Mind the gap: Time to rethink infrastructure finance

The need for increased investment in infrastructure has been widely emphasized in the context of sustainable development, the clean energy transition, and the post-pandemic economic recovery. While the key challenge is typically explained as one of insufficient financing, the real issue holding infrastructure investment back is lack of investable projects. 
 

What is the investment need?

Estimates obtained by adding data from the United Nations Conference on Trade and Development (UNCTAD) and IEA, show that roughly $2.6 trillion dollars is required annually through 2030 to meet the Sustainable Development Goals (SDGs) and stay on a path to a net-zero society by 2050. Undoubtedly, this investment need is large. But, considered in the context of global savings and other large financing markets, it is manageable. The availability of capital is large enough to solve global infrastructure needs.

This figure compares this investment need with the pool of global savings and financing across several other large markets:

 

What is the investable universe of projects?

Comparing the availability of capital with that of investable projects, we see an abundance of capital, but not enough projects—pointing to the need for well-developed infrastructure pipelines.

Our analysis of the pipeline of greenfield projects in emerging markets and developing economies (EMDEs) on industry databases estimated a pipeline of approximately $1.2 trillion in “investable” infrastructure projects across sustainable infrastructure. Many are in very early stages of development and will not be ‘shovel ready’ for years to come. The actual availability of projects falls far short of the $2.6 trillion annual investment need we estimate above.
 

The importance of project preparation

What is causing this logjam? Even the most “private sector-led” infrastructure project requires significant public sector planning and permitting. In fact, most projects require years of design, cost-benefit analyses, and technical, environmental, and social impact studies before they are tendered. This is the project development cycle, and it’s where the real infrastructure delivery gap lies.

 

Figure 2 – Project Development Cycle

 

Privately financed projects need to have contractual structures with an appropriate level of risk allocation amongst stakeholders.  This is referred to as “bankability.” Getting infrastructure projects to a bankable state is not an easy process—it requires rigorous planning and prioritization, feasibility studies, and alignment of interests. The estimated time for project preparation and structuring can vary significantly depending on the circumstances and readiness of each project, but generally ranges from 24–30 months (and roughly accounts for 5 to 10 percent of total project investment) from project conception to commercial and financial closures. There are some extreme outliers, with the preparation of projects extending close to a decade.

Project preparation facilities

Since 2014, the G20 has placed an emphasis on the role of infrastructure in promoting economic growth and reducing poverty. Officials have focused on the crucial role project preparation facilities (PPFs) can play in creating pipelines of projects able to attract private capital. From this came the establishment of PPFs and other infrastructure-related initiatives in the ecosystem, including the Global Infrastructure Facility (GIF), a 2014 G20 initiative that serves as a PPF and global partnership platform.

PPFs like the GIF are also crucial to sustainable infrastructure project design, which is a complex, multi-stakeholder activity, with social, financial, and environmental consequences.  It involves answering questions such as: “Who should pay for this infrastructure?”; “Which risks are best borne by the public sector vs. the private sector?” and; “What level of environmental impact and social disruption is acceptable?” Adequately engaging with these questions requires years of planning and dialogue.

For EMDEs, effectively mitigating macro risk and perceived risk such as cost overruns and construction setbacks is particularly important. A PPF can reduce risk by promoting better project life-cycle efficiencies and value for money. Well-planned and executed projects, moreover, are less likely to meet public resistance or delay due to environmental and/or social concerns if sustainability is factored into the project preparation stage.  The Inter-American Development Bank has found that a lack of environmental, social and governance (ESG) oversight can generate cost overruns between 15 and 70 percent, and delays from 12 months to 13 years. This finding underlines that properly designed infrastructure, with the support of PPFs, can promote a project’s long-term viability, as well as environmental and social benefits to surrounding communities. 
 

Closing the project gap

Addressing the project gap is only possible through greater focus and emphasis on project development.  The funds currently set aside for this are miniscule compared to the allocation for project financing. For example, through GIF support to its 10 multilateral development bank partners, only $18 million was deployed for project preparation in 2021 (compared with $16.3 billion for infrastructure finance provided by the World Bank Group). This funding discrepancy is especially noteworthy when viewed in light of the far greater leverage potential provided by project development investment versus project finance. For example, based on current data of projects that have reached closing, GIF funding has led to $276 of private sector financing for every $1 spent on project development.

For this reason last November, several current and former GIF Advisory Council Co-Chairs published an Open Letter to the Global Infrastructure Finance Community, encouraging them to amplify the critical role the GIF plays in the emerging market sustainable finance ecosystem and its ability to mobilize private capital at scale. The letter calls for taking a different view of the sustainable infrastructure finance gap as one not driven by lack of investor capital or coming up with new financial engineering ideas, but rather the need for robust and bankable infrastructure pipelines to narrow the project gap. 

The global abundance of savings provides a unique opportunity to increase investment in infrastructure to meet the SDGs and advance the energy transition.  Let’s reframe the debate and emphasize the need to significantly scale up investments in project development.

Daniel Zelikow is Vice Chair, Public Sector, at JPMorgan Chase Bank, N.A. (“J.P. Morgan”), and Chair of the Governing Board of J.P. Morgan’s Development Finance Institution.

Fuat Savas is the Co-Head of J.P. Morgan’s Infrastructure Finance and Advisory group.

J.P. Morgan is the current co-chair of the Global Infrastructure Facility’s Advisory Council.
 

^{The views, opinions and estimates expressed herein are their own and were not prepared by the firm’s research department. This material is provided for informational purposes only, and is not intended as an offer or solicitation for the purchase, sale or tender of any financial instrument. © 2022 JPMorgan Chase & Co. All rights reserved.}
 

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