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In my line of work, we have a Holy Grail that many brilliant people have spoken, written, and toiled to achieve: attracting international institutional investors to infrastructure projects in emerging countries.
Yet, according to the recent World Bank Group report, Contribution of Institutional Investors to Private Investment in Infrastructure, 2011–H1 2017, the current level of institutional investor participation in infrastructure investment in emerging markets and developing economies (EMDEs) is only 0.7 percent of total private participation.
This Bank Group report estimates that emerging countries need to invest $836 billion per year, or 6.1 percent of current service level of existing assets. Meanwhile, the International Monetary Fund (IMF) estimates that more than $100 trillion is held by institutional investors—with around 60 percent of assets held by pension and insurance funds from advanced economies—making the amount mobilized for EMDE infrastructure look even more paltry.
But the siren song still rings clear—
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By promoting better standards, methods and benchmarking, development finance institutions can move the mountain that is preventing institutional capital from flowing into infrastructure.
The World Bank Group's initiative to Maximize Finance for Development (MFD) aims to find solutions to crowd in all possible sources of finance, innovation, and expertise in order to achieve the Sustainable Development Goals (SDGs). In the case of infrastructure investment, a significant contribution to long-term sources of private finance is expected from institutional investors such as pension plans, life insurers, and sovereign wealth funds.
These investors have become increasingly interested in infrastructure investment in recent years, in search of new sources of returns, diversification, duration and inflation hedging. However, they cannot be expected to make a substantial and durable contribution to the long-term financing of infrastructure without three important changes:
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In many parts of the world, the sharing economy is ever-present for individuals, allowing them to use personal assets—for example, houses and cars—to their fullest potential. If you plan to be away for a period of time, why not rent your space for a few extra bucks?
Such a phenomenon exists in infrastructure economics, where the level of asset utilization matters for end-cost. As more consumers use the same infrastructure more frequently, the unit cost for all consumers goes down. Recent projects combining expertise from the World Bank’s digital development and energy teams demonstrate this.
It is broadly understood that public-private partnerships (PPP) are a procurement tool that encompass design, financing, construction and long-term operation of a public infrastructure by the private sector. They can be cost-effective thanks to adequate risk transfer and performance criteria, and help bridge Africa’s large infrastructure gap in many sectors.
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There are many drivers of climate change, but few would disagree that energy infrastructure built according to “business-as-usual” standards is a major one. Meeting the lofty goals set at the 2015 Paris Climate Accords requires powering our homes, businesses, and government agencies with a cleaner mix of energy that includes more renewable sources. It also requires promoting standards that encourage energy efficiency—for example, for appliances or building codes—as a low-cost and high-impact way to reduce greenhouse gas (GHG) emissions.
The Global Infrastructure Facility (GIF) is playing a positive role by preparing bankable, climate-smart projects that help countries build low-carbon energy infrastructure and encourage greater energy-efficiency measures. The GIF both drives and leverages private sector investments in climate-smart projects by promoting good governance and standardization in project preparation and has a sizeable portfolio of climate-smart projects in the pipeline.
Photo: HAC/Croatian Motorways
The state of Croatia’s road sector poses a unique challenge compared with more typical World Bank projects where road assets either need to be developed or require significant rehabilitation. If you've ever had the chance to experience Croatian roads you'll quickly realize the country has a well-developed motorway and state road network, in relatively good condition. This begs the question: how can the World Bank help improve a sector with already high-quality assets in a middle-income country like Croatia?
Over the past two decades, rated infrastructure worldwide has grown threefold. Some periods of flatter growth aside, the rise of infrastructure lending for both project finance and corporates has helped steer the sector’s development.
All the while, the infrastructure sector has developed a more robust risk profile compared to companies primarily involved in the production of goods, otherwise known as non-financial corporates (NFCs). And,
Photo: Northern Beaches Hospital | New South Wales Ministry of Health
The way that social infrastructure is being built and paid for is changing. New healthcare facilities, prisons, and public housing have long been constructed under public-private partnerships (PPPs), but the PPP model is now stretching into the operation of the facilities.
Called “operator-led PPPs”, this approach puts the private sector in charge not just of the construction of infrastructure but of the operation of services afterwards for a defined period. For instance, in a hospital PPP the private company would provide clinical services such as x-rays as well as the building. This is also known as an outcomes-based PPP.
This approach transfers operational risks from the state body to the private partner, but the state still retains oversight of the quality of service through key performance indicators, service criteria, and performance standards. Financial penalties are put in place for failure to meet the required standards.
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Solar power is experiencing a surge in popularity across the globe. It prevents carbon emissions, helps diversify the power generation mix, reduces dependence on fossil fuels, and can increase off-grid energy access.
With falling costs of solar photovoltaic (PV) technology, advancing storage technology, and grid integration, prices for solar PV electricity have been falling rapidly around the world and solar is now in many countries price competitive with traditional energy sources and has become particularly attractive for developing countries.
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Public-private partnerships (PPPs) in Brazil have been around since 2004 when federal legislation established the legal framework to make them possible. Since then, approximately 100 PPP contracts have been signed in Brazil, totaling almost 160 billion Brazilian reais ($50 billion) in private investment in numerous sectors, including hospitals, schools, public lighting, sanitation, solid waste management, sport arenas, public buildings, urban transport, and roads. Some notable successes include the Belo Horizonte schools PPP, which supports non-pedagogical services in 51 schools, and the 298-bed Bahia Subúrbio Hospital, which opened in 2010.