Sustainable infrastructure is a powerful tool for achieving inclusive growth. But it is an expensive one. USD 6.3 trillion of investment in infrastructure is required annually on average up to 2030 to support economic growth and the broader development agenda linked to the United Nations Sustainable Development Goals (SDGs). Moreover, an additional USD 0.6 trillion a year over the same period will make these investments climate compatible contributing to the goals of the Paris Agreement and the transition towards a low-emission and climate-resilient economy.
Both advanced and developing economies alike stand to gain. In advanced economies, many ageing infrastructure networks for water, energy and transport need to be replaced or upgraded. In emerging and developing economies, most of the infrastructure required to meet development goals is still to be built, particularly in urban settings. Besides the clear benefits for human development, digital infrastructure is crucial in underpinning a dynamic economy, enabling innovation through high-speed internet access, cloud computing and other new technologies that is transforming production and global value chains, such as in the context of Industry 4.0.
For some time, investment in infrastructure has been a priority at G20 level, but much progress remains to be achieved. The importance of sustainable and quality infrastructure has been confirmed by the high priority given by the current Japanese G20 presidency and the G7 Ise-Shima Principles. The term “Infrastructure as an Asset Class” has been used by last year Argentinian presidency of the G20 with the purpose of promoting bankable projects and private sector participation.
Financing Sustainable Infrastructure
Infrastructure, in particular in emerging markets has been traditionally delivered by the public sector, either directly by national, regional, and local governments or indirectly through government agencies and public corporations. While this is expected to remain the same in the future – especially at current low interest rates – historical trends have seen a decline of the importance of public ownership in infrastructure. Many governments are also currently facing a period of fiscal consolidation and de-leveraging to bring public debt down to manageable levels
In the past, the funding of infrastructure investment in projects has become characterised by high specificity, low re-deployable value and high intensity of capital, and has increasingly taken the form of project finance. On the equity side, the bulk of financing has been provided by corporate sponsors and developers. On the debt side, the prominent role has been played by bank syndicated loans. The collapse of the Monoline insurers after the financial crisis has had the effect of reducing the potential amount of funds that institutional investors can commit to infrastructure investments. Taken together, this means that private sector finance has yet to develop sufficiently to make up for the reduction of the availability of public finance. Banks depending on short-term funding such as deposits are not well suited for this kind of long-term and often illiquid funding. Greater reliance will have to be placed on non-bank intermediaries whose funding base is more stable.
In the case of long-term investors such as insurers, pension funds and sovereign wealth funds, despite increasing interest, total amounts of investment in infrastructure remain relatively limited, considering the large pool of available capital. This puzzle of under-investment in the face of capital availability suggests that other factors are likely holding investor returns too low in many infrastructure markets. Therefore, identifying and understanding potential market and government failures that may be contributing to this under-investment remains a central challenge in order for governments to effectively mobilise further private investment into domestic infrastructure markets.
Attracting Institutional Investors
Given the constraints on government budgets and the considerable need for long-term investment now and in the future, particularly for infrastructure, it is essential that countries improve the efficiency of the use of resources and partner with the private sector to meet some of these investment needs. In relation to institutional capital, several barriers to investment need to be addressed, some specific to pension funds and insurers and SWFs, others affecting investors more generally.
To start, there are few opportunities. Despite the huge needs and potential future investment, current opportunities are limited, due to a lack of projects and a mismatch in the risk and returns offered to institutional investors (i.e. new projects in emerging markets). The size of the infrastructure market will depend on current and future political decisions made to deliver infrastructure services through privatisation or public-private partnership policies. Recent discussions about nationalization of water, railways and transport, reconsideration of the value of PPP models and investment protection of “strategic” sectors from foreigners, are posing important challenges to the global infrastructure market.
In addition, political risk is increasing. The willingness of institutional investors and the private sector more in general to finance major infrastructure investment projects in any given country is heavily influenced by the perceptions of a country’s investment climate and the broad suite of policy settings and institutions that underpin a country’s economy and political processes.
In addition, the role of institutional investors in long-term financing is also constrained by the short-termism increasingly pervasive in capital markets as well as structural and policy barriers such as regulatory disincentives, lack of appropriate financing vehicles, limited investment and risk management expertise, transparency, viability issues and a lack of appropriate data and investment benchmarks for illiquid assets.
