The future of infrastructure in island economies

In a recent report entitled “Island economies and their infrastructure: An outlook 2010 and beyond” KPMG analysed the state of the infrastructure and the challenges currently faced by Caribbean governments. The report investigates key areas of government infrastructure development such as: policy, strategy, procurement, financing and execution of public sector projects. The findings are a result of KPMG, in conjunction with Island Analysis, surveying the Cayman Islands and 15 other island countries and through desktop research and interviews with senior government officials. 

Infrastructure is the underlying foundation upon which societies are built and operate. The movement of people, goods and information all depends on infrastructure. A country’s standard of living is in part measured by the level of infrastructure that exists there. Infrastructure includes airports, ports, roads, bridges, water and waste facilities, telecommunications and other utilities and critical social infrastructure such as schools, hospitals and prisons. Infrastructure does not just serve the citizens that reside in a country, it can also help attract foreign income and investment. Infrastructure typically requires a significant up-front investment and on-going maintenance thereafter, takes years to build up and often represents a significant portion of a country’s GDP.
 
So how do governments help to ensure continued infrastructure investment when they are presently faced with budget deficits and uncertain future revenues? Credit markets remain tight and although debt can still be raised – as highlighted by the recent Cayman bond issue in December 2009, there is a limit to how much a government can borrow. What the limit is, or should be, is not clear cut either. The UK’s total public debt as a percentage of GDP is approximately 60.6 per cent (Source: OECD StatExtracts, 17/9/09) while Cayman’s public debt as a percentage of GDP for the [fiscal year ended 2009 was estimated at 19 per cent]. Nonetheless, the UK Foreign Office has made its position clear on further government borrowing for the Cayman Islands, a strategy to balance the budget and address future revenues need to be tabled. That being said, it’s not the end of the world. It’s not that a strategy cannot be developed for Cayman, but rather there are alternative infrastructure financing options. Public Private Partnerships and Public Finance Initiatives need to be seriously considered as options. There is also the option of privatising infrastructure assets.
 
Financing, however, is not the only major challenge faced by government. The report reviews how government officials view the execution of public sector projects – 89 per cent of government respondents believed the state of the existing infrastructure in their jurisdiction to be average or below average. Reasons cited included a lack of clear long-term strategy and a lack of experienced project management personnel. For example, 66 per cent of officials interviewed believe the execution of infrastructure projects is either average or inefficient in their jurisdictions. Almost 60 per cent of respondents say they never or rarely finish a project on time, and more than 60 per cent either never complete on budget or only sometimes complete on budget.
 
So, for many island economies facing declining government revenues and a public sector that is sized to serve the days of the boom era, infrastructure investment and maintenance is probably not at the top of the list of priorities. This has resulted in infrastructure projects being postponed. After all, how can you plan for projects when you do not know where the funding will come from or if there is funding at all? Many island economies are focused on measures to save money in the near term so that they can buy time to focus on the mid to long term. This is clearly the case in Cayman.  However, at some point governments will return their attention to longer-term projects and when this happens, existing strategy and planned projects will be reassessed and reprioritised. Governments will continue to face tough, political choices that require the balancing of finite resources, both monetary and personnel, against the need to maintain and develop the country’s infrastructure and managing other growing expenditure demands. This is a time when difficult decisions are made that would not have been made when times were good. The question governments need to seriously consider in the current environment is, are we getting ‘value for money’ and efficient services? Without a clear long-term strategy and an efficient procurement process to address overruns, governments will continue to struggle with deficits and ongoing infrastructure development requirements.
 
The rising infrastructure challenge is an issue being addressed across island economies. Bermuda is in the process of putting in place a PPP for a new hospital, the Bahamas is currently privatising its telecommunications industry and here in Cayman projects such as the new high school, government accommodations and the sea port are in the media on a regular basis.
Dependency on two sectors that were particularly hard hit in this downturn, financial services and tourism, for the generation of local revenues is not unique to Cayman. Governments across the Caribbean are now looking to diversify their revenue sources. Recent discussions surrounding the development of the North Sound channel and medical tourism here in Cayman exemplify this.
 
Government and public organisations have a statutory duty of care to the public and are required to provide certain core services. However, with limited budgets, governments are being forced to choose between project across key areas to focus their infrastructure spend: Education – developing a deeper pool of local skilled labour; healthcare – investment in the sector can be a revenue stream in the case of medical tourism and at the same time growing and ageing populations are putting stress on existing facilities; housing – the availability of affordable housing particularly in a downturn; and transport – airports and sea ports are critical for the tourism industry and also for business. 
 
Below are some areas that government will likely be considering when reviewing their infrastructure plans

  • Establish a strategy for infrastructure in light of the future economic and social strategy of the island;
  • Understand and define the mid- to long-term infrastructure needs across all sectors: schools, hospitals, airport, port, utilities, etc;
  • Undertake a review of the way in which infrastructure assets are managed and maintained
  • Review the public sector procurement process to assess changes that would need to be made to strengthen the current procurement process, the allocation of risk, contract performance and other key contractual issues;
  • Determine which areas of infrastructure would be better served under private sector management and ownership;
  • Identify projects that are suitable for alternative forms of infrastructure financing such as Public Private Partnerships thereby reducing the impact on the country’s finances and debt to GDP ratio

The report provides benchmarks against which countries can measure themselves and ask what are other jurisdictions doing to address similar issues and what can we learn from their successes and failures?
 
To request a copy of the report or for further information regarding infrastructure and the public sector please contact Tully.
 
The views and opinions are those of the author and do not necessarily
represent the views and opinions of KPMG. All information provided is of
a general nature and is not intended to address the circumstances of
any particular individual or entity.

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Tully Cornick

Tully heads up the Corporate Finance at KPMG in the Cayman Islands. He has been advising private and public sector clients since 2000. Before coming to Cayman, Tully worked in London with KPMG Corporate Finance, and before that he was with Citi Capital Strategies in the USA. Tully’s experience includes advising clients on acquisitions or disposals, debt and equity fundraising, strategic options reviews, and valuations.

Tully Cornick
Senior Manager
Corporate Finance
KPMG
PO Box 493, Century Yard
Cricket Square
Grand Cayman KY1-1106

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+1 (345) 949 4800
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tullycornick@kpmg.ky
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