Governments and multilateral organizations are making valiant efforts to help unclog infrastructure pipelines by developing increasingly-sophisticated credit enhancement facilities and vehicles.
On face value, this is a vital development. There are literally thousands of projects that are being held up by a combination of poor credit ratings and challenging financing markets. Credit enhancement facilities should allow private sector equity and debt providers to take on more of these projects knowing that a certain level of risk is being covered.
Unfortunately, progress with many of these facilities has been slow. In part, this is because private sector investors are still naturally shy about taking on ‘borderline’ projects that require credit enhancement. And in the developing world, a general lack of regulation, weak institutions and non-existent local infrastructure markets has muted the value of credit enhancement promises. Indeed, in many markets, the greater need is for support in capacity building and strengthening of government institutions.
The bigger challenge, however, is that few credit enhancement deals have actually been struck. Governments and multilaterals have, on the whole, been far too focused on creating ‘perfect’ structures and not nearly focused enough on getting the deals done. Simply put, financial instruments have become too complicated and too finely calibrated and this is stopping projects from being delivered.
Over the coming year, however, we expect (and encourage) governments and multilaterals to recognize that – for many of these projects – their choice is to either find a way to work with the private sector or not deliver the project at all.
As we noted in our Emerging Trends 2015, governments will need to think more about the broad benefits that infrastructure delivers rather than focusing purely on closing a financial deal. They need to recognize the need to take on more risk at the early stages of their infrastructure program knowing that – as they mature – they will be able to pass these risks back to investors or sell out completely. They need to recognize that they have a role to play in establishing markets, recognizing that they additional risk they take on will be far outweighed by the benefits that new infrastructure brings, particularly in emerging economies.
Governments and multilaterals will move at different paces to simplify their financial instruments and take on more risk in order to help build the track record and capabilities of markets. Some will continue to tinker around the edges, striving to achieve the best possible deal but not closing any. This will be as much about changing culture and historic practices as structural change. It is ironic that it is the most developed and liquid markets that have taken the biggest steps (such as the UK with its Guarantee Scheme).