The report shows that the way forward needs to involve new thinking by all parties
A new report from the World Economic Forum (WEF) provides roadmap to maximize private investment in meeting infrastructure funding needs. The report also throws light on key trends policy-makers must anticipate include increasing geographic and sectoral specialization of infrastructure funds, increased importance of capital markets and decreased role for commercial banks.
It also includes case studies highlight key lessons from private infrastructure transactions from around the globe. Of the estimated US$ 3 trillion needed per annum to meet global infrastructure investment needs, only US$ 1 trillion currently comes from private sources.
A third of total funding needs is in developing countries, where private infrastructure finance is less developed. The report, Paving the Way: Maximizing the Value of Private Finance in Infrastructure, provides a common reference point for what considerations are important to private capital providers and how the public sector can develop its capacity to address them.
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Written through active consultation with representatives from both the public and private sectors, the report provides a framework for policy-makers as they seek to create environments favourable to investment, develop meaningful scale for private investment markets, and prepare for the future evolution of these markets. Case studies highlight what approaches have and have not worked across different countries.
"By many measures, private infrastructure investment remains a niche sector and investment opportunity. This World Economic Forum report sets out how the public and private sectors can work together to maximize the role of private finance, particularly given the scale of infrastructure need and the increasing fiscal constraints of many governments," said Kevin Steinberg, COO, World Economic Forum USA, Head of Centre for Global Industries in New York.
Tony Poulter, Global Consulting Leader at PricewaterhouseCoopers, said: "Getting infrastructure investment in place quickly while also delivering value poses a challenge not only to government but to developers, investors and funders. In the current environment this challenge is bigger and more important than ever before. This report from the World Economic Forum shows that the way forward needs to involve new thinking by all parties - but that positive steps can be taken. We are very happy to have worked with the World Economic Forum on this."
The market trends and key factors associated with successfully involving private finance highlighted in the report include:
1. Countries that have been successful in tapping private finance markets have:
- created political, legal and economic environments conducive to investment
- established ongoing programmes of opportunities
- instituted contractual and regulatory frameworks to address any issues effectively and fairly
- provided forums for stakeholders to share experiences
- involved the public at all stages.
2. The costs and terms of commercial debt have changed significantly as a result of the economic crisis; reinvigorating the capital markets as a source of finance for infrastructure is difficult but of critical importance in the long term.
3. There will be a move to more specialized infrastructure funds to provide investors with a better alignment of risk to reward. Investors will also place greater value on fund managers with experience in ongoing infrastructure asset management.
4. Retail finance participation in infrastructure funds is likely to grow, but it requires a clear articulation of the value proposition and related challenges.
5. Not all pension funds are the same and, while some are undoubtedly major investors in infrastructure, there are many that still regard infrastructure to be too specialized an alternative investment.
6. While the heightened government financial support of infrastructure through the current financial crisis is expected to diminish, it appears likely that more countries will set up state infrastructure banks.
7. Budgetary issues and increasingly constrained opportunities in the developed world may help steer more investment dollars to emerging economies (particularly BRIC countries) that have increasingly stable political, legal and economic regimes.
8. Private investors care more about whether an investment is based on established practices than if it is green field. Getting private financing remains a challenge when the project is novel, untested or in a new market, but there have been successful examples of investment in more challenging projects in different markets.
The report is the result of a year-long multistakeholder collaboration between the World Economic Forum, PricewaterhouseCoopers and Industry Partners of the World Economic Forum. Guidance was provided by an Expert Committee of 24 leading practitioners from the private and public sectors and academics.
The report is available at http://www.weforum.org/pdf/FinancialInstitutions/Infrastructure2010.pdf
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