The G20 Infrastructure Hub - Footsteps towards bridging the global infrastructure gap - International Trade & Investment

Based in Sydney, the G20's first infrastructure hub has been tasked with improving infrastructure investment across the world.

The hub is part of the G20 Global Infrastructure Initiative (GII) to address the world's growing infrastructure gap and boost investment in projects.

It has a key role in implementing the G20's infrastructure agenda including making recommendations on best practice approaches to delivering and financing infrastructure projects.

It will also be a clearing house to share knowledge of projects and promote collaboration between governments, international organisations, development banks and the private sector to increase infrastructure investment.

How the Hub will deliver its ideas is a work in progress. Various public and private bodies and think tanks (including the World Bank's Global Infrastructure Facility, and the United Nations Economic and Social Council) are considering these same infrastructure needs questions.

INFRASTRUCTURE FINANCING IS A PRIORITY FOR THE HUB

Increasingly, cash-strapped governments are turning to equity financing to fund critical infrastructure.

Privatisation has been a key driver of equity financing in Europe. However in Australia, recent state elections in Queensland and Victoria have shown that this may not be readily accepted by the public.

However, solutions to quasi-privatising assets in a way that's publicly supported should be a priority for the Infrastructure Hub.

Another source of private equity is from pension and superannuation funds.

There is a vast amount of private capital held in retirement funds that could be invested in infrastructure, but it has been hampered by a deficit of high-quality, investment-ready projects.

Australian Super is Australia's biggest pension fund (US$55 billion) and has been looking for opportunities to raise its investment in infrastructure. They have actively promoted the use of the inverted bid model which was endorsed by the OECD as an alternative financing model for infrastructure projects.

The Ontario Teachers' Pension Plan Board of Canada (assets in excess of $125 billion) has invested in major infrastructure assets in Canada and overseas (including Australia).

PPPs tend to make up only a small portion of infrastructure financing even in advanced economies, and should not be the primary focus of the Hub's work.

OPTIONS ON THE TABLE

The Infrastructure Hub should have a broad mandate to consider initiatives with potential to encourage more investment in, and better delivery of, projects. They include:^[1]

Ratings of infrastructure projects – incorporating institutional and property risks, enforcement risks, illegitimate policy changes; transaction cost risks, economic/commodity price volatility; regulatory risks; and counterparty risks
Credit enhancement tools including government project bonds
Sustainable financing of infrastructure investment including efficient allocation of global savings to long term infrastructure financing. Ideas include global infrastructure funds and privatising national pension funds as has been adopted in Chile.
Access to other sources of long term funds such as superannuation, pension funds and long term private equity
Transparency processes for procurement (to avoid corrupt practices)
More streamlined regulatory frameworks (including simplified tax frameworks) to encourage better investment
Sustainable approaches to use of energy, technology and environment
Long term infrastructure planning including allocating financing efficiently
Identifying new and innovative pay back and reward mechanisms in maintaining, managing and upgrading critical infrastructure.
Identifying innovative ways to finance infrastructure projects over their lifecycle (such as inverted bid models, etc)^[2]

The key for the Hub will be how to put together (without reinventing the wheel) a recommended best practice platform that is also flexible enough to cater for the differences between countries.

The political and social structures of individual countries influences regulatory frameworks and the way in which transactions are executed.

For example, key to China's rapid infrastructure development over the last few decades (averaging rates over 11% but declining to 6-8% recently) has been the Chinese government's ability to plan and implement major infrastructure projects (more so than in many other countries).

Whilst China's outlook appears strong, the dominancy of the government in allocating and financing infrastructure (greater than 85%) is an important factor to consider. Much of the nation's infrastructure projects are funded by local government financing vehicles which has raised concerns about the sustainability of rising local government debt.

In India, another key G20 country, the regulatory framework (including dealing with land acquisition for new projects) is often mentioned as causing lengthy delays and cost blowouts for new projects.

The geography of the country may also play a key role in delivering transport infrastructure. Water transport is generally more efficient (than rail transport which has a greater deployment in developed countries). Ports infrastructure is thus key in Brazil, India and other countries where water transportation of goods is crucial.

Intermodal facilities are also key to bringing together roads, railways, ports and airports to deliver an efficient transport network.

Infrastructure investment is not only about new infrastructure Investment is also needed to modernise and upgrade existing infrastructure systems and networks.

CLEAR ECONOMIC BENEFITS

There are clear economic benefits of spending more on infrastructure, with the multiplier effect of an increase in real GDP spending and supply side benefits.

The quantum, quality and condition of economic infrastructure are key determinants of productivity and economic growth. The results of the latest World Economic Forum Global Competitiveness Index underscore this point, with the index generally ranking countries with poor infrastructure as less internationally competitive

Infrastructure gaps play a big role in slowing economic growth. The recent oil crisis will not help the short term fiscal funding of infrastructure development in a number of countries.

Meeting the world's need for infrastructure is an enormous challenge. While the Sydney-based Infrastructure Hub is not a silver bullet, it is a golden opportunity to progress the best ideas for addressing the infrastructure gaps faced by every country.

A briefing on the new G20 Global Infrastructure Hub, including its structure, objectives, and its role in implementing the G20's Global Infrastructure Initiative will be discussed at a symposium - Innovations in Infrastructure: Beyond the G20 – on 5-6 March.

Footnotes

[1] Chatham House Report (P Sabacchi, S Pickford, D Tentori and H Huang), Building Growth in Europe – Innovative Financing for Infrastructure, September 2014; US Dept of Treasury, Office of Economic Policy; Expanding our Nation's Infrastructure through Innovative Financing, September 2014; PPIAF (T Matsukawa and O Habeck), World Bank, Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends and Developments, 2007; UN Economic and Social Council, Innovative Financing Options for Regional Infrastructure Development and Maintenance, August 2013; PwC, Crunch Time for Brazilian Infrastructure, Spring 2013; Standard & Poors, Global Infrastructure Investment, Credit Week, January 2015
[2] See here and here.

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