CoST Executive Director Petter Matthews reports from a recent ‘Infrastructure Financing Seminar’ organised by the G20 Infrastructure Working Group1 and reflects on the challenges of mobilising private investment in public infrastructure.
It was reported last year that the global financial system is awash with up to $10 trillion dollars of excess cash. This report came soon after the Global Infrastructure Hub had published its Global Infrastructure Outlook that identified a $15 trillion ‘investment gap’ up to 2040 (See Figure 1). Not surprisingly, many are asking why more of this vast pool of investment capital is not being mobilised to help meet the world’s infrastructure needs (See Figure 2). Amongst them is the G20 Infrastructure Working Group that recently convened an ‘Infrastructure Financing Seminar’ in London.
The G20 has a clear sense of the solution and importantly, it includes establishing infrastructure as an ‘asset class’. An asset class is a category of investments that share similar financial characteristics. Investors tend to think in terms of five main asset classes – cash, shares, property, commodities and bonds. Whilst a modest but growing amount of private and institutional investment is going into infrastructure, those investments tend to be unique and don’t share characteristics to the extent that would be necessary for them to be considered an asset class. This can be addressed, according to the G20, by standardising how infrastructure investments are planned, structured and brought to market. The benefits of this include simplifying and improving due diligence procedures, helping investors to price risk, reducing transaction costs and ultimately, increasing the flow of investments to bankable projects.
Figure 1: Infrastructure investment gap by region, 2016 – 2040
An additional and related constraint on investment, according to the G20, is the lack of data on the opportunities available to potential investors. Existing datasets are managed by specialist companies and tend to be small, fragmented and not freely available. The solution proposed by the G20 is to create an asset-level open access data source that is operated a non-profit basis. This is where the experience of CoST and other open contracting initiatives could be useful.
The experience of CoST, particularly where governance is weak, is that gaining access to data and ensuring its quality is very difficult. Governments often lack the analytical capacity needed to gather data and publish it in a form that is accessible. It would of course be possible for the G20 to appoint consultants to gather the data, but that would be a missed opportunity to build the analytical capacity of the governments involved. Analytical capacity is fundamental to monitoring the performance of built assets, predicting future demand and meaningfully consulting with citizens, all essential components of good governance.
Our experience also reinforces the importance of publishing information, not only because there should be an assumption in favour of providing public access to information, but also because the scrutiny associated with transparency helps ensure the quality of data. Those responsible for compiling and publishing data know that gaps in information, inaccuracies and any failure to comply with the relevant data standards will be challenged by the media, civil society and the public.
Figure 2: Barriers to Institutional Investor Flows
Adapted from Contribution of Institutional Investors: Private Investment in Infrastructure, World Bank (2018).
| Lack of sizeable project pipeline | Too few well-prepared and well-structured projects to attract potential investors. |
| Limited resources | Institutional investors have limited resources to establish the specialist teams necessary to assess and track investments in EMDEs. |
| High risk/low returns | Potential investors view these economies as relatively high risk and require minimum returns to justify accepting those risks. |
| Challenges due to the inherent nature of the infrastructure projects | Some characteristics of infrastructure financing constrain institutional investment such as: (a) no returns during construction phase; (b) restrictive and unclear investment exit strategies and (c) often no make-whole provisions on early payment or refinancing by borrowers. |
| Differing mandates and lower risk appetite of institutional investors | Institutional investors differ in terms of governance structures, return expectations and risk appetite making it difficult. |
| Unpleasant past experiences | The first generation of infrastructure-investment products did not cater well to institutional- investor needs, and there were numerous cases of investment in projects with poor returns and little economic value. |
| Information asymmetry | A knowledge deficit about what investing in infrastructure means may deter institutional investors from exploring such long-term investment decisions at the relevant strategic asset-allocation decision meetings. This information gap has the potential to reinforce the view among regulators that infrastructure investment is highly risky and should be generally avoided as an asset class. |
There are of course many who will question the premise of trying to fill the investment gap through private and institutional resources. Particular criticism has been directed for example at PPPs, which it is claimed by some CSOs, are expensive, inefficient and expose governments to considerable financial and other risks. And these concerns are not confined to CSOs. The UK’s National Audit Office recently reviewed the experience of the UK in private financing and found that the costs of private finance deals tended to be higher than publicly financed alternatives and in some cases, up to 40 per cent higher.
One point that tends to unite critics of PPPs is that increased transparency is necessary to improve their performance. CoST recognised this some time ago and began to address it through collaboration with the World Bank to promote good practice and through individual countries extending their approach to include PPPs. CoST Honduras for example recently announced it was to disclose information on close to $2 billion of PPP investments.
PPPs remain controversial for some and the G20, on the evidence of the recent seminar, is aware of this and appears to be adopting a more pragmatic approach. PPPs were discussed as one financing option amongst many and there seemed to be a consensus that the selection of PPPs over other alternatives should be evidenced based.
CoST was one of several CSO and private sector stakeholders in attendance at the recent G20 Seminar and we found it very enlightening. It is to the credit of the organisers that they are willing to consult with external and non-governmental stakeholders. It is also encouraging that under Argentina’s Presidency, infrastructure is again high on the G20’s agenda. Many of the initiatives being undertaken by the G20 require a commitment beyond any individual Presidency and it is reassuring therefore that Japan is committed to maintain momentum on these issues in 2019 when it assumes the Presidency. It is hoped that Saudi Arabia will take over the baton in 2020 and use its influence amongst other things, to improve transparency and accountability of infrastructure investments in the Gulf region.
1. The event was jointly convened by the OECD, HM Treasury and City of London in association with the G20.