By Marie Lam-Frendo, Chief Executive Officer, Global Infrastructure Hub (GI Hub)
We need more investment in economically, environmentally, and socially sustainable infrastructure, but there is real danger that investment by both the public and private sectors may slip backward.
Public sector budgets remain constrained, and soaring inflation has led to an exponential rise in interest rates that is making debt more expensive and lenders more cautious. The long-term consequences are unknown, but there is a clear need for the private and public sectors to adapt their strategies and direct more investment toward infrastructure that holistically targets the United National Sustainable Development Goals (SDGs).
At the moment, we see mostly stagnant private investment and that both public and private investment are largely directed to build more of the same infrastructure, rather than the infrastructure of the future.
What is the current state of global investment?
Between early 2021 and mid-2021, G20 governments announced more than USD$3.2 trillion in infrastructure stimulus, and the GI Hub’s latest figures on private investment show private capital reached record highs in 2020 and 2021, and had already reached the 2020 level by the first semester of 2022.
Yet, private investment in infrastructure projects has now remained stagnant for the eighth year running. Why? Many of the blockers are of long standing: lack of investible project pipelines, inflexibility around investors not being willing to find solutions to manage risk and enable investment in infrastructure in countries with credit ratings below investment grade, aging risk in the context of sovereign credit ratings, and regulatory frameworks that don’t adequately treat infrastructure as an asset class.
There is now a real danger that infrastructure investment by both the public and private sectors may slip backward rather than accelerating. Public budgets are stretched, and economic uncertainty is driving up risk – particularly in emerging markets and developing economies (EMDEs) that need investment the most. The public and private sectors need to act now, and act together, to avoid an investment slip. There are actions both can take to boost investment and drive it toward a sustainable infrastructure future.
Public and private sector actions to accelerate the financing of infrastructure
Let’s start with the long-standing challenge of investors hesitant to invest in EMDEs where credit ratings are largely below investment grade. When it comes to removing blockers associated with sovereign credit rating, it’s time to be serious about creating a systematic de-risking mechanism, at a programmatic level more than simply project level, to give private investors the confidence to invest in countries with credit rating below the investment grade.
The importance for this change to happen has accelerated over the last two-years, with COVID-19 showing the urgent need for investment in essential health infrastructure. Another action pertains to banking regulations playing a crucial role in greenfield infrastructure financing. Indeed, banks financed 63 per cent of private investment in infrastructure projects in primary markets in 2020.
Recent Basel III reforms that curtail this participation can have significant effects, particularly because alternative private sources are not stepping up to finance greenfield infrastructure. To assist with removing blockers related to regulatory capital, the GI Hub is currently forming a coalition of banks to provide advice and shape proposals to the G20 and standard-setting bodies to create a more conducive regulatory environment for infrastructure investment.
With an emphasis on greenfield and sustainable infrastructure investment, proposed reforms will contribute to reducing infrastructure deficits, achieving climate and transition objectives, and ensuring global financial stability. Globally, the pipeline of well-designed, solid projects that both the public and private sector can confidently support is weak.
In 2019, we found that 38 per cent of countries still do not publish national infrastructure plans and 28 per cent do not publish pipelines of projects. The public sector can create change in this area by creating mechanisms to track and monitor projects and improve governance. And, the private sector needs to move the capital that is currently there for the taking. Dry powder (capital committed by investors and available to fund managers but not yet invested or allocated) has quadrupled from 2010 (USD$72 billion) to 2021 (USD$298 billion).
Yet, simply securing funding or financing is not enough – this investment needs to be directed toward the infrastructure of the future.
The infrastructure operating today was largely built between 50 and 100 years ago to serve a widely different world. Existing infrastructure can be adapted to realise important resilience, inclusivity, and environmental benefits – including by adopting new technology – but we cannot continue to build the same types of infrastructure in the same way.
The infrastructure of the future needs to be conceived, planned, and built with the SDGs at the centre alongside local needs and global imperatives. At the GI Hub, we encapsulate these ideas by referring to infrastructure investments that ‘do more with less’ to achieve multiple transformative outcomes with a single investment.
Our analysis of G20 governments’ infrastructure stimulus post-pandemic indicated that governments are moving toward transformative outcomes: 30 per cent of the stimulus related to the low-carbon transition, 20 per cent to affordability, and 16 per cent to inclusive mobility. But this is far from enough, and most governments are making their biggest infrastructure stimulus investment in road maintenance.
The private investment picture is similarly chequered. Private investment in renewable energy has doubled since 2010, but green investment in infrastructure outside of renewables remains low and did not notably increase in 2021. As is the case with public investment, private investors need to amp up their investment in more transformative infrastructure.
Although ESG standards are no silver bullet here, they are one tool that can be leveraged to push investors toward infrastructure that meets the SDGs, if there is movement to adopt a shared ESG scorecard to accommodate the different solutions that may be appropriate in advanced economies and EMDEs.
What Australia is doing well and what it can do better
Climate is now very much ‘on the agenda’ for infrastructure in Australia. The passing in September of Australia’s first climate change legislation in a decade is a historic marker in the country’s effort to hit net zero. This was preceded by Infrastructure Partnerships Australia’s call on state governments to introduce a ‘carbon base case’ for major infrastructure projects. Such policies have been introduced in Europe to better account for carbon emissions and allow competitive tenders that would bring down costs for taxpayers.
In making its call for a carbon base case, Infrastructure Partnerships Australia cited the $759 billion pipeline of projects in Australia and New Zealand as indicative of the decarbonisation opportunity. This highlights one of Australia’s strengths: its visible and investible pipeline of infrastructure projects, which earns investor confidence through its accessibility and transparency.
The Infrastructure Partnerships Australia 2021 Investment Report showed 84 per cent of surveyed investors are highly likely to invest in Australia. To help reduce investment uncertainty, Australia could look to improve procurement processes to shorten procurement duration and minimise cost and risk for both the public and private sectors.
Work also needs to be done to remove regulatory and tax impediments that hold back investment and make the roll-out of projects more difficult. It’s also important to consider market capacity when it comes to using local contractors and services. Infrastructure Australia’s 2021 Infrastructure Market Capacity Report revealed that the peak of demand for skills is 48 per cent higher than supply.
Meeting this demand would require annual growth of 25 per cent over the next two years, which is more than eight times higher than the projected annual growth rate of 3.3 per cent. The report identified increased collaboration with industry to support capacity and capability development as a key reform to address market capacity. Competition is a challenge in Australia – it is imperative we consider our market depth and get the risk allocation right. The long-term impact of the pandemic on Australia’s fiscal position may also impact borrowing costs.
Recover together, recover stronger
The theme of the Indonesian G20 Presidency this year is timely. ‘Recover Together, Recover Stronger’ is a reminder of what is achievable and a call to collective action. Multilateral activities, like our recent work with the G20 Presidency and Asian Infrastructure Investment Bank on the G20 Blueprint for Scaling Up InfraTech Financing and Development, can help point the way. Then it is up to individual governments and private sector entities to act on the results and take appropriate risks to realise the sustainable infrastructure of the future.
