However, with public finances in many countries increasingly stretched, their ability to provide and upgrade infrastructure is limited.

New challenges, such as climate change and technological progress, are also changing the type of infrastructure we need.

So, how can cash-strapped governments fund and construct the infrastructure that’s required for future economic growth?

Role of infrastructure in an economy

Infrastructure is crucial for economic activity because it provides critical services such as energy production, transportation and communication. It is as much of an input into an economy as things like industrial metals and chemicals, or information and know-how.

For example, delivering adequate and reliable energy is essential for production processes and, depending on where you are in the world, keeping people warm or helping them stay cool.

Infrastructure is also long-lasting, with some structures like roads and bridges in use for decades or even centuries. This longevity poses significant challenges for financing, as investors must consider returns and costs over long periods.

Additionally, infrastructure is geographically specific, meaning that its location and the resources available in that area are critical factors.

Cost-benefit analysis in infrastructure

Cost-benefit analysis is a fundamental tool for evaluating projects. It involves comparing the costs of a project with the expected benefits.

However, valuing long-term benefits can be difficult. For example, the value of a benefit some 30 years in the future is less certain than assessing the value of a benefit today.

Discount rates are used to account for this uncertainty – with higher rates applied to assess shorter-term projects and lower rates for long-term ones.

This quantitative approach helps ensure that infrastructure investments make economic and financial sense in the long run.

Changing nature of essential infrastructure

Technological and climate change are reshaping what counts as essential infrastructure.

For example, amid the explosive growth of consumer-oriented artificial intelligence (AI), data centres are now critical national infrastructure.

These centres, crucial to storing and handling the data produced by modern AI applications, necessitate substantial power and cooling. Key planning factors include local energy grid capacity, proximity to a water source for cooling, as well as energy efficiency.

Climate change is also driving the need for new types of infrastructure, such as renewable energy sources and water management systems.

Furthermore, demographic changes, such as ageing populations in many parts of the world, are influencing the infrastructure that we need. Population density in fast-growing urban centres requires building new infrastructure and upgrading the existing stock.

Challenges in building infrastructure

Building infrastructure is fraught with challenges. Material constraints, labour shortages, and planning bottlenecks can all hinder progress.

The planning system, in particular, is often seen as a big impediment. While it’s essential to have limits on unconstrained development, the process can become slow and cumbersome.

That’s why reforms to streamline the planning process can help. For example, the UK’s development consent order (DCO) process was designed to speed up infrastructure investment by limiting consultation periods and expediting decision-making.

Unfortunately, since then, excessive rules and approvals have been added. We need to remove these restraints to restore delivery in a timely fashion.

Public and private sector finance

Both public and private sector investment have roles to play in financing infrastructure.

Public funding can be more cost-effective, as governments can borrow at lower rates. Private sector involvement can bring efficiency, innovation and a long-term view removed from election cycles.

For example, the M6 toll road in the UK is privately funded and maintained, resulting in a high-quality road with no potholes!

Hybrid models, that combine public and private funding, can leverage the strengths of both sectors. Although some big public-private initiatives have fallen short of their goals, this doesn't discredit the overall principle.

Importance of consistency and strategic planning

Consistency of policy and regulatory certainty are crucial for attracting private sector investment in infrastructure.

Frequent changes in policy can create uncertainty and deter investment. That’s why governments should aim to provide a stable and predictable environment for long-term projects.

Strategic planning is also essential, as it helps ensure that infrastructure investments are aligned with long-term economic goals.

For example, the UK Infrastructure Bank and the country’s proposed National Wealth Fund should help provide strategic support for infrastructure projects.

Final thoughts

As we face new challenges, such as climate change and technological progress, the need for innovative and sustainable infrastructure solutions is greater than ever.

By mixing public and private sector funding, streamlining planning processes, and providing regulatory certainty, we can build the infrastructure that will support future economic growth.

This article is based on the podcast episode: How to fund our future infrastructure needs – with Bridget Rosewell