A simple way to close the multi-trillion-dollar infrastructure financing gap

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Even in the best of times, infrastructure is notoriously difficult to get right. It’s capital intensive, complicated, time-consuming to develop, and involves multiple stakeholders. Challenging environmental, social and governance (ESG) issues also need to be addressed. 

But the effort is worth the investment. Infrastructure connects people to services, maintains quality of life, and boosts economic productivity—all of which are now threatened by COVID-19. The impact of the pandemic remains uncertain, but we know the burden will be particularly high for developing countries. Once the acute phase of the crisis is over, governments will need infrastructure more than ever to accelerate economic recovery, create jobs, reduce poverty, and stimulate productive investment.                                                                              

However, two long-standing problems remain—the multi-trillion-dollar financing gap and—relatedly—the dearth of bankable infrastructure projects. Compounding these challenges, most governments will have even fewer public resources to invest post-crisis. Private sector mobilization will be more urgent than ever.

There’s general consensus on the need for more resources for infrastructure. The World Bank estimates that developing countries need to invest around 4.5 percent of GDP to achieve infrastructure-related Sustainable Development Goals (SDGs) and to stay on track to limit climate change by no more than 2 degrees Celsius. Studies from the G20’s Global Infrastructure Hub, the United Nations, and McKinsey & Company confirm that the infrastructure financing gap is huge, standing in multiples of trillions per year. 

Unfortunately, the specter of trillion-dollar gaps is intimidating—even overwhelming—and the more these unimaginable numbers are tossed around, the easier it becomes to dismiss them as unachievable.

Most governments simply don’t have the resources needed to fully finance their infrastructure needs, which makes private sector participation essential. The financing gap persists, even as more than $100 trillion is held by pension funds, sovereign wealth funds, mutual funds, and other institutional investors. Infrastructure investment by these entities is no charitable endeavor: it’s a viable proposition that can add significantly to their bottom lines, if managed well. Yet their contribution to global investment in developing-country infrastructure is minuscule—only 0.67 percent—according to the World Bank’s Private Participation in Infrastructure (PPI) Database. What’s holding them back?

Our proposition: Start with a nibble

We can start unpacking this complex issue by taking 3 percent of the first trillion dollars—$30 billion—and applying it to a very discrete purpose: infrastructure project preparation and development. Why is this important? Because we know that inadequate project preparation and expertise have been the main impediments to securing finance from the private sector.

Studies show that project preparation cost is approximately 2 to 10 percent of total project cost, or up to 3 percent on average according to our own experience at the Global Infrastructure Facility (GIF). For example, developing a $100 million project could require an investment of approximately $3 million for studies, designs, environmental and social impact assessments, structuring, and preparation of project agreements.  

In comparison to the multi-trillion-dollar gap, 3 percent per project is a manageable goal for both the public and private sectors. Nevertheless, given the long lead time to prepare infrastructure projects and their inherent uncertainties, even 3 percent can be both risky and costly. That is why donors and multilateral development banks (MDBs) must step up their game.

It was an encouraging time in 2015 when MDBs committed to helping countries, partners, investors, and the global community to use billions in development aid to mobilize trillions in investments of all kinds—public and private, national and global—to achieve the SDGs. As influential MDB members, donors are similarly committed. It’s time to move those commitments to further action.

Why investing in project preparation is key

Getting infrastructure right will be even more challenging after the COVID-19 crisis. Governments, under enormous pressure for quick results, will likely look to infrastructure as an economic stimulus measure. However, pitfalls in infrastructure development—including corruption, public waste (“white elephant” projects), and debt sustainability—could have severe fiscal impacts for governments and damage investors’ confidence. Clearly, they also deeply affect people’s livelihoods and development, which access to quality infrastructure services intends to improve.

Getting infrastructure right starts with good project preparation in line with best practices and the G20 Principles for Quality Infrastructure Investment. The involvement of MDBs helps ensure that best practices and high standards are observed, increasing their attractiveness to potential investors. Without exaggeration, investing in project preparation is one of the most effective ways to ensure quality and sustainability and maximize the mobilizing power of donor contributions.

The GIF, a project preparation facility that connects governments, MDBs, private sector investors, and financiers to help prepare and structure complex infrastructure public-private partnerships (PPPs)—embraces this approach.  In less than five years, working with our MDB partners, we’ve already built a robust pipeline of more than 80 projects that are expected to mobilize more than $60 billion in investments, more than half of which is expected to come from the private sector.

While we’re doing our part—thanks to the generous support from Australia, Canada, China, Denmark, Japan, Singapore, and the World Bank—this modest proposal is a call-out to all stakeholders to recognize project preparation as the lynchpin that can solve the enduring challenge of infrastructure underinvestment.

The project preparation phase is also the best time to address issues relating to ESG, climate changes, value for money, fiscal impacts and debt sustainability—to avoid common pitfalls and missed opportunities.  With more emphasis here, we can secure more financing and come closer to getting infrastructure development right.

 

To learn more about working with the GIF, visit our website at https://www.globalinfrafacility.org.

 

Related Posts:

Reasons for optimism in closing the infrastructure financing gap

How the GIF helps governments build successful infrastructure projects

What’s next for ESG and investment decisions?

GIF: making climate-smart infrastructure bankable

Preparing bankable infrastructure projects

The Global Infrastructure Facility: Closing the infrastructure gap by building country capacity


 


This blog is managed by the Infrastructure Finance, PPPs & Guarantees Group of the World Bank. Learn more about our work here.

 

Authors

Jason Zhengrong Lu

Head & Lead Infrastructure Finance Specialist, Global Infrastructure Facility (GIF)

Join the Conversation

Dr. Prosenjit Bose
May 05, 2020

Wonderful blogs, helpful for all.

Selimuzzaman
May 05, 2020

To know advanced knowledge of world economic situation l want participate the conversation.

Sharon Lee
May 05, 2020

Hi Jason nice article. Is part of the problem regarding the dearth of bankable projrcts, due at least in part to the gap in expectations between Lenders, Project Sponsers and Constructors regarding the risk allocation required for project to be bankable? Wpuld part of the solution be changing the definition ?

Data Dynamics
May 05, 2020

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Daryl Oster
May 05, 2020

With regard to private infrastructure investments you ask: "What’s holding them back?" The short answer is marginal to negative expected ROI. In the US during the 1830s - 1860s private investment dominated infrastructure developments in railroads. The government only got involved to grant land along the intercontinental railroad right of way to reduce risk for investors. Then private investments in aircraft/airlines, and automobile production displaced trains. Now private investment in new transportation technology is chilled due to gross subsidy to failed transport paradigms like passenger rail and bus transport. The powerful rail industry spends millions to convince governments to tax private individuals and industries to pay billions for passenger rail systems that mostly go unused, and require billions more in operating subsidy. This tax-and-subsidize approach cuts off private investment in innovative transportation infrastructure - what start up company (and investors) can compete with government that taxes them to subsidize their competition? The result of this anti-market approach has resulted in trillions in shortfall. The answer is for all governments of the world to immediately end subsidy, especially in developing markets. Only when this happens will investors risk funding innovations in infrastructure.