Currently, infrastructure needs far exceed the capacity of public funding. By 2040, the investment gap will exceed US$15 trillion.

The evidence shows that private capital is eager to invest in infrastructure due to infrastructure's potential for portfolio diversification, its delivery of social outcomes and its often stable income streams. However, when it comes to converting this willingness into action, private investors face barriers, as evidenced by the falling number and value of primary private infrastructure investments since 2010. Two key barriers are (1) difficulty navigating the regulatory, political and economic uncertainty surrounding infrastructure and (2) unattractive risk-weighted return profiles of some projects.

GI Hub’s Innovative Funding and Financing tool is designed to help governments understand their options, identify frictions in their markets, and access solutions to improve the quality and quantity of projects attractive to private sector investors.

This tool complements the work of the G20’s Infrastructure Working Group and contributes toward the G20 Roadmap to Infrastructure as an Asset Class – an initiative that is ultimately focused on lifting growth, creating jobs and increasing productivity through infrastructure.

What the Innovative Funding and Financing tool offers

While other literature explores the broader benefits and value created through infrastructure, including social outcomes and other outcomes, the focus of this tool is to specifically address solutions for structuring projects to optimise private infrastructure investment.

The framework presented here will enable governments to explore emerging funding models and pinpoint specific areas where domestic infrastructure financing markets require interventions.

To complement the tool, 38 case studies have been compiled, exemplifying practical applications of the funding and financing levers that are identified in the framework.

Together, the framework and case studies contained in this tool will help governments structure more bankable projects and explore new ways to mobilise private finance to help close the infrastructure gap.

The GI Hub funding framework considers both funding and financing.

As defined by the International Monetary Fund (1), funding of a project refers to how investment and operational costs are repaid over time; in the case of public infrastructure, this means by users, taxpayers or a combination of both. Financing refers to money raised up front – through equity or debt instruments – for the design, construction and early operating costs of an asset. New funding and financing models have emerged in recent years, with a whole range of solutions to increase and diversify revenues and financing options.

The framework is visually represented as a house, in which each of the four basic structural elements of the house represent an element of the framework.

• The foundations: The overall macro-economic climate, the legal and regulatory context, and the specific management capabilities needed
• The roof: The overall objectives of a government infrastructure program
• The outer walls: Detailed guidance for developing projects with attractive risk-weighted return profiles; includes the models through which the private sector participates in deals and the entities that provide the necessary capital
• The inner walls: The heart of the framework; the levers that support government officials in their efforts to determine how best to create and capture the value inherent in the projects in their pipelines.

Levers

The three ‘inner wall’ levers that are critical to creating strong, predictable projects capable of attracting the capital needed to develop a PPP are as follows.

Revenue levers
Revenue levers are the fundamental means of generating the cash flows that fund every project. They are required at the earliest stage of the project journey, as they determine how value will be created by a project, which in turn drives the business case for investors.

Risk management levers
Risk management levers are the contract clauses and financial instruments that balance the risk-reward profile of a project for investors. For example, if a given country’s currency fluctuates considerably, hedging tools can mitigate the risk that a devalued currency will adversely impact investors’ returns or require governments and/or users to shoulder additional financial burdens. (2)

Financing levers
Financing levers are the tools used to source capital for a given project. These are further divided into primary levers (including financing received directly from investors and financing raised through equity shares or bonds listed on stock markets) and secondary indirect levers. Sources of capital can include either equity or debt, and sometimes a combination of the two.

Together, the three levers define the options that governments have to structure projects in ways that are attractive for private sector investment.

Overview of the practical examples by level of innovation, lever and country

In the image below, the level of innovation is plotted on the left axis, the lever is plotted along the top and countries are marked by their flags.