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Citi Perspectives for the Public Sector |
2014
7
world be investing in infrastructure annually,
and how to fund it? While the first question is
highly theoretical, the frustration around the
large number of infrastructure projects that go
unfunded and unbuilt every year is very real.
Governments around the world, many of
them in the Emerging Markets, are sitting
on one-page concept papers, as well as
partially and even completed studies for
major infrastructure projects, ranging from
ports and airports to roads and power plants.
These are primarily legitimate, growth-
enhancing projects, but in many cases have
not yet been fully developed to the point of
being financeable. The plight of “gridlocked”
infrastructure projects is a result of the
morass of environmental, social, political
and economic hurdles governments must
frequently overcome to get things done.
But the single biggest hurdle, of course, is
funding. Governments are under enormous
pressure to reduce debt and deficits, and
fiscal constraints make growing infrastructure
spending politically challenging. Given the
predicament of government budgets, it is
somewhat surprising that governments
continue to fund infrastructure primarily
themselves, on their own balance sheets, with
little help from the world’s private sector.
Of the over $3 trillion of global spending on
infrastructure projects, less than $400 billion
was financed in 2013 by the private sector in
the project finance world.
There are many reasons why the global project
finance market is less than 15% of global
infrastructure spending. Many infrastructure
projects entail “externalities,” where the
beneficiaries lie beyond the immediate users
(and thus there is a premise of taxation as
a funding source). In order to be financed in
the private sector, an infrastructure project
needs a source of revenue that can pay both
the equity and debt investors in that project
a return commensurate to the risk each of
these investor classes take. With respect to
these risks, the vast majority of infrastructure
situations are “greenfield,” or new projects
with construction risk, which are more difficult
to get financed through private funding
sources. There is often still a disconnect
between governments and the private sector
on the appropriate risk-return tradeoffs,
particularly in areas such as performance risk
or construction risk. Institutional investors
still shy away from construction risk, and in
many cases have yet to develop the capacity
to assess complex project finance structures.
Infrastructure projects in the Emerging
Markets often need local currency funding, and
Infrastructure
investments
are germane
to broader
economic
growth, and
yet the gap
between what
the world
spends on
infrastructure
and global
economic
infrastructure
requirements
is massive.