For developing cities, private participation crucial to financing infrastructure innovation: Deloitte Global report
NEW YORK, NY, 30 October 2018–Governments around the world today spend approximately $2.5 trillion each year on building and repairing critical infrastructure.i Developing countries require an additional $1.3 trillion of public infrastructure investment.ii Yet these amounts are not nearly enough to meet current demand for transportation, water, power, sanitation, energy, telecommunications, and other infrastructure, especially in developing countries. Government budgets will not alone be able to finance these needs. A new Deloitte Global report, “Smart cities funding and financing in developing economies,” explores how governments in developing economies can overcome this challenge through private sector participation.
In developing regions, the gap between infrastructure needs and investments is widening at an unsustainable pace. Forces such as rapidly increasing urbanization, lack of available funds, and underinvestment in current infrastructure systems are putting an increasing strain on cities and their governments. Additionally, projects in developing economies present unique challenges, making it more difficult for private institutional investors to participate in financing public infrastructure.
“Historically, private financing for infrastructure projects in developing economies has been limited, and investors willing to finance these projects have required higher returns,” says Michael Flynn, Deloitte Global Financial Advisory leader, Government & Public Services. “To overcome this obstacle and build a stronger pipeline of private financing, developing cities should identify business models that allow investors to finance specific aspects of a project, in turn distributing risk among key stakeholders.”
Since every location and infrastructure project brings unique goals and challenges, governments and project teams must be meticulous in selecting a business model, value capture and financing strategy, and procurement structure that fully accommodates their needs.
Deloitte Global’s new report explores several approaches, including:
- International development organizations (IDOs), such as multilateral development banks and bilateral donors, can help to catalyze infrastructure projects by facilitating private investment in developing economies. By providing lower-than-market-rate concessional finance, technical assistance to structure private investment projects, and additional capacity to mobilize private financing, IDOs can reduce risk for private investors and help to make projects a reality.
- The blending of multiple sources of finance (e.g. IDO loan financing, commercial financing, and government funds) can create a project financing structure that enables developing cities to finance their most complex infrastructure projects. Thereafter, a procurement structure based on the eventual public-private share of risk allows governments to transfer risk to the private sector where appropriate, while mitigating risk for each stakeholder and enhancing innovation.
- Due to the growing strain on cities, governments should consider the technological implications of an infrastructure project to ensure the investment will create value over the long term. Smart infrastructure solutions use advanced technologies to deliver works and services to citizens. Smart cities that embrace this approach operate more rapidly, more effectively, and more efficiently than those opting for traditional infrastructure options.
“The objective of an infrastructure project should be two-fold: governments need to fix short-term problems while still creating long-term value,” adds Flynn. “The smart cities of the future will be those that prioritize innovation, integrating technological solutions into the framework of infrastructure projects, thus creating sustainable returns for stakeholders and citizens.”
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i. OECD, Fostering investment in infrastructure, January 2015, https://www.oecd.org/daf/inv/investment-policy/Fostering-Investment-in-Infrastructure.pdf.
ii. World Bank Group, “City creditworthiness initiative: A partnership to deliver municipal finance” [undated], http://www.worldbank.org/en/topic/urbandevelopment/brief/city-creditworthiness-initiative.