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Executive Summary

© New York University/Stern School of Business, CC BY 4.0

Infrastructure and its effects on economic growth, social welfare, and sustainability receive a great deal of attention today. There is widespread agreement that infrastructure is a key dimension of global development and that its impact reaches deep into the broader economy, with important and complex implications for social progress.

There is equally broad agreement that infrastructure’s dynamics are often hard to gauge. The external costs and benefits of infrastructure projects often differ materially from their internal costs and benefits. There are usually winners and losers, so in the political arena debates on infrastructure tend to be amplified. Consequently, infrastructure is a rich field for the kind of inquiry needed to craft sensible business strategies and public policies. They begin with the basics:

  • Just what is “infrastructure”, and where do its boundaries lie?
  • How should infrastructure services be priced when they generate significant public goods whose benefits are hard to allocate?
  • How should adverse effects of infrastructure projects be incorporated into their cost structures, to be passed forward to end-users and backward to investors?
  • On the spectrum between private and public ownership, where should individual infrastructure projects fall? What is the appropriate role for public-private partnerships, purpose-specific infrastructure authorities, and build-operate-transfer models?
  • What kinds of regulatory arrangements covering infrastructure projects are appropriate given widely differing political and economic circumstances?
  • How should infrastructure development be financed, either on or off the public accounts of governments or private-sector sponsors? Where in the global pool of investable financial assets can infrastructure debt and equity best be placed?

This study focuses on the last of these issues — infrastructure finance. The scale of infrastructure investment needed in both developed and developing countries parallels the need for investable assets to create efficient portfolios in pension funds and other long-term managed asset pools. So a sustainable global equilibrium based on returns, costs, and risks can generate dramatic shared gains.

Some Key Conclusions

© New York University/Stern School of Business, CC BY 4.0

Infrastructure finance is among the most complex and challenging areas in the global financial architecture, and so the problem of assembling a set of sensible guideposts for it is equally formidable. We begin with a dozen findings backed by serious theoretical and empirical research:

  1. Infrastructure development matters in the context of economic performance and growth.
  2. Infrastructure tends to generate significant positive spillovers, and is therefore hard to price.
  3. Infrastructure projects are usually large and complex, involving financial engineering that reflects their complexity and the need to align differing participant interests in pursuit of common gain.
  4. Infrastructure projects usually extend over long periods of time, with their successive phases reflected in their capital structures
  5. Risks surrounding infrastructure projects reflect their inherent complexity, ranging from cost overruns and delays to changes in government policies and force majeure.
  6. The interaction between project complexity and risk can lead to highly contract-intensive financing arrangements. In turn, infrastructure finance in projects involving the private sector can combine equity, commercial loans, and fixed-income securities which must be taken up by suppliers of capital.
  7. Commercial lending’s role remains critical in the early phases of infrastructure project development, and is the province of financial intermediaries that have accumulated the necessary expertise (today predominantly European and Japanese banks).
  8. The 2007–2008 global financial crisis — and the ensuing regulatory response focusing on risk-weighted assets, capital adequacy, liquidity, and funding stability in large financial institutions — do not seem to have materially impaired the availability of bank financing for viable infrastructure projects.
  9. Efforts to tap global bond markets for infrastructure finance remain a work in progress in light of their risk ratings, maturities, and secondary market liquidity. Nevertheless, large asset managers have the opportunity to build expertise and appetite in this asset class, which would broaden this channel for infrastructure finance.
  10. Based on the available evidence, infrastructure equity has performed well over various time periods, compared to the standard equity indexes and sector indexes such as commercial real estate.
  11. An array of institutional initiatives and policy measures — including reforms in traditional multilateral agencies and new entrants — could be catalytic in addressing blockages in global infrastructure finance.
  12. In the contemporary market environment, the overriding problem is less the shortage of available financing than the shortage of financeable infrastructure projects worldwide. This has retarded the migration of infrastructure finance from the public sector to global capital markets.

In this study, we explore each of these findings based on what we think we know about infrastructure finance and, where available, empirical evidence. It is structured in two parts: First, we review the key attributes and drivers of infrastructure development. Second, we examine the specifics of infrastructure financing.