A new IMF working paper investigates the emerging global landscape for public-private co-investments in infrastructure. The creation of the Asian Infrastructure Investment Bank and other so-called “infrastructure investment platforms” are an attempt to tap into the pool of both public and private long-term savings in order to channel the latter into much needed infrastructure projects. This paper puts these new initiatives into perspective by critically reviewing the literature and experience with public private partnerships in infrastructure. It concludes by identifying the main challenges policymakers and other actors will need to confront going forward and to turn infrastructure into an asset class of its own.
Institutional investors such as pension funds, insurance companies and mutual funds, and other investors such as sovereign wealth funds hold around $100 trillion in assets under management. One gets a clearer grasp of the enormous size of this global wealth by comparing it to US nominal GDP $18 trillion in 2015.Against this backdrop of a largely untapped pool of global savings, estimates suggest that the world needs to increase its investment in infrastructure by nearly 60 percent until 2030. There is a huge infrastructure investment gap in a large number of countries. The average infrastructure investment gap amounts to between $1 to 1.5 trillion per year. Infrastructure investment needs are mostly earmarked for upgrading depreciating brownfield infrastructure projects in the EU and in the US and for greenfield investments in low-income and emerging markets. The future growth in the demand for infrastructure will come increasingly from emerging economies.
There is growing recognition globally that development banks can play an important role in facilitating the preparation and financing of infrastructure projects by private long-term investors. A number of infrastructure platform initiatives have been launched very recently, most of them still at a prototype development stage. We discuss four different models that are currently at various stages of development. These platforms are all different attempts to tap into the vast pool of global long-term savings by better meeting long-term investor needs to attract them to infrastructure assets and by relaxing operating and governance constraints traditional development banks have been facing.A first obvious lesson from an analysis of these platforms, is that the ability of development banks to leverage public money –committed capital from government contributions—by attracting private investors as co-investors in infrastructure projects is increasing the efficiency of development banks around the world. It is not just the fact that development banks are able to invest in larger-scale infrastructure projects and thus obtain a greater bang for the public buck, but also that these private investors together with development banks can achieve more efficient PPP concession contracts. Development banks are not just lead investors providing some loss absorbing capital to private investors. They also give access to their expertise and unique human capital to private investors, who would otherwise not have the capabilities to do the highly technical, time-consuming, due diligence to identify and prepare infrastructure projects. In addition, they offer a valuable taming influence on opportunistic government administrations that might be tempted to hold up a private PPP concession operator. Private investors in turn keep development banks in check and ensure that infrastructure projects are economically sound and not principally politically motivated. No wonder that this platform model is increasingly being embraced by development banks around the world.The paper has documented that new platforms of investments have emerged. Notwithstanding, they are confronted with serious structural limitations. These platforms will certainly help on two important fronts namely on financing and origination of infrastructure projects, which this paper has focused on. Formally integrating these dimensions in models of PPP are important avenues for academic research.Besides financing and origination, there are other important challenges to complete the broader task that lie ahead, such as in making infrastructure investment an asset class of its own. Two important directions are needed to further the agenda. First, the lack of standardization of underlying infrastructure projects is an important impediment to the scaling up of investment into infrastructure-based assets. Large physical infrastructure projects are indeed complex and can differ widely from one country to the next. In that respect, making use of securitization techniques such as collateralized bond obligations (or CBOs) or collateralized loan obligations (or CLOs) allow for better price discovery which will enhance the efficiency of the market and allow a more effective pooling of risk. It would also allow to “bulk up” the bond offering by addressing the problem of insufficient large sized bond issues. Overall, securitization will provide many advantages such as diversification for investors, lower cost of capital by allowing senior tranches to be issued with higher credit ratings, as well as higher liquidity. At the same time, securitization also creates debt instruments of variable credit risks to match the different risk appetites of investors. Second, there are important complementarities between actors participating in the “value chain” created by platforms including host countries, financial investors, guarantors and financial intermediaries. For all these reasons, the EIB has recently launched a renewable energy platform for institutional investors (REPIN) to offer repackaged renewable energy assets in standardized, liquid forms to institutional investors15. Although interest from institutional investors has been limited so far, the new carbon footprint disclosures and regulations of institutional investors that are expected be implemented after the Paris COP 21 climate summit, could nudge more pension and sovereign wealth funds to take on these securities.Finally, host countries may put forth viable long term infrastructure projects but without the provision of guarantees to address construction, demand, exchange rate risks or without the securitization of underlying assets by financial intermediaries, those projects will not be funded, thus leaving everyone worse off. There is obviously also a need for enhanced coordination and cooperation across the various platforms in existence and for the creation of a global infrastructure investment platform. Part of the coordination should lead to risks being assumed by those best placed to hold them. Governments are the natural holders of political, regulatory and governance risks. The private sector for obvious incentive reasons should take on most of the construction risk, and demand risk should probably be shared, depending on the sector and type of project.
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