Financing Global Infrastructure: The Role of the Private Sector

China’s Belt and Road Initiative (BRI) began, in part, in response to the dire need for infrastructure in developing countries. Globally, it is estimated that by 2040 there will be a fifteen trillion-dollar gap between infrastructure needs and actual investment. Closing this gap is critical to accelerating global growth and mitigating the effects of climate change.

The United States has moved to address these needs, both to enhance global stability and security and offer a counterweight to China’s BRI. However, rather than trying to compete dollar-for-dollar with China, the United States has sought to take advantage of one of its core strengths—access to deep pools of private capital. The United States, alongside partners like the World Bank, can steer large amounts of private capital towards infrastructure projects in the developing world, allowing for much-needed investment while protecting state balance sheets and offering an alternative to Beijing’s opaque and controlling lending practices. The success of this effort, however, depends on the Biden administration’s ability to follow through on its existing commitments while making additional investments in infrastructure standardization and project preparation.

Investors have so far been reluctant to direct their funds towards infrastructure projects due to costs and perceived risks. From 2015 to 2019, the private sector in the Group of Seven (G7) countries invested a mere $22 billion in infrastructure projects in developing countries. Private sector investors in Organization for Economic Cooperation and Development (OECD) countries collectively manage more than fifty-five trillion dollars, but infrastructure projects account for just one percent of those funds.

How can the United States increase the appeal of infrastructure investments? Part of the solution should be to mold infrastructure projects into a standardized and tradeable asset class, so investors do not have to analyze the intricacies of individual projects. This approach has been endorsed by several multilateral institutions, including the Group of Twenty (G20) and the OECD.

Currently, the disparate nature of infrastructure assets, the paucity of shovel-ready projects, and a lack of clear data can make infrastructure investments in many developing countries unappealing. By resolving these issues, the hope is that more of these projects can attract funding. In particular, there is a sense that institutional investors, who are less averse to the long time-horizons associated with infrastructure projects and manage vast quantities of capital, would be more willing to direct funds towards infrastructure projects if they were housed in a standardized and well-documented asset class.

Standardization in this instance implies a greater degree of coherence and transparency in the legal, financial, and technical factors associated with projects. Financing structures and fine-grained issues like termination rights and dispute resolution mechanisms can make projects more or less attractive to private investors. For large investors who can move significant sums, however, the need to conduct a thorough examination of small individual projects can make infrastructure unappealing.

Standardization could also facilitate the securitization or bundling of distinct infrastructure projects into financial instruments. Securitization can help transform illiquid and potentially risky assets, like loans associated with a particular dam or bridge, into liquid and more robust ones—further increasing the appeal of investment.

While disparate domestic legal regulations and other issues make total standardization difficult to achieve, a variety of efforts are underway to develop best practices for infrastructure projects. The World Bank, for instance, has compiled a set of best practices related to domestic regulatory environments as part of their Benchmarking Infrastructure Development project and, in conjunction with the G20's Global Infrastructure Facility (GIF), has issued guidance intended to streamline contracting for private-public partnerships.

The United States has also taken its own steps towards developing a clear set of development standards for infrastructure projects. The Blue Dot Network program, initiated by the Trump administration as part of its response to BRI, is explicitly intended to “propose a common standard of project excellence” in order to “attract private capital to infrastructure projects in developing and emerging economies.” The Biden administration has embraced the Blue Dot Network and has promoted it as part of the larger Build Back Better World (B3W) initiative.  These efforts, however, are at a nascent stage. The United States and its partners are still working to define the metrics for qualifying Blue Dot Network projects and few additional details have emerged about the investments pursued under the banner of B3W.

It is critically important that the Biden administration follow through on efforts like the Blue Dot Network. It should also substantially increase its participation in the G20's GIF, which supports private-public infrastructure projects over their lifecycle and  develop best practices for these projects. Increased support for the GIF would help channel private funds to infrastructure projects and ensure that the United States has a seat at the table as global standards are developed.

A key part of the GIF’s work focuses on project preparation. In developing countries, preparation expenses run up to ten percent of total project costs. Greater support for these activities—in the form of technical assistance for local governments and increased funding for institutions like the GIF—would help create a steady stream of projects capable of attracting investors. Greater capacity at this stage of the process would also allow concerns about Environmental, Social, and Governance (ESG) issues, which are increasingly important to investors, to be addressed early on.

Fostering private investment in infrastructure projects may also require the use of various “credit-enhancement mechanisms.” These tools, which range from political risk guarantees to provisions that protect investors from initial project losses, can help make infrastructure investments more attractive and reduce short-term fiscal pressures associated with investment. The need to provide financial guarantees to attract private investors will likely only grow as climate change’s impact becomes more pronounced; many of the developing countries in most desperate need of infrastructure will be on the frontlines of climate change—making investments riskier but more critical. When developing nations assume the risks associated with private investments, however, they are ensuring that taxpayers rather than investors will pay the price for any failures—potentially exacerbating the fiscal pressures that helped justify the reliance on private investment in the first place.

This is one of several criticisms levelled against the strategy of relying on private capital for infrastructure investments. Skeptics also point out that private financiers tend to focus their attention on secondary markets rather than on primary investments—in 2019, just twelve percent of infrastructure investment was directed towards primary investment—and suggest infrastructure projects that can deliver regular returns for investors may not always be best suited to unlocking growth or supporting citizens. Rural electrification, for instance, may not always be profitable but, in the long run, can have a transformative impact.

Practical challenges have also plagued efforts to mobilize private capital. Globally, infrastructure projects are frequently managed by state-owned enterprises that can be difficult collaboration partners for development agencies and the private sector, particularly when they seek to incorporate political or state concerns in their decision-making. Institutions like the U.S. Development Finance Corporation or the U.S. Export-Import Bank face a number of restrictions that limit their flexibility to support the consortiums that often must be assembled to complete infrastructure projects.

 As a report co-chaired by Stephen Hadley and Charlene Barshefsky points out, the United States must also be willing to fully staff and support U.S. institutions. From July 2015 to May 2019, for instance, the U.S. Export-Import Bank lacked a quorum among its board of directors due to delays in the appointment and confirmation process, limiting its ability to finance and support investment.

Despite these drawbacks and challenges, private sector expenditures may be the only realistic way to make these desperately needed investments. Among developed nations, there is limited political appetite for massive state-led investment abroad and developing nations lack the necessary fiscal capacity. Without private sector investment, it is unlikely that the infrastructure needs of the world can be met or a real alternative to China articulated. Guiding and supporting those investments should be a priority for the Biden administration.