4 ways governments can develop digital infrastructure

The development of infrastructure is critical to achieving the Sustainable Development Goals.

The right infrastructure investments act as the backbone of better-functioning economies and more inclusive societies.

But infrastructure development requires a scale of investment that governments simply can’t achieve alone.

In developing countries, The World Bank has framed the step-change in the investment levels as moving from “billions to trillions”.

It’s one of the greatest challenges of our time, and the stakes are high. We must find a way to close the investment gap as soon as possible.

One of the fastest ways to transform a country’s society and its economy is to invest in digital infrastructure.

Digital: an engine for growth

It has taken less than two decades for the internet to go from the computer science laboratory to the engine of global economic growth.

Fast and ubiquitous connectivity is changing what we produce, how we produce it, and how we engage in commerce.

The socio-economic benefits are immense, not least in developing countries.

Research commissioned by Vodafone has demonstrated that a 10% increase in mobile penetration correlates to a 0.6% increase in GDP.

The World Bank has found that a 10% increase in internet access correlates to a 1.38% increase in GDP in developing countries. Similarly, a recent study found that fast internet infrastructure can stimulate job-creation in Africa, with between 4.2% and 10% higher employment rates in connected areas relative to unconnected areas.

Mobile technology also has a democratising effect.

Transforming lives

For many citizens in developing countries, the mobile phone is their only gateway to the internet.

This has spurred the growth of a vast and complex mobile ecosystem of apps and services, which transform the lives of millions by improving access to healthcare, financial services, and education, as well as enhancing agricultural processes.

For example, research conducted by MIT found that M-PESA, a mobile money service created by Vodafone in Kenya with support of DFID of UK, has lifted almost 2% of Kenyan households out of poverty.

Similarly, a study by Accenture identified six key mobile-based services by Vodafone and other companies that can offer higher earnings, higher yields, reduced waste and improved go-to-market-options for around 70 million Indian farmers by 2020 as well as generating additional farming incomes of $9 billion annually.

Billions to trillions

However, while the benefits are clear for all to see, governments simply don’t have the money to take the level of investment from “billions to trillions”. This means the infrastructure that underpins the digital economy will falter and fail.

As a result, governments have to find investment from elsewhere: contributions from the private sector are critical.

Private sector investment is not new. Infrastructure investments have been private-sector led in most parts of the world for more than a generation. However, the scale of the investment required means that governments have had to attract money from overseas in order to meet their objectives. Foreign direct investors therefore account for a significant proportion of investment in many countries.

While policies to attract foreign investors are standard in many countries, establishing a stream of investment that is sustainable over the long term is more complicated.

Long-term commitment

Investments in digital infrastructure are never one-offs. Data-driven economies - in Africa and India now, as much as any other region - demand continuous cycles of investment.

Each new technology cycle brings new requirements for capital - in new infrastructure, new spectrum, and new services.

Communications networks, far more so than other assets, are also faced with extremely rapid capital depreciation, at a pace almost three times faster than that of other utilities.

If you build a railway, your assets will depreciate in 75 years or more; a road, perhaps some 25 years, at least; in mobile communications networks, 3-10 years.

This puts incredible strain on profitability, which ultimately plays a huge role in investors’ decisions. And that places an enormous responsibility on governments to ensure they create the best possible conditions for investors.

So, what does this mean for governments? Ideally they would do some or all of the following four things:

1) Promote a sustainable commercial environment within which the private sector can flourish.

Securing investment means paying attention to the financial health of the industry.

Imposing regulations that only benefit consumers in the short-term (such as drastic price decreases), have to be weighed against the long-term interests of the citizen in infrastructure deployments.

Healthy competition will help drive investment and innovation, and it must exist at all levels, from investment to wholesale to retail.

Attempts by companies to monopolise all aspects of the infrastructure will mean less competition and less investment. Creative solutions, like co-investment and sharing of sites in less profitable areas, should be facilitated.

2) Governments must ensure stability and predictability of the policy environment.

Radical or unexpected government interventions within well-functioning markets - or sudden shifts in policy that undermine competition or change the conditions within which the investment is being made - seriously harm investor sentiment.

Similarly, actions that appear to discriminate against foreign investors or to reduce their protection will see them take their money elsewhere and make it difficult to attract new investors.

3) Regulatory best practice is vital, and governments must adopt it wherever possible.

Delays in licences or spectrum allocation and bureaucratic obstacles that slow down network rollout directly impact companies’ ability to deliver digital services to businesses and consumers and, therefore, harm activity across an economy as a whole.

So too does preventing access to other existing infrastructure that could improve the speed and cost-efficiency of connectivity investment.

Governments need to understand the various trade-offs involved. For example, overcharging for licences or spectrum directly undermines private investors’ ability to invest in connectivity for more isolated rural areas.

4) Governments must seek to stimulate demand for digital solutions.

Uptake of new technologies is rarely automatic. Digital offers huge advantages in terms of administrative efficiency, resilience and ubiquity of access for all citizens.

There is also much that government can do to support local digital applications, develop content services and promote digital skills across the population as a whole.

Communications networks are the highways of the future: essential to the economic development of nations, and with a critical potential to enhance quality of life for all citizens.

Investment in digital infrastructure is the tide that raises all boats.

Governments have a responsibility to create the optimal conditions to attract a sustainable flow of private investment.

At stake is the citizen's ability to access the kind of digital services that permeate every aspect of the global economy - and that are fundamental to political visions of a better and more prosperous future.