There is a sizeable gap between the world economy’s infrastructure needs and available financing. The shortfall is especially pronounced in emerging markets.
Infrastructure investment has fallen short of what is needed to support potential growth. At the same time, financial resources in world markets have contended with low long-term interest rates, while opportunities for greater returns from potential infrastructure assets are missed.
The development of properly structured projects, with risks and returns distributed in accordance with stakeholders’ incentives, will help to close the gap between private sector financing and infrastructure. Worldwide infrastructure investment, including from international financial institutions, public investment and public-private partnerships, amounts to around $1.7tn per year. This leaves a funding gap of more than $1tn.
Global infrastructure financing has fallen short of its potential. Institutional investors and other private sector players could increase allocations under appropriate conditions. Private sector investment and institutional investor capital are often raised as possible solutions for filling the infrastructure funding gap.
The contrast between the dearth of investments in infrastructure and the savings liquidity glut in the global economy must be confronted. Lowering legal, regulatory and policy risks are essential steps. Improving the availability of sophisticated, developed financial markets and instruments will help facilitate partnerships between different financial agents. Increasing private investor involvement and designing rational financing structures will both boost funding and improve the efficiency of infrastructure projects. Building such bridges is well within reach for resourceful financial actors.
First appeared at OMFIF