Building the $15 trillion bridge

The release of the Addis Ababa Action Agenda marked a watershed moment in the global discussion on funding for infrastructure projects. Produced to mark the conclusion of the third United Nations' International Conference on Finance for Development, in contained two noteworthy admissions: that the shortfall in funding for the global infrastructure pipeline could not be corrected without significant levels of private investment; and that, for a variety of reasons, the global infrastructure pipeline was not an attractive destination for private capital. For the first time, a consensus among development institutions had been established on the need for commercial banks and investors to help fund vital infrastructure initiatives, and the cause of their reticence to do so.

Throughout the second-half of the 20th century, various blended-finance models were proposed as having the potential to ease the burden on taxpayers of paying for largescale public projects. Nonetheless, it wasn't until the UK government's Private Finance Initiative (PFI) of the mid-1990's that a major developed economy adopted a largescale Public-Private Partnership (PPP) model for delivering essential infrastructure. Over the course of the following decade, such delivery models proliferated globally.

Matti Siemiatycki, Interim Director of the School of Cities at the University of Toronto says of those early PPPs: "With the first generation of deals that took place in the 1990's and early 2000's, there was a sense that the private sector was more efficient than the public sector and that governments should be trying to transfer risk and responsibility to the private sector. What we learned from those early deals is that it was an extremely expensive way to go about things, because private lending is more expensive than government financing. And so, you started to see these long-term deals face real scrutiny about whether they were delivering value-for-money."

The UK's early misadventures with PFI have caused an unforgiving public to view blended-finance with suspicion ever since. In 2006, Tony Blair's government announced the commencement of over 70 new PFI projects with a combined capital value of £7 billion and yet, by 2018, in the wake of the collapse of UK firm Carillion – the largest trading liquidation in the country's history – the government announced plans to phase out PFI altogether.

The British experience has been instructive for developed and developing nations alike. In Canada and Australia, steps have been taken to ensure PPP models protect the public interest and assuage taxpayer concerns regarding public value and corporate responsibility. Meanwhile, in January 2019, international development specialist David Baxter wrote a blog for the World Bank in which he predicted the rise of "people-first" PPP's across the developing world.

The emerging trend, he posited, would be characterised by an increased focus on Sustainable Development Goals in infrastructure policy, planning and, crucially, finance arrangements. But while work continues to change popular perceptions of PPP, public scepticism is only half of the story.

Professor Martin Haran of Ulster University's Built Environment Research Unit explains: "It's ironic, given the size of the global infrastructure investment gap, that when we speak to private equity investors and pension funds, one of their biggest grievances around investment is a lack of a project pipeline. Effectively, their ability to place capital in the market is compromised by the inability of governments to bring forward their project pipelines in an efficient and effective manner. The single biggest block to investment is the protracted nature of development pipelines, and it's no coincidence that private equity infrastructure funds have record levels of 'dry powder.'"

The reality is that the growing investment gap does not necessarily reflect general public hostility to the use of private money in development of nominally public projects, nor does it denote a lack of available capital. The issue instead seems to be a perceived lack of investible projects. This partly vindicates the concerns raised by signatories of the Addis Ababa Action Agenda, when they acknowledged “an insufficient number of well-prepared projects.” But Professor Haran also notes a “misalignment” between how investors and governments assess the opportunity and risk profile of individual projects and, more generally, infrastructure as an asset class.

For Zhi Liu, Director of the China Program at the Lincoln Institute of Land Policy, there are encouraging signs across the developing world that the overall capacity to deliver projects on time and within budget is improving. For instance, in states such as Ghana, Kenya and Mauritius, PPP units have been created at national government level, designed to borrow knowledge and expertise from more mature markets. The intended effects include improved models of packaging projects for investors and the streamlining of procurement processes previously vulnerable to corruption. Characteristic of the age, Liu also cites the effective adoption of new technology as essential to further engendering investor confidence: “Digitalisation is really growing quite rapidly in the developing world. I am in China and I see how technology is spreading into many professions. From an infrastructure perspective, it is going to be the greatest thing for us to speed up the implementation of the project pipeline.”

The Global Financial Crisis of 2008 saw a major movement of private equity into the infrastructure space. Investors bruised by the recession and seeking to de-risk their portfolios were lured by the security of tangible assets in the otherwise volatile ecosystem of markets. In particular, pension funds, insurance firms and sovereign wealth funds were attracted to the promise of predictable, long-term returns offered by well-placed investments.

As population growth, urbanisation and climate change increase the pressure on governments to renew vital infrastructure assets, and with public purses squeezed the world over, the fact that so much private capital earmarked for the sector remains unspent is a source of immense frustration. The finance is both urgently necessary and tantalisingly available. And yet the bridge remains unbuilt.