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Improve project bankability by shifting toward the subsidization of individual users.

Many investors participating in the summit shared that they are keen to increase their investments in infrastructure, but they are continually challenged to find the right projects, as not enough emphasis has been placed on developing pipelines of well-planned, bankable projects that are attractive to private investment. One of the biggest hurdles in attracting private capital to invest in infrastructure is the lack of adequate revenue streams that provide sufficient returns.

Bridging global infrastructure gaps

New solutions can unlock financing to close infrastructure investment gaps

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While project owners can consider an array of funding and financing mechanisms on a project-by-project basis, conversations at GII centered on public-private partnerships (PPPs), which can face challenges in developing the revenue streams needed. This drawback is particularly evident in projects in which users are sensitive to paying fees such as highway tolls. Today, governments often step in and provide project subsidies to lower fees and make projects more accessible to the broader population of end-users. The catch is that in many jurisdictions, subsidizing the system becomes too big a financial burden for the government or it skews the risk-return profile of the project for private capital.

One alternative approach is to subsidize individual users through tax credits, or some other means, rather than subsidizing the cost to build, operate, and maintain the project. Using this approach, the public sector can establish a market-based fee or toll that is attractive to private capital but keeps the system accessible to lower-income members of the population. Arup Group Chairman Greg Hodkinson reinforced this approach: “Delivery of the infrastructure project is not the end goal—we do so to facilitate the growth of the economy and enable the society.” The role that the private sector plays in that mission is unquestionable, but its participation depends on the market’s ability to ensure funding and sustainable revenue streams.

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While some countries such as Australia, Singapore, and the United Kingdom successfully operate toll roads and dynamic congestion pricing, the majority of the world has yet to shift their mind-set. A move to user credits may help achieve that mind-set shift and alleviate the concerns that often make user fees a politically unpalatable issue. As Canadian Imperial Bank of Commerce (CIBC) Managing Director Laurie Mahon emphasized, “Acknowledge that user fees are essential. Transport infrastructure should not be viewed as a public good, and users have to pay for it. As long as it is high-class service, they will.”

We think that it is very important to ensure two things: efficiency and equity. Efficiency is best achieved by having the right price signals. Equity is best achieved, not by subsidizing a particular commodity, but by providing broader-based subsidy schemes to help poorer families.

Measure, track, and elevate the performance of government organizations in the execution of PPPs.

By definition, PPPs require participation from government. However, politics, competing agendas, and a lack of government capabilities can hinder their successful execution. Private capital views these factors as a risk in the PPP process.

Tactical ideas for optimizing government performance to ensure an attractive value proposition for private investment include the following:

  • Creating an independent organization that is staffed to work within reasonable timelines.
  • Ensuring the government invests in the initial stages of designing and contracting so the market functions well around the project.
  • Conducting outcome-based procurement that includes factors such as ability to meet life-cycle cost, schedule, and sustainability goals.
  • Future-proofing project planning, as some assets (for example, roads and energy lines) might be used differently over time.

The rising advantage of P3s

The benefits of P3s for project delivery

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Countries with clear rules, laws, and processes, along with a transparent and collaborative government, are the preferred targets for investors. As Hastings Funds Management CEO Andrew Day concluded, “A good partnership goes a long way to reduce risk and increase the chance of sustainable assets.” To this end, several jurisdictions (for example, Ontario and New South Wales) have created entities staffed with PPP professionals and a clear mandate to deliver PPPs. The capabilities of these teams, their successful track record, and favorable market terms for projects have enabled PPPs to begin flourishing in these jurisdictions.

When we talk about the factors that have been so key to our success, first and foremost it’s been around ensuring that we have actual, real, competitive processes in place and that our approach is transparent and fair.

Use big data and advanced analytics to better price risk into the underwriting process, enabling capital flows in infrastructure.

Leveraging technology to drive smarter capex decisions

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When applied, technology, big data, and machine learning are increasing the accuracy of long-term demand forecasts, reducing revenue uncertainty, and giving better insight into capital expenditure (capex) and operating expenditure (opex) requirements over the life of an asset. These advances will significantly increase the predictability of outcomes for an asset with a 50-year (or longer) life span and improve investors’ comfort level. Improved predictability and reliability result in better risk transparency and pricing, and therefore investors are likely to require lower returns to support their investments.

Will the availability of such analytics open the door to better-structured and standardized transactions? The desire for such an outcome is apparent and likely achievable in some countries. The creation of a central repository of granular project data that is powered by advanced analytics could enable deep benchmarks, helping investors evaluate risk and returns and helping construction companies execute projects with greater certainty. However, as Multilateral Investment Guarantee Agency (MIGA) CEO Keiko Honda put it, “One size does not fit all, especially emerging markets.”

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Given the rate of technological progress and evolution, technology is no longer the primary limiting factor in capitalizing on the opportunities offered by big data and advanced analytics. The change management process and collaboration with diverse stakeholders are the main hindrances.

When approaching a new build project that may take decades, it’s important to take a view of the technological risks which will arise over the period of that investment. If building a toll road for example, this could include taking a view on the future of electric cars and automated driving. The impact of all these new technological shifts need to be built into the investment thesis.