $25,937.42 after 10 years of savings (if the bank does not collapse).

The other option, Option B is to invest the $10,000 on an infrastructure program that will construct deep water wells, pump stations and a water network system unplugging the stagnant water pools that harbour the malaria carrying mosquitoes hence destroying malaria from the ground up.

According to the CBA, combatting malaria will give you a ROI of 1:39 thus multiplying the initial $10,000 investment into an impressive $390,000 after 10 years.

The experienced and internationally recognised economists who carried out the study used intricate statistical data and macro-economic models to analyse the cost and benefit of each social outcome. I will not aim to delve into the mathematics of the CBA but I will attempt a simplified description of the effects of pro-poor investment.

Reducing the recurrent malaria and cholera outbursts will improve the collective health of a previously marginalized populace. The capable number of working employees will increase, as less people take time off from malaria related illness and more importantly, fewer people die. A pool of capable employees empowered by the prospects of good health care will produce medium to long term benefits to the investor many times the amount of the initial project cost.

This study has shattered the short term, high return of investments type projects such as the building of malls, lavish hotels and luxury real estate many hardnosed bankers and capitalist champion.

Harvard Business School Professor, Michael Porter wrote an article in “The Harvard Business Review” about the urgent requirement for businesses to shape its business model to tackling societal problem and create shared value for the business and the local community. The old system of companies prospering at the expense of their communities have to transform.

“Focused on optimizing short-term financial performance, they (companies) overlook the greatest unmet needs in the market as well as broader influences on their long-term success. Why else would companies ignore the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of suppliers, and the economic distress of the communities in which they produce and sell?…Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the centre. We believe that it can give rise to the next major transformation of business thinking.”

The Copenhagen Consensus provided compelling evidence that investing in projects that carry societal benefits such as infrastructure, not only carry immediate benefits to the society, but also prove to be financially lucrative investments many times greater than those offered through banking and their short term goals.