Creating investable infrastructure: key insights from industry experts
Investment in infrastructure has an incredible power to transform the lives of people around the world – helping countries become more prosperous and develop their skills and workforce.
As part of our series around Transforming performance of major programmes, we brought together three sector leaders to discuss the challenges and solutions that come with creating investable infrastructure:
- Julia Prescot, Deputy Chair of the UK’s National Infrastructure Commission and co-founder of infrastructure investment and development firm, Meridiam
- Pablo Lutereau, Chief Analytical Officer for Infrastructure & Project Finance, S&P Global
- Raffaele Della Croce, Senior Research Fellow at Imperial College Business School and Co-Director of the Singapore Green Finance Centre.
Connecting and enabling us, investment in infrastructure is at the root of tackling some of our largest problems – from the climate crisis to social inequality.
However, around the world, there is a growing gap between the funding required for the infrastructure we need and the funds available. While public sector spending on infrastructure has been consistently rising for decades, private funding has stagnated, leaving a shortfall in many cases. The Global Infrastructure Hub predicts that this gap will reach US$15tn globally by 2040 – and the American Society of Civil Engineers (ASCE) puts the gap in the US alone at US$2.6tn.
We recently brought together experts and leaders from across the world to discuss the solutions to closing this gap.
Public private alignment and collaboration
A key theme discussed by our panel was how to share risk. It was noted that for many that infrastructure as an investment and asset class has too much uncertainty. Long timescales on returns, tight regulation, planning consent battles and poorly forecasted revenue sources can simply switch investors off.
In the recent UK auction for new offshore wind energy generation contracts, no bids were received, and the US’s first offshore wind auction in August also attracted just two bidders for three leases – with only one awarded. These are examples of how investors can be deterred by the risk/return dynamic not quite tipping in the right direction.
Laying the groundwork for discussion to bring together public and private interests was seen as especially critical – much less a question of available finance, and more around optimising of the risk profile.
The panel stressed the importance of “early dialogue and consultation with the private sector” to create more investable options and ensure that the “incentives align” on the project. This should involve doing more to “bring in market testing and help investors influence the shape of a project” rather than force investors to make a yes/no decision on an already fixed proposition.
The panel agreed on the need to “bridge the risk gaps” with firmer guarantees from government and the public sector. Whether this means blending private and public money to improve value for money, or offering insurance on an investment, such commitment will help make infrastructure investment more attractive and palatable to decision-makers.
Transparency and trust through digitalisation
Trust and transparency go hand-in-hand with the issues around risk. Our panel discussed that even where risk inherently exists in a project, transparency is key for investors. It was highlighted that “too often, not enough is being done to fully establish and set out what the risks on a project are, and who is bearing them”.
Digitalisation has a key role to play here, as better digital maturity can create and enable access to data, and therefore improve visibility on risks.
However, it was recognised that this would require a “radical change in mindset” in the public sector especially to bring this about.
Of course, greater digitalisation has wider benefits too – from improving productivity, to allowing project teams to benchmark progress against similar global projects. It is also able to detect and mitigate potential difficulties at the earliest opportunity. All of this helps to offer reassurance to investors.
Delivering social value and resilience
Investors’ interests and drivers are also shaped by the wider global context – and the panel was keen to discuss the impact of the greater sector focus on sustainability and environmental, social and governance (ESG) criteria for investing.
It was suggested that investor appetite in green projects may currently exceed the number of schemes which exist to invest in.
Questions were raised about the speed at which sustainable infrastructure is being developed and the need for much more to meet demand.
This demand is growing despite the risks and uncertainty, which the panel pointed out are made greater by the climate crisis. Many infrastructure projects will need major adaptation and further investment in the future – costs that must be paid by the users or taxpayers.
In many parts of the world, this need for adaptation is “not on the radar” of governments, despite potentially vast spending being required down the road. We need to have these debates now around “the costs of doing nothing” versus financing resilience – and the prioritisation of investment versus public acceptance. It is important to be leading the conversation and to assess the need for adaptation early so project teams can mitigate risk and keep investment flowing.
The challenges associated with measuring and reporting on ESG performance were also recognised. More than ever, investors are eager to report on the positive outcomes they are delivering across sustainability and social value. Demonstrating and valuing these returns on investment requires “better, more robust ESG measurement” so that ESG can form a key part of investment cases for the future. The panel agreed that across our sector we must “revisit what we count as value and benefit”.
The panel made it clear just what a vital role infrastructure will play in solving the problems of the present and future. While there are challenges – and in many ways risk and uncertainty may only grow as the full weight of climate change is felt – the takeaways from the session were positive.
Private capital has the appetite, demand for progress exists, and the tools for measuring the total value of projects and reporting transparent data are improving all the time.
We need to keep debating, thinking outside the box and collaborating to ensure projects are set up to be investable, and both the public and private sectors leverage their respective talents to deliver the programmes and transformations we need to see.