Public-private investment to close the infrastructure gap

In a world of slow growth and very low interest rates in most major economies, there is increasing interest in infrastructure development. Building quality infrastructure helps spur economic activity and jobs in the short term and expand countries’ capacity and potential growth in the medium term. It also contributes to higher confidence levels — a key ingredient to macroeconomic stability.

Today, the private sector still provides only a small share of the total investment in infrastructure for emerging markets, despite the importance of private operators in many countries, especially where there are strong fiscal constraints to financing public investment.

The appetite for infrastructure on the part of fixed-income investors, in particular, is clearly below its potential. This is in part because of insufficient information and an apparent mismatch in risk-adjusted returns. Good projects and innovative risk mitigation instruments can help address this mismatch and unlock new sources of finance for infrastructure.

Political instability, regulatory hurdles, market volatility, foreign exchange fluctuations, and information asymmetries are among the most common causes of concern for institutional investors investing in developing countries. There are many ways to mitigate these risks, including comprehensive government investment programs with standardized features that reduce the costs of gathering and processing information for investors. That is what Colombia has been doing with the support of the World Bank Group and private financial institutions.

Helping achieve this strategy is a goal of the Global Infrastructure Facility (GIF), whose third Advisory Council Meeting took place June 6 in Changsha, China.

The GIF brings together financial institutions, infrastructure builders and operators, as well as governments and multilateral development banks, with the aim of improving project preparation, bid documentation and other essential elements to finance infrastructure investments. Seed funds of $100 million are being used for this purpose during its initial three-year pilot.

There has been a good deal of progress in GIF’s pipeline this past year. From programmatic assistance for a logistics infrastructure program in Brazil, to last-mile support for a hydropower plant in the Solomon Islands that will generate more than two-thirds of the country’s energy needs, the GIF is helping reduce the infrastructure gap across the globe.

Indeed, GIF is proving its extraordinary potential in creating best practices in infrastructure project design and implementation, as well as in leveraging the participation of its Advisory Board of commercial, institutional, bilateral and multilateral financiers with over $12 trillion in assets under management.

In order to mobilize the trillions of dollars needed to close the infrastructure gap, better projects will have to be accompanied by measures in other segments of the infrastructure investment value chain. When you listen to stakeholders, it becomes clear that the work in the downstream, midstream, and upstream segments of this chain should include:

• Downstream: Continue to influence the environment in which projects operate and mechanisms through which disputes are resolved; improve project preparation and the use of construction insurance; standardize and make available to investors the information about projects in data platforms or hubs.
• Midstream: Further use of guarantees by multilateral financial institutions, as well as hybrid products that integrate the risk appetite of banks for construction risks with the long-term horizon of pension funds, while addressing refinancing risks; foster the standardization and comparability of contracts and financial documentation of projects and of related financial instruments.
• Upstream: Develop and disseminate tools such as fixed-income infrastructure indexes; and understand the regulatory constraints and fiduciary responsibilities of asset managers and their principals.

This three-pronged approach will help us narrow the global infrastructure gap, yielding a strategy to end extreme poverty and boost shared prosperity. Studies from rating agencies show that infrastructure bonds typically have a better risk profile over their lifetime than corporate bonds, often with a lower chance of default and higher recovery rate, including in emerging markets.

Most importantly, closing the infrastructure gap, while providing a steady income stream to investors, will mean that billions of people living without basic services — from electricity, to all weather-roads to clean water and sanitation — will have access to the infrastructure they need to lift them out of poverty.