According to the World Economic Forum, global spending on basic infrastructure, which include transport, power, water and communications, currently amounts to $2.7 trillion a year. Much of the money to plug the gap needs to come from the public purse: even in an age where many governments should be spending more.
The most cash-strapped emerging economies have room to cut inefficient subsidies and switch the money into building better roads and sewers. But public money can be only part of the solution. The greater opportunity lies in tapping private capital. The potential pot of gold is elsewhere, in the $50 trillion of capital managed by pension funds, sovereign-wealth funds, and insurance companies.
In principle, investing in a power station or toll road ought to be an attractive prospect for institutional investors. The long life of these assets is a perfect match for the long-term liabilities of a pension fund. Infrastructure projects offer reliable cash flow, a hedge against inflation, low volatility and returns that are generally not correlated with other assets.
In practice, though, many money managers have shied away, scared by the scale, complexity and political risk involved. Individual pension funds lack the expertise to assess complicated projects, too many of which are dreamed up by politicians who care more about winning votes than commercial viability. In emerging economies these dangers are magnified by the possibility of currency crises.
These changes could have dramatic results. Infrastructure bonds could become as ubiquitous as mortgage-backed securities. That won’t mean every African country gets the road network it needs. But it would help ensure that more of today’s savings finance the building blocks of tomorrow’s growth.
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