Government spending on global infrastructure projects could hit $30 trillion over next 20 years: CIBC World Markets
In Canada, $10 billion infrastructure investment could potentially create 110,000 jobsTORONTO, Jan. 26 /CNW/ - CIBC (CM: TSX; NYSE) - As governments look to spend their way out of the recession, between $25 and $30 trillion of fresh infrastructure investment will be pumped into the global economy over the next two decades, finds a new report from CIBC World Markets. "Governments all over the world are buying jobs," says Benjamin Tal, senior economist at CIBC World Markets. "And the infrastructure sector is where many of these jobs will be created. When it comes to creating jobs and stimulating activity, infrastructure spending is a much more effective tool than tax cuts. "In the U.S., the impact of economic growth of infrastructure spending worth one per cent of GDP is more than double the impact of tax cuts, which have a greater leakage to imported consumer goods, and which risk being saved by households. In Canada, $10 billion of infrastructure spending can potentially create 110,000 jobs and lift economic growth by close to 1.5 percentage points-well above the stimulus effect of a tax cut of a similar size. The report estimates that in the U.S., the Obama Administration will spend close to $150 billion out of the upcoming $875 billion fiscal stimulus on infrastructure investments. China will spend almost 80 per cent of its near-$600 billion stimulus package on infrastructure. Overall, the report estimates that governments will commit an additional $650 billion in global infrastructure spending in the next two years. While some question the effectiveness of infrastructure investment in stimulating the economy due to the long planning process associated with these projects, Mr. Tal notes that close to $57 billion worth of shovel-ready projects can be started in the U.S. in the next 120 days. That number swells to $136 billion over a 24-month time frame. In Canada, municipalities can deliver close to $14 billion worth of infrastructure work in 2009 alone. Based on an examination of Canada's 100 largest upcoming infrastructure projects, Mr. Tal estimates that roughly $23 billion, or 40 per cent of all upcoming infrastructure investment, will go to the energy sector-of which the vast majority will be used to finance major hydro and nuclear projects. Later, that spending will be joined by new oil capacity investment as now-cancelled oil sands projects are moved to the front burner as crude oil prices rebound. The coming years will also see a significant inflow of infrastructure money into the transportation sector followed by spending on health infrastructure. "Beyond the short-term stimulus, what will keep the fire going is private money," adds Mr. Tal. "By now infrastructure is viewed by almost half of global institutional investors as a standalone asset class - up from 10 per cent only three years ago. And rightly so, since the risk/return characteristics of the sector are notably different than any other asset class including real estate. "In Canada, for example, with more than $700 billion to play with, even a minor change to pension funds' asset allocation can dramatically change the mathematics of infrastructure funding. And it's already happening. We estimate that currently roughly five per cent of pension funds' assets are allocated to global infrastructure investment-up from only two per cent earlier in the decade. And this allocation is rising." He expects that rising trend to continue, with pension funds allocating between 10 per cent and 15 per cent of their assets to infrastructure investment by 2017-adding more than $200 billion of fresh money to this capital intensive sector. "While investors have already priced-in these rewards in some countries and sectors, elsewhere there is still time to capitalize on the coming infrastructure boom," concludes Mr. Tal. "And with massive injection of public and private money, this asset class will prove to be a profitable one."The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/occrept66.pdfCIBC World Markets is the corporate and investment banking arm of CIBC. To deliver on its mandate as a premier client-focused and Canadian-based investment bank, World Markets provides a wide range of credit, capital markets, investment banking, merchant banking and research products and services to government, institutional, corporate and retail clients in Canada and in key markets around the world.