Skip to content
Financial Insights Unveiled — Master Your Money — Master Your Financial Future — Financial Headlines

Europe's infrastructure crisis deepens as private finance falls short of promises

Public budgets are collapsing, and private money isn't fixing the problem. Who pays the price when infrastructure projects prioritize profits over people?

,   and  Administrator
3 min read
The image shows a bustling city street with vehicles on the road, a footpath on the right side,...
The image shows a bustling city street with vehicles on the road, a footpath on the right side, electric poles with wires, buildings, trees, and a sky with clouds in the background. In the foreground, there is a building with a sign that reads "Capas Public Market".

Europe's infrastructure crisis deepens as private finance falls short of promises

The EU and the UK need to build and upgrade a massive amount of infrastructure following decades marked by underinvestment. To give a sense of the scale of investment required, European Investment Bank (EIB) estimates suggest an annual economic infrastructure investment shortfall of around €366bn per year (2.9% of GDP) for the EU. In the UK, an estimate from consultancy EY suggests that, under the current fiscal outlook, there will be a funding shortfall of over £40bn a year on average from 2024 to 2040 compared to the total number of proposed infrastructure projects.

While this should prompt a ramp-up of public investment, policymakers are predominantly placing their hopes in private finance to fill the investment gap. Across the political spectrum, European politicians are turning to derisking, deregulation, and subsidies to incentivise private actors to build infrastructure on our behalf.

Yet the last four decades of private infrastructure provision have shown that private delivery is often a worse option when judged on a range of factors. There is no empirical evidence to suggest that privately owned infrastructure is systematically more cost-efficient. It has often performed poorly on social and environmental outcomes, charging high bills and distributing profits to shareholders while underinvesting in service provision. A high capital cost, misaligned incentives, uncompetitive markets, and weak regulation have combined to deliver outcomes often worse than the publicly delivered alternative. Furthermore, the pace of privately financed infrastructure build-out has so far been dramatically below what is required to meet societal and environmental needs, resulting in decades of under-delivery.

The belief that private finance should be the primary solution for delivering infrastructure is guided by a deceptive narrative, which we term the private finance myth. The private finance myth asserts that, owing to the public sector's perceived fiscal constraints, the best option is for governments to entice private actors to finance as much infrastructure as possible. An uncritical adoption of this myth has led policymakers to jettison the notion of a large state led infrastructure drive, believing that mobilising private finance alone will be sufficient.

The problem with the private finance myth is that it promotes the assumption that private finance should be the default option, without considering the comparative benefits of public and alternative models. This evades the fact that private finance does not come for free. Private infrastructure investors typically demand high rates of return, often extracted from consumer bills or government subsidies.

Meanwhile, the private finance myth presents all forms of public investment as a burdensome cost on the taxpayer, erasing the fact that direct public investment in infrastructure could bring substantial benefits to the public finances, in the form of direct revenues, indirect economic multipliers, and the prevention of costly future crises.

A perceived lack of fiscal space is a key driver trapping politicians in the private finance myth. The EU and the UK are constrained by fiscal rules and political discourses that fail to recognise the long-term fiscal benefits of public infrastructure investment and the long-term hidden costs of private or blended alternatives. Outdated macroeconomic frameworks lead to a disjointed approach to inflation management that raises government borrowing costs and undermines private investment.

In the absence of reform to fiscal frameworks and monetary policy regimes, policymakers will continually be pushed into relying on private finance for infrastructure delivery. Private finance will be preferred even when it represents a higher aggregate cost to society, causes social and environmental harm, and fails to materialise at a sufficient scale and speed to meet societal needs.

Rather than mindlessly following the assertions of the private finance myth, governments should apply a systematic approach to determining where and when public or private delivery better serves the societal interest. We propose a simple three step framework for designing a macroeconomic policy agenda that can truly deliver the infrastructure we need, under the most beneficial ownership structures.

When assessing which infrastructure models will deliver the best societal outcomes, policymakers must consider the full range of pros and cons rather than focusing singly on avoiding immediate fiscal outflows. This includes assessing the impact on billpayers as well as taxpayers and examining financing costs (including any wider effect on general government borrowing costs) alongside delivery costs. Finally, policymakers must transparently weigh up the full range of social, environmental, and strategic factors that influence which infrastructure delivery models best serve the societal interest.

Read also:

Related

Latest