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Understanding the Challenges for Infrastructure Finance

date Date: August 1, 2014
date Author(s): Torsten Ehlers
date Affiliation: BIS
Abstract

What is holding back infrastructure investment, even though real long-term interest rates are low and the potential supply of long-term finance is ample? The answer matters to policy makers, because infrastructure is a key determinant of the growth potential of an economy. This paper identifies some key obstacles for better and greater infrastructure finance and investment. One such obstacle is the lack of investable projects. Often, projects are not properly designed and contractual arrangements imply a distribution of risks and returns that create the wrong incentives among the various partners. The greater involvement of private investors and the design of economically rational financing structures can mitigate such problems. They also improve the efficiency and success of infrastructure projects. A pipeline of investable projects would allow large investors to commit a greater share of their financial resources to infrastructure. Tapping the vast resources of capital markets, which thus far have been underutilized, could significantly boost infrastructure finance. A greater variety of financial instruments for infrastructure finance would help to make infrastructure more attractive for a broader group of investors and would allow a better diversification of risks.

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