Recycling our Infrastructure for Future Generations

Preface
Short political cycles, short-term investment horizons, a lack of viable financing structures, inappropriate risk assessment frameworks and a lack of long-term vision mean that much-needed investment does not flow to infrastructure and development. This results in a US$1 trillion annual shortfall in infrastructure alone.
As part of the System Initiative on Shaping Long-term Investing, Infrastructure and Development1,
this report – Recycling our Infrastructure for Future Generations – builds on earlier work completed
under the Forum’s Strategic Infrastructure Initiative2 and takes a closer look at an emerging approach
to financing new infrastructure, which is known as “asset recycling”.
Insight presented in this report demonstrates that asset recycling in infrastructure has the potential
to significantly increase levels of investment. This is the result of creating alignment with long-term
institutional investors that have a preference for built assets, notably pension funds. Asset recycling
unlocks and directs capital from these investors towards governments’ most critical greenfield
infrastructure needs.
This approach can be particularly valuable in jurisdictions that face difficulties in raising finance for
infrastructure projects due to existing high levels of public debt or the perceived levels of risk of
building new infrastructure.
If successfully implemented, asset recycling can provide governments with a viable route towards
closing the infrastructure investment gap and accelerating national infrastructure programmes to
stay on a path to inclusive economic growth and recovery. It can also allow citizens to invest in
mature local infrastructure through their pension funds, meaningfully diversifying retirement savings
portfolios.
We would like to thank the many World Economic Forum partner companies and other expert
stakeholders that have contributed their expertise and leadership. In particular, we wish to express
our appreciation to Atkins Acuity, a member of the SNC Lavalin Group, for their support and
collaboration in this project and to this report.

Executive Summary

Obstacles to private investment in infrastructure: Private sector–government expectations mismatch and distrust from populations Infrastructure has long been recognized as a key enabler of economic and social development.
Even so, persisting wealth differences exist between regions, and new challenges such as climate change, ageing of the existing asset base, population growth and urbanization, all require increasing levels of investments in infrastructure.
The slow growth in developed economies in the aftermath of the global financial crisis has
significantly reduced the share of governments’ budget allocated to building, maintaining and
operating new infrastructure. High debt levels have also restricted government’s ability to borrow,
and governments are increasingly looking at ways to create space on their balance sheet rather than
considering simple on or off the balance sheet approaches. Furthermore, demographic patterns
such as ageing populations can increase pressure on government budgets, notably through the
impact on providing healthcare or the increasing retirement savings gap (see Box 1). These factors
reduce governments’ flexibility or ‘fiscal space’ to address the infrastructure investment shortfall.
Lack of transparency has also been a major challenge, with governments diluting any proceeds from
the sale of assets to the overall budget or using them to pay off debt, thus failing to show the value of
the infrastructure sale. This lack of transparency also relates to the lack of standardization in financial
market documentation and reporting. Infrastructure debt is still far from being a tradable asset class.
Further efforts are needed to standardize and ensure the hurdles for investing are minimised.
In parallel, private sector offerings in infrastructure have significantly developed and governments
are learning more about how to regulate and structure public-private partnerships. Multiple reports,
articles and analyses are now available to explore the risk sharing, governance, models and types of
assets that have had the best results, as well as the pitfalls to avoid.
Private engagement in building and operating assets has not always delivered the innovation and
higher levels of service expected, although there equally are many cases where it has. The history of
this journey also contributes to a negative public perception of private sector participation. In parallel,
the private sector has often increased prices to cover real costs where governments previously
subsidized these services. Today, people expect higher levels of services from private operators of
infrastructure.
People also fear a loss of control, but the fact that many investors are pension funds managing
constituents’ funds for retirement has often not been well understood. There has often been a lack
of engagement and communication both from the government and private operators with affected
communities.
Private investors’ appetite for infrastructure assets has been growing, driven in part by the slow
growth environment characterized by the low returns of sovereign debt instruments. In particular,
the growth in number of assets under management in pension and sovereign funds has been
encouraging. However investors’ interest for infrastructure exceeds the supply of investable projects
and assets. There is often a mismatch between what governments want in terms of new or social
infrastructure, and private investors’ preference for existing and proven economic infrastructure,
especially long-term investors such as pension funds.

Fuente: WEF

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