By Joaquim Levy
Institutional investors are increasingly interested in
infrastructure but face important hurdles to increasing their
exposure to it.
Pension funds and insurance companies have a natural
interest in infrastructure as a long-term asset yielding
predictable and robust cash flows, with low correlation to
other assets. The risks of new ("greenfield")
infrastructure projects are, however, often well beyond the
typical fixed-income risk appetite and the mandate of many
The World Bank Group—which is being entrusted by
governments to help crowd in new forms of private finance with
longer tenors and lower interest rates than traditional project
finance—can help bridge this gap by engaging with
countries to enhance regulations and make innovative use of
The five World Bank Group institutions are committed to
helping countries improve several key things: project design
and preparation, the regulatory environment at both the
sectoral and the broader investment policy levels, and the
information flow related to infrastructure in the emerging
markets and developing economies (EMDEs).
These actions, together with developing local markets and
reviewing the regulatory constraints that institutional
investors face in both developed and developing nations, can
help match the risk profile of many infrastructure programs and
projects to the risk capacity of institutional
However, despite these efforts, many institutional investors
might still not feel comfortable to participate in new
projects, but instead remain focused on brownfield projects,
i.e., those that are already operational, do not face
construction risks, and have settled part of their demand
Finding ways for institutional investors to invest in
brownfield projects could help countries recycle their assets,
raising resources to invest in new projects.
In Australia, where superannuation funds have long held as
much as 12% of their investments in infrastructure (primarily
domestic), the government recently established a fund to
encourage such recycling of assets.
Similar approaches—securitizing revenues and then
leasing or selling brownfield assets to turn the embedded value
into money for greenfield investment—offers tremendous
potential in Asian developing countries that have developed
good assets but face a large public debt.
With adequate governance, roads and energy plants in these
countries could attract resources from institutional investors
and be recycled to create fiscal conditions for new
investments. Such a strategy can also broaden investment
opportunities for local insurers and pension funds and deepen
domestic capital markets.
The supply of brownfield investments—at least those
that produce enough revenue to cover their debt
obligations—is limited, which has led to price
inflation in this segment.
One can productively tap into this unmet demand by using
financial facilities that help replicate the risk and financial
features of mature projects when financing new, greenfield
The World Bank can "synthetize" brownfield project cashflows
by helping governments enhance the cash flow provided by
public-private partnerships (PPPs) and similar projects to
support their debt service during the construction phase,
including if project completion is delayed.
Such an enhancement would respond to institutional
investors’ demand for low-risk payments from the
beginning of their investment. Synthetizing these features of
brownfield projects offers advantages: providing predictable
income streams for investors since the construction phase would
broaden the range of potential investors, and under the right
governance, helping address one of the most controversial
aspects of PPPs—that private capital during the
initial phase of infrastructure investments is too expensive.
There are various ways to implement this approach.
• One is to lend to governments that are committed to
transfer the asset to the private sector upon completion.
This would, however, miss the chance of mobilizing
institutional investors from the beginning of the project, and
may face time-consistency risks.
• A second, rather straightforward way is for the World
Bank to enable the government to provide support, backing a
government facility that will pay for the
project’s debt service during construction, with
a contingent amount to continue covering this service if
delays in project completion occur. This facility would be a
fairly simple sovereign operation and a transparent,
effective way to foster immediate mobilization of private
sector resources, covering the project debt as it is
disbursed to finance the construction phase.
• A third way, explored by the World Bank
Group’s Finance and Markets Global Practice, is
for the World Bank to finance the government’s
contribution to a fund that would back enhancement of the
securities issued by the project sponsors. This fund could be
open to other investors and would guarantee the service of the
project debt until the project is fully implemented.
All of these options are self-sustaining, and their cost can
be efficiently incorporated into the overall cashflow of the
projects. If the contingent part is triggered, the additional
cost can be gradually passed through tariffs if a sufficient
cause is warranted.
The World Bank and its sister institutions, the
International Financial Corporation (IFC) and the Multilateral
Investment Guarantee Agency (MIGA), can also provide a suite of
complementary products to cover other risks of cross-border
investments, including breach of contract and
From the World Bank Group’s point of view this
approach is efficient, because it lowers the amount to be
raised in the market by the World Bank, as well as the time
that its resources are tied up to specific projects.
It has some similarities with relatively popular
"mini-perm," i.e., short-term, loans that are extended by
commercial banks during construction with the aim of being
replaced by long-term resources at completion of the
However, the World Bank facility would allow institutional
investors to receive interest during construction and avoids
By taking concentrated risks, although not through
subordinate tranches, such facilities crowd in private
resources to support the surge in climate smart infrastructure
in EMDEs that the world needs while still enabling the World
Bank to hold a capital buffer proportional to its ultimate
exposure to the country benefiting from the proposed facility.
The approach helps optimize the World Bank’s
balance sheet, while creating new and important investment
opportunities for domestic and international institutional
investors around the globe.
Mr. Levy is the World Bank Group's chief