Infrastructure Finance Projects: Major Sources of Funding

It is a known fact that the world is in great need of infrastructure projects and, therefore, infrastructure finance. Developing countries need to build their infrastructure for the first time. This needs to be done in order to attract more investments. However, even developed countries need to build more infrastructure projects. This is because the population in the developed countries is growing steadily. As a result, the infrastructure which was adequate a few years earlier is no longer adequate. Also, normal wear and tear make it necessary to build infrastructure projects.

The bottom line is that infrastructure projects all over the world need a lot of funding. It is estimated that more than $96 trillion is required to fund infrastructure projects by the year 2030. At present, the annual budget available for infrastructure funding worldwide is close to $2.5 trillion to $3 trillion. However, the actual amount of funds needed is more than double the available amount. Also, the problem is that most of this shortfall of funds exists in low and middle-income countries.

Funding of this magnitude cannot be provided by anyone’s source alone. This is the reason that infrastructure needs to be funded by several sources having deep pockets. Some of the most common sources of infrastructure finance have been listed below:

Public Finance

Government funding is one of the biggest sources of funding for infrastructure finance. Tax dollars collected all over the world are spent in huge numbers on creating infrastructure. In general, countries spend anywhere between 5% to 14% of their GDP on developing as well as maintaining infrastructure. A lot of this money is spent on financially unviable projects which have social value for the community.

In many cases, the government does engage the private sector to execute the project on its behalf. However, this may be done to increase the efficiency of the project. The private sector only brings in the necessary expertise to deliver the project on time. In return, the government provides all the funding when developmental milestones are completed. In essence, governments worldwide use the services of the private sector as subcontractors.

However, it needs to be understood that infrastructure finance projects funded by the government are notorious for corruption. Since the taxpayer is paying the bill, a lot of the time, the development charges are highly inflated, and all the money spent on these projects ends up in the hands of mafia controlled by corrupt politicians.

Supra National Financial Institutions

Supranational bodies such as World Bank, International Monetary Fund, Asian Development Bank, etc. are also important sources of finance for infrastructure projects. However, such organizations tend to only fund projects which are financially viable. As a result, urban projects like metro rails, bridges, flyovers, etc. tend to get funded by these institutions. The internal rate of return (IRR) required by these financial institutions is generally lower as compared to other private sector institutions.

Institutions like the World Bank and the Asian Development Bank also provide other services to enable the better execution of infrastructure projects. This means that even if they do not directly fund a project, they try to add value by providing advisory services such as loan guarantees, advisory services for the creation of suitable policies, etc. In many cases, these institutions also provide treasury services to infrastructure projects. This is done to enable optimal utilization of funds.

Private Finance

Governments all over the world are desperately seeking the intervention of private money to help fill the funding gap being faced for infrastructure projects. As a result, many private mutual funds have been set up for this purpose. Governments try to make these investments more attractive by providing tax breaks to individuals who invest their money in such projects. A wide variety of financial instruments (both debt as well as equity) are being used to help channelize the savings of the general public towards infrastructure projects. Attempts are also being made to woo institutional investors such as insurance companies and pension funds to increase the amount of funding available.

Public-Private Partnership

The public-private partnership model is also widely used in infrastructure funding. This model works differently than public funding. Here, instead of the government using its money for the initial outlay, the private sector does so.

The idea is to create a partnership, where the government brings in land and other resources, wherein the private party brings in technical expertise. The private party then has certain rights over the asset it has helped developed.

For some years, the government allows the private party to collect money in order to generate revenue and payback its investment plus a reasonable amount of profit. Then the asset is finally given back to the government, which can decide whether or not they want to continue collecting revenue for the upkeep of the project.

The only problem with this model is that it can only be used to raise funds when the underlying project is extremely viable i.e., provides an IRR that is sought after by private investors. Otherwise, private investors will simply give it a pass.

The simple fact is that extremely large sums of money are required for infrastructure projects. One source of funding cannot really help fulfill the gap. In fact, all the sources of funding, together, may also not be adequate. There are many governments in the world who are trying to set aside as much money as they can for infrastructure projects.