Conditions to attract institutional capital to advanced and emerging markets in infrastructure are the creation of a pipeline of investable infrastructure opportunities and addressing the current information gap perceived by investors. Ultimately, to guarantee the success and sustainability of the investment in the long-term, a “new investment culture” among stakeholders is needed.
Creating a Pipeline of Investable opportunities
Attracting private sector and boosting investment in sustainable infrastructure requires investable investment opportunities. Integrated investment strategies and a whole-of-government policy approach are needed across different dimensions.
First, sustainable infrastructure investment requires supportive macroeconomic conditions including the implementation of structural reforms and adequate policy frameworks promoting a stable regulatory environment (including procurement, tax, competition, etc.). Despite low interest rates, in advanced economies fiscal constraints combined with concerns about the efficiency of public sector investment have led to a reduction in the share of public funds allocated to infrastructure to around 40% compared with 60-65% in developing countries.
Second, it should be based on sound public governance and optimisation of risk allocation. Delays, substantial cost overruns, corruption scandals, poor consultation processes and disputes should be addressed through better governance and transparency. Good governance tends to encourage private participation by offering a predictable, reliable and rules-based environment for private investment. Integrated strategies optimise the allocation of risks, including within PPPs, across the infrastructure lifecyle from construction to operation among the stakeholders.
Third it should focus on diversifying the types of financial stakeholders and sources of finance for such investment through new financing and funding structures, and innovative financial tools, to help align public and private sector interest in infrastructure provision and management, while optimising the capital structure and reducing the cost of capital for the public sector. This will include pooling mechanisms such as blended finance in developing countries and capital pooling, innovative techniques such as asset recycling or land value capture, and increasing reliance on capital markets through the development of financial instruments.
Fourth, leveraging private sector finance through new instruments and institutions such as National and Multilateral Development Banks and bilateral DFIs supporting the move from 'billions to trillions', particularly in developing countries. In the current context of low interest rates and ample liquidity a key element of public sector intervention is the additionality of the projects supported, making sure not to crowd out private sector and addressing only sub-optimal investment situations and market gaps.
Fifth, the importance of technology with enhanced access to digital infrastructure as a critical condition to benefit from the digital economy. With nearly 60% of the world’s population (four billion people) still remaining offline, OECD analysis has also identified as major theme in future infrastructure procurement and finance, the impact of technology (i.e. blockchain, Big Data, Artificial Intelligence and Internet of Things) allowing individuals and companies including SMEs to benefit from the digital opportunities while harnessing technology to improve infrastructure services.
Addressing the Information Gap and Creating Infrastructure as an Asset Class
Despite the growing interest and need for private low carbon infrastructure investments, the empirical studies on the investment characteristics of these asset classes are limited in quantity and quality, creating a perceived information gap. Several stakeholders would benefit from more data and analysis.
Investors and asset managers appreciate an improved risk assessment for performance evaluation and for asset allocation decisions to or within the low carbon infrastructure asset class. A better understanding of these risk properties by investors lessens the information gap on this alternative asset class, helping to match suitable investments with investor preferences. A potential outcome could be opening new channels of funds to low carbon infrastructure.
Such work can shed light on the green investment proposition and ESG criteria in low carbon infrastructure investment, providing valuable analysis on clean energy projects and green low carbon infrastructure. The results also would highlight which risk management strategies and investment screening capabilities are needed for low carbon infrastructure investing.
The findings will also support regulators in determining fair regulated prices by appropriately including risk charges in the costs of capital. Indeed, the same need to create new knowledge on the risks of long-term investment is also patent on the regulatory side. More accurate risk measures may imply lower capital charges, and the more effective and efficient intermediation of long term capital. For example, the analysis conducted by the FSB in 2018 on Basel and the impact of regulation on low carbon infrastructure financing - and EIOPA in 2016 on Solvency - has covered investments in low carbon infrastructure project debt and equity (both directly and via funds).
