Aging infrastructure poses economic, security risks

Underinvestment in critical infrastructure is putting society at risk in both developed and developing countries around the world, risk experts believe. There is growing unease among risk experts that continued lack of funding for both existing and new infrastructure will have serious consequences for economic growth, resource availability, and climate change adaptation.

Increased spending

Lloyd’s List reports that against a background of financial crisis and global warming, there is an urgent need for governments to increase their spending on agricultural, energy, water, transport, and information technology infrastructure.

The World Economic Forum launched its Global Risks 2010 report in advance of last week’s Davos meeting of world leaders. The report highlighted underinvestment in critical infrastructure as one of the biggest threats facing the world today.

Speaking at the launch of the report in London, Daniel Hoffman, group chief economist of Zurich Financial Services, said that critical infrastructure was the most changed risk since the 2009 report. “Over the years the deficits are growing,” he warned.

Creeping risks

Raj Singh, chief risk officer of Swiss Re, stressed that some of the biggest exposures facing the world stem from what he called the “creeping risks” associated with underinvestment in infrastructure. “This is particularly acute for agriculture and food security… billions of dollars need to be spent on water provision, energy supply, transport and climate change measures,” he said. “Governments must work together with the private sector to make it happen.”

John Drzik, CEO of Oliver Wyman, said political thinking needs to take a longer view. “The time horizon on risk is too short — it is shorter than the electoral cycle,” he explained. “And that’s a major issue in regard to infrastructure investment.”

The World Bank estimates that global infrastructure investment needs will be $35 trillion over the next twenty years. In the United States alone, the American Society of Civil Engineers estimates that $2.2 trillion is needed over the next five years. It rated U.S. critical infrastructure as a D in 2009, where A is the highest grade.

In its report Manifesto for U.K. Infrastructure, published this month, the Institution of Civil Engineers (ICE) says that the United Kingdom will need to spend around £400 billion on new and refurbished infrastructure by 2020 in order to address historic underinvestment and kick start the transition to a low carbon economy. ICE director general Tom Foulkes said: “There is a clear case for continued investment in our transport, energy, waste, flooding and water infrastructure, despite the restrictions the current financial situation places on government spending. This is not just for the benefit of industry and the economy, but for the benefit of society as a whole – our quality of life depends on infrastructure.”

Interconnected risk

Underinvestment in infrastructure is one of the most highly interconnected risks on the World Economic Forum’s Risks Interconnection Map. The strongest links are to financial crises, oil prices, and natural catastrophes but it also links to health issues, including both infectious and chronic diseases as well as to food price volatility. Amongst other links, the map highlights that:

• Financial systems, industry, and emergency services are highly dependent on telecoms systems
• Power grids are huge but as vulnerable as the weakest link, as witnessed in the power failures that affected more than 50 million North Americans in 2003
• Disease spreads rapidly thanks to global transport networks, as seen with SARS and swine flu
• The closure of a port such as Rotterdam or Hong Kong would have widespread economic consequences on world trade and businesses run on a “just in time basis”

Scott Steedman, spokesman for the Lighthill Risk Network, believes that regulators have been too focused on controlling prices to consumers instead of investment or building resilience: now action is urgently needed. “Given that our critical ageing infrastructure was by definition engineered in a past era, it becomes increasingly difficult to justify its safety or environmental impact against modern standards. It also becomes more and more difficult over time to insert new technology into ageing systems or simply to upgrade our infrastructure to modern standards of comfort or performance and reliability,” he said. “Maintenance becomes increasingly lengthy and unpredictable, like the challenge of keeping an old car on the road.”

Trevor Maynard, Lloyd’s emerging risks manager, believes that the current economic difficulties around the world should not be used as an excuse to underinvest in critical infrastructure: “This is not only for the benefit of society in terms of improving quality of life, but also to ensure that critical infrastructure networks - water, power, transport and telephone – are resilient in the face of catastrophe, be it manmade or natural.”