Infrastructure Has Declined Substantially

8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5%

Change in primary structural balance

Capital expenditure as % of current expenditure Fiscal contraction

Fiscal expansion

1.2. Infrastructure Has Declined Substantially

An area that suffered disproportionately from the fall in public investment is infrastructure investment. Applying the EIB methodology to proxy infrastructure investment,⁵ we find that infrastructure investment continuously declined since 2009.

At 1.7% of GDP, overall infrastructure investment now stands at about 75% of its pre-crisis level (Figure 6).

5 We define proxy infrastructure investment as gross fixed capital formation in other buildings and structures in the infrastructure sectors (Revoltella et al. 2015).

The government sector is the main driving force behind the decline. Government infrastructure investment declined between 2009 and 2017 by 0.5% of GDP. Over the same time horizon corporate infrastructure investment increased by 0.1% of GDP while infrastructure investment activities by Special Purpose Vehicles declined by 0.1% of GDP. The decline in government infrastructure investment (as a share of GDP) corresponds to a fall of 37%; which is more than the fall in public investment reported earlier, suggesting that the latter affected infrastructure investment activities disproportionately.

1. Europe Needs More Public Investment 23 a. Infrastructure investment (% of GDP) — by institutional sector

0.0 0.5 1.0 1.5 2.0 2.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Infrastructure Investment (% of GDP)

Non-PPP Project PPP Corporate Government

b. Infrastructure investment (% of GDP) — by sector of economic activity

0.0 0.5 1.0 1.5 2.0 2.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Infrastructure Investment (% of GDP)

Health

Education Utilities Communication

Transport

Fig. 6 Infrastructure investment by sector and promoter

Note: based on EIB Infrastructure Database. Data are missing for Belgium, Croatia, Lithuania, Poland, Romania and the UK. PPP: public-private partnership. Source of data: Eurostat, Projectware,

EPEC. Figure created by the authors.

Government infrastructure investment includes fewer sectors and asset types than overall public investment. While public investment spans all sectors of economic activities including, for example, defence, security and recreational activities, infrastructure investment is limited to a narrower set of activities. Notably, for this paper it includes transport, energy, water, ICT, health and education. In addition, whereas public investment does not differentiate between investments in different asset classes, infrastructure investment activities are limited to gross fixed capital formation in ‘other buildings and structures’; therefore excluding investments in machinery, equipment, vehicles and intellectual property. To the extent that infrastructure investment activities are often much more bulky than non-infrastructure public investment, they lend themselves more easily to delays and/or cuts (EIB 2017).

The decline in government infrastructure investment has affected primarily the transport sector and educational sector. Government infrastructure investment accounts for the biggest share of total infrastructure investment in the transport and education sector (with 80% and 90% of total infrastructure investment, respectively).

The share of government investment is lower in other sectors (55% in health; 30% in the utilities sector; and 10% in ICT). If we compare the evolution of infrastructure investment across the various economic sectors, it is, therefore, not surprising to find that — on the back of the strong contraction of government investment in these sectors — it is in particular transport and education that saw the strongest declines in overall investment activities.

Sub-national governments reduced their infrastructure investment activities disproportionately. Subnational investment accounts for more than half of overall government infrastructure investment (Figure 7). If we compare the fall in overall government infrastructure investment and the change in sub-national infrastructure investment, we find that changes in overall government infrastructure investment often came with disproportionate changes at the subnational level in the same direction.

This is true in particular in regions with little fiscal autonomy (EIB 2017).

The fall in government infrastructure investment does not reflect a saturation effect. The fall in infrastructure investment activities was particularly pronounced in regions which had a poor infrastructure quality to start with (EIB 2018). However, were the drop infrastructure investment driven by diminishing returns to the construction of new infrastructure, the opposite would be the case. In addition, the EIB Municipalities Survey shows that about one in three municipalities report that infrastructure investment activities in the last five years were below needs (Figure 8). Finally, and again in contrast with the view of a saturation-driven decline in infrastructure investment activities, there is evidence that the construction of new infrastructure continues to produce large positive economic spillover effects (EIB 2018).

