Private Matters: Systematically Assessing Private vs Public Investment in Infrastructure

By Kopo Mapila

Some $2.5 trillion in infrastructure financing will be needed each year to meet the demands of the Sustainable Development Goals in developing countries — nearly three times what is spent today. Governments, which fund close to 80 percent of current infrastructure investments, are unlikely to find the additional funds needed to bridge the infrastructure gap.

So scaling up the role of the private sector is essential. And institutional investors and private banks, with close to $120 trillion of assets under management, offer a potential solution. Yet mobilizing these resources will require a rethinking of the current approach to infrastructure development.

This can be done by using a framework that assesses the relative risks and rewards of both public and private infrastructure financing, weighing the merits of current methods of infrastructure provision (mostly public) against potential methods offered by private firms and investors. If done right, such a framework could significantly improve the decision making process for development finance in a given country and sector context.

To make this possible, several critical factors that affect the overall cost and efficiency of providing an infrastructure project need to be identified. While these factors can range widely, some that apply to most projects include:

· Borrowing costs

· Conflicts of interest

· Cost and time discipline

· Political risk

· Project management efficiency

· Risk pricing

· Time horizon benefits

Government provision and private provision of infrastructure can be examined along each of these dimensions and assigned a grade of low, medium, or high in terms of potential risks or rewards.

Both governments and private firms bring distinct advantages to infrastructure provision, of course. But many common assumptions can be challenged by approaching infrastructure provision through such a systematic framework. For example, when a project is considered over the long term, government provision may in fact be more expensive than it is often thought to be — and private provision cheaper by comparison. This is particularly the case in fragile political environments where political risks are greater.

Another observation generated by such a framework is that the procurer-provider relationship that pure public provision of infrastructure entails may have inherent conflicts of interest. When government is the builder and operator of infrastructure, as well as the watchdog of the taxpayers’ money, there may be greater leniency with regards to cost and time discipline. The effects of this could be as narrow as project overruns or, depending on the scale, economy wide.

By allowing us to look at the provision of infrastructure through a lens of long-term cost and risk issues, a structured framework challenges assumptions that public sector infrastructure finance is always cheaper and better. This is critical, because without a new perspective on the roles of government and private actors in infrastructure financing and provision, it can be difficult to increase private firms’ involvement in a feasible and sustainable manner that can reach the Sustainable Development Goals.

Needless to say, further research is needed to more accurately weigh and compare the risks, incentives, and advantages of different forms of infrastructure provision. Our approach, while rudimentary, is a step in that direction.

Our latest EMCompass note, Toward a Framework for Assessing Private vs Public Investment in Infrastructure, has more, and can be found on the Thought Leadership Resource Page.

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Kopo Mapila is a Consultant (Research Assistant) with the IFC’s Thought Leadership Unit. His research focuses on the role of private enterprise in economic development with a particular focus infrastructure development and private investment in emerging markets.

Senior Economist — Thought Leadership, Morten Lauridsen and Operations Officer — Thought Leadership, Florian Moelders made inputs to both this blog and the EMCompass Note.

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