Long-Term Domestic Capital Markets and Sustainable Infrastructure Development: A Cross-Sectional Evaluation

PROBLEM

Across Brazil, India and Indonesia, inadequate and poorly performing transportation infrastructure presents major challenges to economic growth. The size of the transportation infrastructure investment gap and the availability of funding sources are the linchpin of current debate on this issue. Governments across   these   countries   are   increasingly    turning   to   public-private partnerships (PPPs) to finance infrastructure initiatives.  Large institutional investors, such as insurance companies and pension funds, are welcoming the potential of long-term stable and inflation-indexed returns embedded in infrastructure projects.  However,  distortions  in regulations  and capital  markets hinder the efficient allocation  of long- term  funds  from  institutional   investors  into  infrastructure projects.   In partnership with the International Finance Corporation (IFC) Infrastructure Advisory, the Capstone team identified ways to further involve domestic institutional investors and private sector in financing infrastructure projects in the transportation sector.

METHODOLOGY

The team collected data primarily from government agencies and multilateral organizations.  They also employed various research methodologies, including literature reviews, case studies, and interviews of investment and legal professionals as well as academics. The team focused on Brazil, India, and Indonesia, but also researched global best practices from Chile, UK, and Australia. First, they took on a holistic approach by starting with current infrastructure financing trends and major stakeholders across the three countries.  Second, they analyzed the regulatory and policy frameworks at different governmental levels in order to examine the issues that limit private sector participation in financing infrastructure development. Third, they identified project-level bottlenecks and specific  risks involved  in each project  phase of greenfield  and brownfield  projects,  respectively, taking into account the context of a PPP framework where public and private risk-sharing is pre-established.

This analysis led the team to identify the appropriate funding sources pertaining to each project phase that reflects the proper risk-pricing. Finally, the research concluded with case studies of transportation infrastructure projects across respective countries to evaluate the success and failure factors.

IMPACT

The team identified the pre-conditions for sustainable (strong and continued) infrastructure development in Brazil, India, and Indonesia given political and capital markets conditions. The team proposed recommendations to address the risks at each stage of a project life cycle and also provided suggestions for the policy initiatives to further leverage local capital markets and increase participation of pension funds and insurance companies in financing infrastructure projects.