Who finances infrastructure, really? Disentangling public and private contributions

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Who pays for infrastructure investment? Private or public money?
Businessman showing money. Image credit: Pixabay | mohamed_hassan

Most citizens, and undoubtedly all of the readers of this Getting Infrastructure Finance Right blog platform, have questioned and even critically debated the role that governments play in aiding the growth and economic development of countries for which they’re responsible.

We blame government for not fixing potholes on the road, not maintaining public transport buses or metros, not ensuring 24/7 water supply—you get the picture. The extent of severity or complaints vary widely across the spectrum of developing and developed countries.

The bottom line: we hold the government accountable for provision of infrastructure services. 

There’s a lot of discussion around public-private partnerships (PPPs) and private participation in infrastructure (PPI)—both their benefits and pitfalls. Our PPI Database also indicates an uptick in the use of these models. However, a recent World Bank study finds the share of private investment in infrastructure projects in developing countries remains overwhelmingly low.

In essence, infrastructure investment continues to be very much a public sector “business.” Eighty-three percent of investments in infrastructure projects in 2017 were sponsored by government entities and state-owned enterprises (SOEs) in developing countries. The public sector’s dominance here applies for both project sponsorship (that is, the number of projects being implemented) and the volume of infrastructure project investments.

Nevertheless, we observed important regional and sectoral differences:

With respect to the distribution of public versus private investments, projects with majority public sponsorship accounted for more than three quarters of investment in all regions, except Latin America and the Caribbean where the public sector accounted for 60 percent of investment. In Sub-Saharan Africa, this share jumps to 95 percent.

Whereas most countries recorded higher government commitments, in line with global results, in 10 countries private investment eclipsed public commitments for 2017: Cambodia, Mongolia, the Philippines, Ghana, Jordan, Egypt, Turkey, Colombia, Brazil, and Mexico. This may be attributable to policies aimed at actively promoting private sector participation.

Private sector dominance in certain sectors

While the public sector continues to drive overall infrastructure investment and project implementation, private participation plays an important role in offsetting financing shortfalls and injecting much-needed management and technical expertise into public services.  We see this starkly in subsectors like renewable energy and ports. Private investors accounted for 95 percent and 85 percent of total wind and solar project investments, respectively; they accounted for 50 percent of port investments.

SOE investments significant, especially for multibillion-dollar projects

One of the key findings of the study is that a significant portion of all infrastructure investment worldwide is implemented by SOEs. The significant role that SOEs play in infrastructure investments has important implications for policymakers and multilateral organizations. SOEs served as primary sponsors for less than a quarter of the projects initiated in 2017 (488 of 2,111), but still make up the largest proportion of global infrastructure investment commitments—accounting for 55 percent of overall infrastructure investment and 66 percent of public investment.

We see this phenomenon because SOE investments are concentrated in large-expenditure projects in a handful of markets. In fact, almost half of SOE investment was accounted for by just 12 transport and energy mega-projects (each valued at more than $5 billion) in seven countries, including four projects in China.

How can we encourage more private investment?

While governments and the international development community are increasingly seeking innovative approaches to mobilize more private sector investment in developing countries, the study confirms the private sector’s share of infrastructure investments remains relatively small.

There’s no dearth of expert opinion on what works and what doesn’t for PPP projects and any PPP practitioner will tell you that well-prepared, well-structured projects with adequate risk allocation procured through competitive processes is the key.  In addition, strong political will coupled with clear and consistent policy is the hand that holds these keys to unlock the private sector potential for investment in developing countries.

We need both the public and private sectors to work together responsibly, guided by fiscal responsibility, best practices, and concern for the well-being of all consumers of infrastructure services.

We need all hands on deck if we want to finance the infrastructure that will allow countries to meet the Sustainable Development Goals and react smartly to climate change. 


Read the full report here and feel free to leave comments or questions.

 

Related Posts

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New report on private capital for infrastructure in the poorest countries: 2017 a stellar year

New data reveals uptick in private investment in EMDEs in 2017

PPI Database users leave their mark on the new resources section

 


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

Authors

Deblina Saha

Associate Infrastructure Specialist, Infrastructure Finance, PPPs and Guarantees (IPG) Group

Fatouma Toure Ibrahima

Manager for Global Infrastructure Programs and Analytics, Infrastructure Finance, PPPs and Guarantees (IPG) Group.

Join the Conversation

Domingo P.
February 04, 2020

Nice post. An important point here is that users and/or taxpayers are who end up footing the bill of any investment in infrastructure. If you are an institutional investor this is a key point to get involved in PPI, especially major projects: the more capacity of the public agency (SOEs or whatever hybrid company) to pay, the more interest for long-term financing arrangements. In general, the capacity of citizens to pay, i.e. the government's ability to obtain funds from users and/or taxpayers, is inversely proportional to risk, even though there are other factors that are also important for the success of PPPs (overarching legal/fiscal framework, governance, policy continuity, etc.). One suggestion: it would be interesting an study linking the level of PPI to the capacity to pay of the countries' citizens.

February 11, 2020

Many thanks for your interest in the topic. It is an interesting point that there could be some correlation between citizens capacity to pay and level of PPI, though there are could be many factors involved including the government’s efficiency in collecting taxes and user fees as well as the conduciveness of enabling environment for PPI. Thanks for the suggestion- perhaps something we can keep in mind for future research topics.”

Hossein Nourzad
February 04, 2020

Thanks for the insightful paper. It is crucial to foster smart investment both from public and private sectors and it requires a collaborative culture.