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A rural road in Bolivia
Few doubt the need for significant global investment in sustainable infrastructure.
Without better roads, sanitation, hospitals, and schools, the prospect of achieving the Sustainable Development Goals looks increasingly remote.
Enter the G20 with their plan to develop an ‘infrastructure asset class’. In other words, the solution they suggest is to transform infrastructure into a tradeable financial product, through financial engineering: repackaging money invested in an infrastructure project into a number of standardised financial products, as easy to buy and sell as stocks and shares.
However, we don’t have to dig deep to find three major problems with this plan.
Firstly, the G20 is ignoring opportunities to increase and improve public investment.
Historically, infrastructure projects in developing countries have been overwhelmingly financed through public investment: 80-85% according to the World Bank, and over 90% in fast-growing Asia.
There are good reasons for this reliance on public investment.
‘Creating an asset class out of infrastructure may please some private investors, but it will not meet the development commitments that the G20 countries have signed up to.’
It is difficult to persuade investors to invest in infrastructure and there are a limited number of opportunities for purely commercial infrastructure projects.
The private sector wants to make money and this model can end up costing the public purse through bailouts and risk guarantees.
Secondly, creating an asset class to attract institutional development is likely to hurt the public purse – and therefore citizens - for two reasons.
First, turning infrastructure investments with low or no returns into attractive high-return opportunities for investors can only be done through additional public subsidies.
Second, infrastructure projects are inherently risky.
The G20’s definition of risk covers just about every aspect of a project – construction, completion, currency, revenue and demand fluctuation, environmental, political and regulatory.
To turn projects into attractive and safe assets that can be bought and sold by investors usually means transferring this risk to the public sector.
Thirdly, the push to develop an infrastructure asset class is a huge leap in the dark.
Private finance for infrastructure has fallen in recent years, despite the G20’s efforts to promote it, and the current level of institutional investor investment in developing country infrastructure is miniscule, according to the World Bank.
The G20’s plans are unlikely to work because of the fundamental contradiction between private investors’ need to earn substantial returns and the generally low returns of infrastructure investment in developing countries.
They are especially unsuitable for low-income countries - the very ones which need infrastructure investment most – and they might encourage socially and environmentally damaging ‘mega-projects’.
Civil society organisations from across the world will meet at the Civil20 Summit in Buenos Aires this week and will deliver its main messages to the G20 presidency.
CSOs are seriously concerned about this agenda and are calling on the G20 to stop putting private finance first and instead focus on how to improve and deliver publicly-financed infrastructure.
Creating an asset class out of infrastructure may please some private investors, but it will not meet the development commitments that the G20 countries have signed up to.
Sustainable infrastructure is vital for reducing poverty and promoting development.
Recognising that the ‘infrastructure financing gap’ is in fact a public financing gap, and that no amount of wishful thinking will allow private financing to replace public funds for critical types of infrastructure, is the logical place to start.
