The Importance of Infrastructure Sector

An economy consists of many sectors. However, infrastructure is known to be the backbone of any economy. Roads, railways, electricity, and banking services are the very bedrock on which the modern economy grows. Until and unless a nation has robust infrastructure, any other industry will find it difficult to grow and prosper.

In this article, we will have a closer look at the various problems that are faced when a nation decides to expand its infrastructure.

Why Is Infrastructure Important?

The main reason why the development of infrastructure is considered so important is the fact that it is ubiquitous. Consider the example of electricity for instance. All industries use power. Hence, if a nation does not have a stable supply of cheap electricity, enterprises will find it difficult even to survive. Infrastructure is composed of utility industries which become the part of the cost structure of every kind and service produced. Just like electricity, transportation and telecommunication will also be an expense for every industry.

Infrastructure is controlled by a handful of large corporations and the government. This makes it easier to make it more efficient. Consider the case of China which has built excellent infrastructure for all its industries. The result of the effort taken by the Chinese government is that the cost of production of all goods and services is lower than the rest of the world.

Common Problems Associated With Building Infrastructure

• Scale and Time: The most obvious problem is that infrastructure projects are built on a very large scale. Hence they require a lot of investment. A lot of these projects are not viable when they are started. However, once they are built they do become economically viable. In fact, they raise the economic standard of the surrounding areas as well. Also, infrastructure projects tend to take a lot of time. They cause a lot of inconvenience to the population while they are being built. The problem with infrastructure is that places that need it the most do not have the funds to make it.
• Capacity Planning: As mentioned in the above point, infrastructure building requires a lot of time. Hence, by the time the project is completed, the situation may have changed completely. For instance, if a road needs to be built between two towns, the number of lanes is decided based on the current amount of traffic that is flowing between the cities. Some adjustments are made to account for the possibility of increased traffic. However, in many cases, traffic increases manifold. It is not possible to foresee where people will live or travel in the next few years. Hence, capacity planning for infrastructure is actually an imperfect art.
• Balanced Growth: it is very important that the focus is on the balance between different types of infrastructure which are necessary for the economy. For instance, if an economy builds lot of high speed roads but neglects telecommunications entirely in the process, the economy will not benefit. Each country must realize its competitive advantage and build infrastructure accordingly. Consider the case of small countries like Liechtenstein. Their economy is entirely dependent upon banking. Hence, they focus more on building banking and telecommunications infrastructure than they focus on building roads. On the other hand manufacturing hubs like China and Germany build more roads, ports and airports.
• Regulatory Uncertainty: Infrastructure projects require governments to hand over a lot of resources to private parties. A lot of times such privatization is opposed by other stakeholders. Also, the regulators tend to be very powerful in infrastructure development. This is why private companies are not generally interested in entering this field unless the government provides a deal sweetener in the form of lower taxes. The problem is that these tax rules are also arbitrary. In developing countries, the on-ground execution of infrastructure projects is filled with corruption. Public-private partnerships help in mitigating these uncertainties to some extent. However, the implementation of infrastructure projects is still an uphill task given all the challenges.
• Ecological Issues: Modern society is constantly torn up between high speed growth and preservation of the environment. This problem is faced mainly by infrastructure groups. Each time a new highway or airport needs to be built there are protests from environmental activists. The solutions to these problems are not easy by any means. This is because these problems are not logistical but instead political in nature. Hence, they need to be solved by consensus building. The problem is that consensus building tends to take a lot of time. The passage of this time leads to cost escalations and compounds an already severe problem.
• Paucity of Funds: There are always more infrastructure projects that need to be undertaken than the government has funds. There is a limit to what the taxpayer can pay. Hence, a lot of these projects are built using infrastructure finance from foreign institutions like the World Bank. However, it is essential that only self-sustaining projects are funded through debt. Otherwise, incessant spending on infrastructure building has led to the bankruptcy of many nations.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.