The need for infrastructure investment has never been greater. In order to keep pace with economic and demographic changes – including rural-to-urban migration and the delivery of the UN’s Sustainable Development Goals (SDGs) – US$97 trillion of infrastructure spend will be required by 2040, according to the Global Infrastructure Hub.
This ambitious target is made even more challenging by the current global infrastructure investment gap of around US$15 trillion by 2040. Meeting the SDGs increases the need to US$18 trillion. To close the gap, annual infrastructure investment will have to increase from the current level of 3% to 3.7% of global GDP.
Private investment in infrastructure is not a new concept
Much of the infrastructure investment around the world has been financed by governments or Multilateral Development Institutions. However, with countries experiencing high debt levels, it is almost impossible for governments to fund the entirety of infrastructure needs.
Private input
Private investment in infrastructure is not a new concept. Numerous 19th-century projects such as railway and canal construction were financed by capital raised from shares and bonds. More recently, since the 1980s a wave of privatisation of state-owned enterprises and assets, particularly in utilities, telecommunications, railways and airports, is once again enabling private sector involvement.
While considerable new infrastructure investment requirements are linked with the transition to a carbon net-zero world – from clean renewable energy generation to the electrification of road systems – substantial other infrastructure needs exist across transport, IT networks, data centres, hospitals, schools and other social services.
Public private partnerships enable greater private participation and risk-taking
The right route
Infrastructure debt issuance to finance building or modernising projects for local, state or community-owned and operated assets, whereby usage charges enable interest servicing and repayment, is one way of getting private capital into infrastructure. Educational, water and waste services, along with public transport extensions, are types of assets that could suit such cases, providing long-term stable cashflow for investors such as insurance companies and pension funds.
Public private partnerships (PPPs) offer another route. These enable greater private participation and risk-taking in designing, financing, building and operating the infrastructure service, usually over the life cycle of the asset and service. In most cases, PPPs have provided good value for money for taxpayers, and from a private sector perspective have to pass threshold return requirements for investors, ensuring economic value.
More than US$1 trillion of private funds is invested in infrastructure assets
Globally, more than US$1 trillion of private funds – a sixfold increase since 2008 – is invested in infrastructure assets, either in public or PPP projects, through listed assets or private investments. However, much more needs to be mobilised, given the scale of what’s required over the next two decades.
Role of banks
Banks and financial institutions can play a vital role by not only extending balance sheets and managing risks but, more importantly, as originators and distributors of financing transactions, providing liquidity and access to capital through market mechanisms. Financial institutions and asset managers have come a long way in understanding, and educating on, infrastructure risks to investors, such as from changing regulation and policies, construction and completion risks, financial leverage, cashflow uncertainty, and project cost overruns.
The foundations have been well developed over the past four decades, and this will no doubt allow for the rise in supply of private capital for infrastructure investments, matching greater volumes of projects seeking investor funding, including in faster growing Asian economies.
Public capital and multilateral development banks (MDBs) can also get involved by underwriting risks for projects that have uncertain characteristics, such as project initiation risks, completion uncertainty, and unpredictable demand and cash flows.
Having government and MDB support to reduce economic and financial risk will enable private capital to take on a greater role in financing infrastructure assets. This is even more important in developing countries, where financial risks tend to be higher for longer term private capital.
Failing to invest will only create greater problems for our economies and our planet
The US$1.6bn Sarulla Geothermal Power Project in Indonesia is one such example. The Japan Bank for International Cooperation and the Asian Development Bank are the lead structuring banks, providing loans of US$492m and US$250m respectively, while US$80m has been loaned by the Clean Technology Fund, US$20m by the Canadian Climate Fund for the Private Sector in Asia and US$328m from six commercial banks.
Another growing trend has been for private capital to fully undertake infrastructure projects. This typically involves building and owning the asset, and delivering a service based on commercial terms, usually approved, overseen and regulated by governments. Most of the mobile telecom and IT networks, container shipping terminals and solar and wind farms of the 21st century have been built this way – an approach that is likely to play a much greater role over the next few decades, and already evidenced by large investments in EV charging networks.
Infrastructure builds require large sums of money, but failing to invest will only create greater problems for our economies and our planet. Given the scale of the requirement and the challenges with public finances, private capital will have to play a much bigger role in financing infrastructure projects of the future. The good news is that, supported by the public sector and MDBs, investor and financial institutions are rising to the challenge.
