Contracts, not concrete : de-risking private finance of sustainable infrastructure in emerging markets

Abstract

Matching long-term infrastructure demands in emerging markets with long-dated capital supply - from pension funds, insurers or sovereign wealth funds - has never been so high on the agenda of governments, climate funds and multilateral development banks. It has been argued that with the right policies and incentives in place, and with careful use of development capital and climate finance, private investors can make a profit financing emerging market infrastructure needs in a sustainable manner. However, this focus on policies and incentives constitutes a model of infrastructure investment risks comprised of country-level and sector-specific macro correlates. In fact there are significant contract-level micro correlates of infrastructure investment risks. Despite the literature on private demand for sustainable infrastructure investments, few have considered the effects of supply constraints on the process. Infrastructure is not yet clearly an asset class and sustainable infrastructure presents greater uncertainty because technologies are new, funding models are uncertain, financing instruments are inadequate, and there is a paucity of cashflow data with which to forecast risk-adjusted returns. Substantial private investment in infrastructure cannot take place without adequate measures of expected risk and performance measures which the market has failed to supply. If sustainable infrastructure is to become an asset class, relevant to the asset-allocation and liability-management of investors, then a change of focus is required from the governments, MDBs, sponsors and climate funds who provide institutional investors with access to sustainable infrastructure assets. The focus should be on collecting project cash-flow data to help answer open questions about cash-flow performance and risks, a task that requires large scale collaboration. Better information on cash-flow performance by contract-level variables enables benchmarking of infrastructure investments in a manner which can add value to strategic asset-allocation decisions. This focus on contracts-not concrete - offers great potential both to de-risk infrastructure investments and to influence up-stream project preparation in emerging markets.