Trend 8: Innovative new ways to fund infrastructure emerging

Trend 8

As responsibility for investment into infrastructure starts to devolve to state and city-level governments and central/federal funding becomes increasingly constrained, many are starting to look for new ways to unlock capital flows.

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For the vast majority, the challenge is simply about finding enough money to go around. But some are also looking for new ways to ensure that the cost of infrastructure development is borne by those that most directly benefits from it. 

In 2016, we expect the trend towards user-pay, identified in previous years, to continue and grow. We also expect to see governments start to focus on bringing forward and capturing both the current ‘stores’ of value and the future value that they expect their projects to deliver in order to fund its development.

For some, pragmatism will lead to more boldness in the privatization of assets (or, to give it its politically correct term, ‘asset monetization’). Rather than shrinking away from the political implications of privatization, governments will increasingly start to see privatization as a smart way to recycle capital in order to fund new services and assets. 

Yet, to achieve this, a clear and compelling logic for the use of the proceeds of monetization – well articulated to the population – is an absolute prerequisite. Australia is leading the way on this but many other countries are beginning to follow, albeit on a smaller scale.

At the same time, we expect to see new innovative ways of ‘value capture’ emerge and public authorities will get tougher and smarter with private developers who own land surrounding projects. Others will likely leverage the value that will be gained by homeowners and businesses within proximity to the asset through land taxes and development taxes. And we will almost certainly see new taxes being developed and ring-fenced to fund future infrastructure investment.

The challenge, however, will come in localizing the approach to value capture. Much will depend on politics, local customs, expectations and norms. 

The long view

For now, these new innovations in terms of raising funds have been largely isolated to developed markets and, as such, approaches for value capture have yet to penetrate into the developing world. Over the long-term, we expect to see the more progressive emerging markets quickly adopt these methods, both at the local and at the central level, with the more risk-averse markets following up in a ‘second wave’ of value capture. And this, in turn, should unlock new sources of funding to bridge the developing world infrastructure gap.

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