Three compelling reasons why the G20’s plan for an infrastructure asset class is fundamentally flawed
Few doubt the need for significant global investment in sustainable infrastructure. Without better social and economic infrastructure, such as hospitals, schools, railways and sanitation, the prospect of achieving the Sustainable Development Goals looks increasingly remote.
Enter the G20 with a plan to develop an ‘infrastructure asset class’. An asset class is a group of tradable securities or investments – for example equities or bonds. Transforming infrastructure into a tradable asset class would mean repackaging money invested in an infrastructure project into a number of standardised financial instruments which are easy to buy and sell, and which provide an attractive revenue stream for institutional investors, such as pension funds, life insurance and sovereign wealth funds.
Echoing the World Bank’s mantra of ‘private finance first’, the G20 Roadmap to Infrastructure as an Asset Class takes as its starting point the assumption that only private capital, particularly from institutional investors, can fill the infrastructure investment gap. Developing an infrastructure asset class, the G20 argues, will help to unlock the trillions of pension and insurance dollars currently sitting in equities, bonds, hedge funds and other investments. It sounds plausible – all you have to do is make infrastructure less risky and more profitable, and investors will fall over themselves to finance schools, hospitals, roads and other essential services.
But there is a snag. Infrastructure projects are inherently risky and frequently unprofitable, which makes them unattractive to investors. The G20’s response to that is to ‘de-risk’ the investment. But the risk rarely just disappears – someone has to take responsibility for underwriting it when a project hits unforeseen problems, overruns or fails to generate the expected number of paying customers. The G20’s proposal is disingenuous - what would happen in practice is that the risk is transferred to the public purse, with potential negative impacts on citizens.
There are many reasons why an infrastructure asset class is a bad idea - not least because it assumes that infrastructure investments are simply another type of tradable asset. It ignores the uncomfortable fact that they are physical, concrete buildings, bridges, clinics or water pipes which millions of people rely on in their everyday lives.
This Eurodad briefing focuses on three main reasons why the G20 Roadmap is fundamentally flawed – and just as importantly, offers practical, tried-and-tested alternatives.
Firstly, the G20 plan ignores the main issue of how to increase and improve public investment. Historically, there are good reasons why infrastructure projects in developing countries have been overwhelmingly financed through public investment. It is difficult to persuade private investors to invest in infrastructure, there are extremely limited opportunities for purely commercial infrastructure projects and most require significant public investment by default.
Privately-financed infrastructure often ends up costing the public purse in the shape of bail-outs, subsidies or risk guarantees, as countless examples of failed Public-Private Partnerships (PPPs) can testify. Perhaps most importantly, the infrastructure needed in order to ‘leave no-one behind’ – such as water, sanitation or rural roads – are the very projects which are least likely to attract private investors. Moreover, improving the quality of infrastructure is key, and should be considered as a high priority, rather than channeling more money into infrastructure in countries with poor track records.
The second reason is that creating an asset class to attract institutional investors will often end up hurting the public purse. The direct and indirect costs of developing an infrastructure asset class are enormous and will inevitably fall on the public sector, and on citizens. 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. When projects do run into trouble, it is the public sector which picks up the extra costs. Additional burdens would come from subsidising – or ‘blending’ – private investments with public funds and from introducing standard ‘plug and play’ contracts - good for investors but a threat for accountability, transparency, environmental and social standards.
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’.
If the G20 is serious about increasing and improving investment in infrastructure, it should stop putting private finance first and start focusing on how to improve and deliver publicly financed infrastructure. Private and institutional investors are putting pressure on the G20 to help them maximise returns during a continuing global economic slump, but creating an asset class is not the way to ensure that essential infrastructure gets built in those developing countries which need it most.
This briefing is also available in Spanish: