Making infrastructure investment work
World Bank, IFC can help build coalition
by David Marsh in London
Thu 4 May 2017
Making infrastructure spending work more effectively as a tool for regeneration and growth is an important global task. To achieve this aim, world governments need to demonstrate more joined-up thinking and action.
Imaginative steps must be taken, especially from governments providing development aid, to allow taxpayers’ money to stretch further into boosting beneficial investment in ventures ranging from ports and railroads to energy and education. Imagination and discipline are needed. One measure could be to form an international coalition of public authorities occupying different positions on the infrastructure value chain.
Infrastructure is the word of our times. Donald Trump’s election campaign emphasised the US investment gap in this field – although the president has done little so far to try to plug it. The issue extends around the world. Rarely has one technocratic-sounding term been imbued with so many beneficial meanings.
Infrastructure investment stands for multiple benefits. It is a desirable outlet for investment funds and an attractive means of raising growth rates and living standards. Moreover, it is an efficient way of promoting development and, if designed with environmental motives, a method for building sustainable, low-carbon economies in both advanced and developing markets.
Governments and investors are considering how best to guide the world’s surplus of income-seeking investable funds down the infrastructure route. Much more needs to be done. We need a compact between three categories of officialdom which seldom speak to each other: government investors, donors, and project sponsors.
The first of these three groups are Global Public Investors. These include the world’s sovereign funds and public pension funds which, together with central banks, command around $35tn of investable assets, according to OMFIF rankings. Many of these institutions are seeking higher returns in what are popularly known as ‘alternative’ assets like infrastructure.
The second category comprises government departments and agencies that fund development. Increasingly, through sophisticated and powerful indirect financing mechanisms, they are embarking on improving the scope and efficiency of lending by multilateral agencies such as the World Bank and its private sector-focused scion, the International Finance Corporation. At April’s spring meetings of the International Monetary Fund and World Bank in Washington, donors explored ways of providing guarantees for raising private sector participation in official infrastructure funding programmes. A lot of this can be linked to ‘green’ financing instruments.
Government guarantees from Nordic donors are helping catalyse the IFC’s ‘managed co-lending portfolio programme’, allowing official and private sector institutional investors access to the IFC’s emerging market loan portfolio. Donors’ involvement in a World Bank loan guarantee facility is helping the Bank to recycle older loans, transferring them to private sector creditors. This frees the Bank’s capital for fresh infrastructure loans and markedly increases government funding leverage.
The third group is made up of infrastructure project sponsors from government departments responsible for bringing deals to market, both in advanced and emerging market economies. From Atlanta to Zanzibar, providers of equity and debt are seeking bankable infrastructure projects for their portfolio strategies.
In nearly every region, banks, governments and development agencies speak of infrastructure needs running into tens of trillions of dollars for coming years. Yet demand for fully commercial projects greatly outstrips supply. Unless governments around the world make a more determined effort to promote projects in which investors can beneficially place their funds, the market imbalance will count against investors. Too much money will be chasing too few commercially propitious projects. Excessive demand will drive up prices and lead to lower returns. Government pensions agencies and sovereign funds – and with them taxpayers – will be the losers.
The need for coordination on infrastructure investment has never been greater. It is time for the international community – with bodies like the World Bank and IFC playing a key role – to turn aspiration into reality.
David Marsh is Managing Director of OMFIF.
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