Region: Global
Country: Global / Non-Specific
Topic: Financing and Risk Mitigation
Keywords: Age of Disruption, Risk allocation
Document Link(s):
Document Summary:
The report is building in large part on discussions held at the APEC Seminar on Long Term Investment in Infrastructure part of the APEC Senior Finance Officials’ Meeting on the 17-19 May 2017, Ninh Binh, Viet Nam. In addition this work has benefited from two recent OECD reports covering APEC and ASEAN economies.
Document Details:
Infrastructure investment gaps impose fundamental impediments on sustainable economic growth and social development across developing countries in the APEC region. With real GDP increasing from 16 trillion USD in 1989 to 20 trillion USD in 2015, the region has outperformed global growth generating 59% of worldwide GDP and 50% of global trade (APEC, 2017). The 21 APEC economies represent half of the world’s population building a young and dynamic workforce and creating a large demand for infrastructure.
In meeting the growing demand for infrastructure investment, the private sector is expected to have a major role. As different types of private investors are willing to take on different types of risks, the structuring of risks and returns is a crucial factor in determining the pool of willing investors. Increasing levels of private investment and financing will entail certain risk transfers to the private sector, with appropriate risk allocation being crucial for long-term viability. A deep understanding of risk allocation principles, measures and government support arrangements is a precondition to attract private sector capital. Consequently, risks need to be clearly classifiable, measurable and contractually allocated to the party best able to manage them.
New and alternative funding and financing models, including Public Private Partnerships, can potentially align public and private sector interests in infrastructure provision and management in APEC economies. Also by using risk mitigation measures and combining different sources of finance through 'blended finance', governments and Development Finance Institutions (DFIs) can employ development finance catalytically to mobilise additional investment towards sustainable development in developing countries4 . This is particularly important in APEC developing countries where investment is sometimes further hindered by weak policy frameworks and governance. To attract private sector financing and alternative sources of finance such as institutional investors, effective transaction design of PPPs and forms of collaboration beyond traditional instruments such as direct equity stakes and bank loans may be needed. This can make infrastructure as an asset class more accessible to a broader group of investors and help to diversify the large risks of infrastructure projects - currently shouldered to a large extent by the banking and public sectors through guarantees - across many groups of investors through the capital markets.
Several APEC governments have introduced various mechanisms to support private capital funding public assets, changing the risk allocation between the private sector, taxpayer and consumer. To attract more private sector finance into infrastructure projects, policy makers will need to consider how material residual risks or other constraints can be mitigated so that potential transactions are seen as investable opportunities.
Updated: December 26, 2023