Time for Think Big round two?
02 May, 2016
Many New Zealanders remember the Think Big infrastructure programmes kicked off by our government in the early-1980s. The aim was to create jobs and help pull our floundering economy out of the doldrums. While the merits of these programmes are still hotly debated by some, Think Big did create a hive of activity and employment opportunities.
Fast forward 35 years and economic commentators and the International Monetary Fund are increasingly urging western governments to turn on the infrastructure spending tap to revitalise economic growth. With ever-increasing question marks around the ability of quantitative easing and zero interest rates to jump start economic growth, infrastructure may again be part of the solution.
Recent research by the Federal Reserve shows that US highway spending doesn't just increase GDP dollar-for-dollar, but there is also a multiplier effect, with GDP typically increasing by $1.5-$3 for every dollar spent on roading. The multiplier effect results from the new infrastructure lifting the productive capacity of the rest of the economy. Importantly, the research showed that the multiplier effect is even stronger during periods of low economic growth.
Across the ditch, Australian politicians are already enthusiastic about the potential for infrastructure spending to help spur growth and offset economic weakness emanating from the mining sector. While the Australian government is directly funding a significant number of infrastructure projects in areas like roading and rail, they are also looking to the private sector to fund and deliver this development.
An uplift in global infrastructure investment would provide a nice tailwind for a number of companies in our Property & Infrastructure Fund, but even with the status-quo, there are still good growth opportunities in infrastructure. Examples in our portfolio include toll road operator Transurban, which has a solid pipeline of roading projects in Melbourne and Sydney, or water distribution company Aqua America, with a long runway of water mains replacement work needed to repair ageing US water infrastructure. In a low growth world, there is a surprising amount of growth in infrastructure.