Fig. 7 Change in subnational investment share by overall government investment trend Note: blue bars in Panel b refer to countries in which regions have relatively high fiscal autonomy, red bars to countries in which fiscal autonomy is relatively low. The change in subnational investment share by fiscal autonomy is based on a relatively small number of observations and should therefore

be taken as indicative.

Source of data: Eurostat, Projectware, EPEC (for infrastructure investment) and Eurostat for subnational government investment in infrastructure sectors. Fiscal autonomy data comes from

Hooghe et al. (2018). Figure created by the authors.

a. Change in subnational investment share

-12 -10 -8 -6 -4 -2 0 2 4

Increased or stayed the same Decreased Government Investment

Change in subnational investment share

b. Change in subnational investment share by fiscal autonomy

-30 -20 -10 0 10

Autonomous Not-Autonomous Autonomous Not-Autonomous Government Investment Increased or

Stayed the same

Government Investment Decreased

Change in subnational investment share

Weak infrastructure investment has led to substantial investment gaps. A bottom-up estimation suggests an annual “investment gap” of roughly €155 bn for the EU27 (i.e. all Member States except the United Kingdom) until 2030. This corresponds to 1.2% of the current EU27 GDP and 5.8% of Gross Fixed Capital Formation (Table 1). The investment gap is defined as the difference between investment needs and current investment levels. The infrastructure investment gap of €155 bn per year is only one part of the estimated overall investment gap of €403 bn, as investment needs in innovation and energy efficiency are also substantial. If dynamics in infrastructure investment do not reverse, this gap is likely to increase.

Fig. 8 Underprovision of infrastructure by Country and Sector

Note: the Figure plots the net balance of municipalities that report underinvestment by country/

region and sector. A green circle signifies a share of mentions below the median; a red circle above the median. The number inside each circle states the net balance of municipalities that report underinvestment vis-à-vis over-investment for a particular area in a country/country grouping.

Source of data: EIB Municipality Survey. Figure created by the authors.

Question: for each of the following, would you say that, overall, past investment in your municipality has ensured the right amount of infrastructure, or led to an underprovision or overprovision of

infrastructure capacity?

EU France Germany Italy Spain Poland United Kingdom Other Northern Europe Other Southern Europe Other Central Europe South East Europe Baltics Benelux

Urban Transport

Table 1 Annual infrastructure investment gaps for EU 27

Note: GDP and Gross Fixed Capital Formation (GFCF) refer to 2017. All numbers refer to EU27, i.e.

all Member States except the UK. Estimates of infrastructure investment gaps are based on EU policy targets and EIB expert judgements. Notably, EU policy targets for broadband (European Gigabit Society targets), energy (EU 2030 climate and energy targets) and water and sanitation (compliance with EU Directives) are considered. For mobility and social infrastructure, investment needs reflect past investment backlogs combined with higher future needs to accommodate demographic trends,

migration and other megatrends. Source of data: estimates by the EIB Projects Department.

Fig. 9 Infrastructure financing and infrastructure quality

Note: bottom (top) tercile refers to the third of municipalities reporting the lowest (highest) average infrastructure quality relative to country mean. Source of data: EIB Municipalities Survey 2017.

Figure created by the authors.

Questions: can you tell me approximately what proportion of your infrastructure investment activities were financed by each of the following? Thinking about all of the external finance you used for your infrastructure investment activities, how satisfied or dissatisfied are you with: the number of available external funding sources; amount of external funding available; interest rates offered; maturities available (i.e. the length of time over which the external finance has to be repaid);

administration/documentation requirements associated with the external finance?

0 10 20 30 40 50 60 70

Budget Balance Debt Limit External Finance

Share of municipalities

Bottom Tercile Top Tercile