Rethinking investment options for public infrastructure projects

Whether it be in developed or developing economies, there’s a widespread view that it’s time for significant investment in public infrastructure. One of the challenges lies in how to finance new projects.

The search for alternatives to increased public debt is shifting attention towards the potential role of major investors, particularly institutional investors.

On October 5, 2016, the Global Infrastructure Facility, established by the World Bank, invited experts its Washington headquarters to discuss how to make projects “investor ready” and how to develop innovative frameworks to leverage private investment to close the infrastructure gap.

Participants included Kemi Adeosun, Nigeria’s Finance Minister, Joaquim Levy, World Bank Group Chief Financial Officer, Nasser Malik, Citigroup Managing Director and Head of Global Structured Debt, Bill Morneau, Canada’s Finance Minister, and Macky Tall, CDPQ Executive Vice-President of Infrastructure and President and CEO of CDPQ Infra.

“Infrastructure is attractive from a risk-return perspective because it’s a strategic and long- term investment, that generates a cash yield and is generally tied to inflation since it’s a real asset,” said Macky.

As head of CDPQ Infra, Macky has been part of developing a new model for working with governments. The subsidiary is taking on greenfield infrastructure projects, the first of which is the planning, building and operating of the REM, a new light-rail transit system proposed for Montréal. The model outlines financing structures as well as the governance requirements for successful investor-government partnerships.  

“The overall governance has to be clear, robust and transparent. The regulatory and legal framework have to be easily accessible and understandable so that projects are predictable over the long term,” he said.

Infrastructure is attractive from a risk-return perspective because it’s a strategic and long-term investment, generates a cash yield and is generally tied to inflation since it’s a real asset.

Macky gave examples of investments CDPQ chose to make following improvements to a country’s regulatory framework. 

“In the case of India and Mexico, where we invested in infrastructure, the governments had undertaken significant reforms to facilitate and accelerate infrastructure projects.”

The World Bank estimates that there are trillions of dollars’ worth of infrastructure projects waiting for financing. However, despite the appetite of investors, most struggle to evaluate them and make sound comparisons between projects. The World Bank wants to help change that.

“[Investing in infrastructure] can transform the conditions in which people live,” said the World Bank’s Joaquim Levy. “Infrastructure is a greater engine of growth than simply giving money.”

Finance Minister Morneau said his government has been consulting with investors, seeking ways to help finance both new “greenfield” projects and the renewal of aging infrastructure in Canada.

“Investors want counterparties on our side that are really experts, that really understand what is going on. Many are also looking for governments with which to co-invest,” said Morneau. “We’ve heard their request for a pipeline of projects so that investors can see the investment horizon.”

The issue of an infrastructure pipeline is very familiar to Macky.

“A pipeline is important because when we begin to focus on a market, we need to put resources towards understanding the specificities of a project,” said Macky. “A visible pipeline creates an additional incentive to look at a country for investment.”

The panel’s moderator, MSNBC anchor Stephanie Ruhle, asked about concerns of an investment bubble potentially forming due to the attractiveness of certain projects. Citigroup’s Nasser Malik said that risk still seems fairly remote.

“The lesson from the global financial crisis was this: never invest in something you don’t understand,” said Malik. “To invest in infrastructure, you need more than one or two people. You need a team.”

That lesson is behind CDPQ’s two pronged approach. The CDPQ Infra team has the broad range of experience required to undertake infrastructure projects from the planning to the operation stages. At the same time, CDPQ continues to invest globally in infrastructure —as it has been for more than 15 years — seeking strategic partnerships across selected markets and fields of expertise, leading to even more in-depth knowledge of both greenfield and brownfield projects.