Ultimately, this work will be instrumental to improve public low carbon infrastructure procurement as well. Robust cost/benefit analysis and better understanding of the risks and expected financial performance of long-term public-private contracts should both optimise the value-for-money of such contracts from the point of view of the tax payer and help minimise political risk for investors by increasing transparency. Governments get a better understanding of the risks of public low carbon infrastructure investments and the risk exposure potentially shifted to the private sector, ensuring efficiency of risk sharing mechanisms (i.e. risk guarantees and pricing of contracts)
Conclusions: A new Investment Culture
Addressing the information gap and creating a pipeline of investable projects are necessary conditions to incentivize substantial investment in infrastructure. As market mechanisms have so far failed to create the information necessary for the supply and demand of long-term investment to meet, there is a clear role to play for policy makers and academia to address a collective action problem and support the standardization of data collection and the creation of adequate investment benchmarks.
This analysis needs to be translated then into adequate policy frameworks and strategies to be implemented by governments and international institutions. Such strategies can be developed on national, regional or local levels as sub-national entities and especially cities are main drivers of infrastructure development.
This will not suffice though. At the moment there is a major disconnect between long term investors’ portfolios strategies and political decisions for infrastructure. The institutional investor’s investment strategies and the decision to invest in infrastructure are based on strategic asset allocation and asset-liability management considerations, based on long term trends such as economic growth, ageing population, inflation protection etc.. On the other hand, government choices for example about different types of private funding models and forms of financing of infrastructure are based on short term national priorities driven by electoral mandates and budget constraints.
Ultimately, moving from the current mind-set to a longer-term investment environment requires a transformational change in both government and investor behaviours. Promotion of a public-private dialogue ensuring a co-ordinated approach between investors, the financial industry and the public sector will be a key element in developing this new “investment culture” based on common understanding, mutual trust and a shared vision of the future.
 OECD (2017)
 Corfee Morlot (2012), Towards a Green investment policy framework The Case of Low-Carbon, Climate-Resilient Infrastructure, OECD publications
 OECD, Key issues for digital transformation, 2017
 G7 Ise-Shima Principles for Promoting Quality Investment Infrastructure approved at the OECD Ministerial Council Meeting (MCM) in June 2017 in Paris
 Della Croce, R. and Stefano Gatti (2014), Financing infrastructure – International trends, OECD Journal: Financial Market Trends, Vol. 2014/1.
 Despite current record level of fundraising in the infrastructure unlisted market, not much is deployed. Also compared to the trillions of asset under management amounts are limited. On average approx 1% for the funds is invested directly in infrastructure, see OECD (2018) Annual Survey of Large Pension Funds and Public Pension Reserve Funds
 Blundell-Wignall, A. and Caroline Roulet (2015), Infrastructure versus other Investments in the global economy and stagnation hypotheses: What do company data tell us?, OECD Journal: Financial Market Trends, Vol. 2014/2.
 G20/OECD report on G20 investment strategies, 2015
 OECD Policy framework for investment, OECD Guidelines for multinational enterprises, OECD Convention on combating bribery of foreign public officials in international business transactions
 Ahmad, E (2015), “Public Finance Underpinnings for Infrastructure Financing in Developing Countries Infrastructure Finance in the Developing World Working Paper Series, Intergovernmental Group of 24 and Global Green Growth Institute, Washington DC
 OECD Recommendation of the Council for the public governance of PPP
 See G20/OECD Guidance Note on Diversifying Instruments for Infrastructure and SMEs, endorsed by G20 Leaders in September 2016
 Capital markets instruments to mobilize institutional investors to infrastructure and SME in emerging market economies, WB/IMF/OECD
 For example for the Juncker Plan the key factors to assess the additionality of the EFSI (defined as EIB Special Activities, i.e. operations with a higher risk profile) are higher risk coverage including through subordination, exposure to specific risks – such as unproven technology and higher-risk counterparts – as well as investments in new cross-border infrastructures. For MDBs the gap between the economic/social and the commercial returns of a project resulting from positive externalities that the private sector cannot capture is at the basis of MDBs interventionsWhen such a gap is particularly wide (e.g., infrastructure services for poor consumers, innovative clean energy technologies, etc.), a mix of public and concessional finance can be deployed, and targeted subsidies considered.
 FSB Evaluation Working Group, November 2018