Building Infrastructure During Inflation

By Frank-Jürgen Richter

July 1, 2024

Infrastructure development is the cornerstone of economic growth, environmental sustainability, and societal well-being. It drives job creation, stimulates economic activities, and enhances productivity. Upgraded transportation, energy, and communication networks reduce operational costs and attract businesses. For instance, India’s port has significantly boosted the country’s economic growth and greatly influenced local industry development.

Research consistently shows a strong positive correlation between quality infrastructure and GDP per capita growth. It also aligns with improvements in health, education, and wealth outcomes, which are crucial for thriving societies. 

The Indian government has implemented various schemes and policies to address the nation’s infrastructure needs. Introduced in 2019, the National Infrastructure Pipeline (NIP) focuses on social and infrastructure projects, including energy, roads, railways, and urban development, with a total investment of INR 102 lakh crores. Contributions to the NIP are shared almost equally between the Centre (39%) and the States (40%), with the private sector accounting for the remaining 21%. Complementing the NIP is the PM GatiShakti Master Plan, which aims to enhance India’s logistics network. In the 2023-24 Budget, the Indian government emphasized the necessity of increasing infrastructure spending, nearly tripling it to 3.3% of GDP compared to the spending in 2019-20. The Budget allocated INR 75,000 crores for 100 projects critical to improving the overall multimodal logistics infrastructure.

There is now a strong push towards developing sustainable infrastructure that benefits both society and the environment. A notable example is the Swachh Bharat, or “Clean India” Mission, launched as a nationwide infrastructure campaign by the Indian central government in October 2014. Phase 1 of the initiative that ran between 2014 to 2019 witnesses the construction of 109 million individual household latrines, making more than 280,000 villages open-defecation free. Phase 2 of the program that is scheduled to run between 2021 to 2021 and 2024 to 2025, will aim to implement solid and liquid waste management for at least 80% of households and all public places, including primary schools, rural homes, and rural childcare centers.

Our upcoming Horasis India Meeting 2024 will touch upon several other areas of interest for the business community in India. The two-day event (16th edition) will bring together business leaders from India and Greece to foster cooperation, impact investing and sustainable growth, between the two nations.

Infrastructure could be a focal point of interest for Indian investors planning to invest in the Greece market. Post the pandemic, Greece has changed its outlook towards outside investment in its infrastructure projects. The country is now placing increased value on the PPP model (public-private partnership) to achieve its €25-billion target to complete large-scale infrastructure projects. Greek Minister of Infrastructure, Transport and Networks Christos Spirtzis said: “private sector participation is key for supplying high value-added products with an emphasis on new technologies. Synergies are needed between the private and the public sectors because the former needs the security that the public sector can provide for the execution of projects.”

Rising Inflation a Problem

Recent inflationary pressures are hampering the development of new infrastructure projects. Prices of key infrastructure materials, rose significantly. In the US, costs of brick, cement, and concrete were up by 20%, 13%, and 11% respectively. Meanwhile in Australia prices of asphalt rose by 11% on the back of high demand. Other than price pressures, countries also face the problem of elevated energy prices, land acquisition prices, higher debt servicing, and higher labor costs, in their pursuit to building key infrastructure projects.

These price variations differ significantly across countries and regions but are expected to persist due to ongoing supply disruptions from the COVID-19 pandemic and the Russia-Ukraine conflict.

Given the multifaceted benefits that infrastructure brings, it remains essential for governments to proceed with their infrastructure initiatives. Abandoning or delaying projects due to inflationary pressures can have long-term negative repercussions. The question then arises: how can governments ensure that the intended benefits of infrastructure projects are realized even in inflationary times?

Strategic Approaches to Overcome Inflationary Challenges

Infrastructure programs remain an essential driver of global growth, and so is the problem of rising costs. Governments should focus on the following measures to ensure development of vital infrastructures remain a key policy objective:

  • Prioritization and phasing of projects – Governments should prioritize projects based on urgency and potential impact. Essential projects that promise immediate and significant benefits should proceed first. Infrastructure developers could also look at dividing large projects into smaller, manageable phases to manage cash flow better.
  • Quantifying economic and societal gains – Governments should embed infrastructure for good principles from the start, creating measurable indicators for both environmental and societal gains, alongside financial growth.
  • Cost considerations and value for money – Governments should actively and regularly assess different parts of the project costs to ensure they don’t under- and over-estimate it. Additionally, direct and indirect value capture should also happen from project tendering to its completion to measure value for money metrics.
  • Effective lifecycle cost analyses – Governments should have a clear project costing mechanism to cover the project’s entire lifecycle from strategy to its replacement and decommissioning. Costing efforts should employ deep data insights to enable critical decision-making in terms of processes, materials and day-to-day maintenance.
  • Refine contract management – Governments should also focus on enabling proper contract management, including fairness and clarity over expected costs, measurement methodologies, planned project stages, and junctures for potential rescoping or contract adjustments. 

Inflationary pressures undoubtedly complicate infrastructure development, but they do not render it unfeasible. Proceeding with well-planned infrastructure projects not only addresses current economic and social needs but also lays the foundation for future resilience and growth. Thus, careful and strategic continuation of infrastructure initiatives is not just wise but imperative for sustainable development.

Photo Caption: A toilet construction site in remote Himalayas in India.