The global infrastructure financing gap: where sovereign wealth funds and pension funds can play a role

Econography

October 31, 2022

The global infrastructure financing gap: where sovereign wealth funds and pension funds can play a role

By
Amin Mohseni-Cheraghlou and Naomi Aladekoba

The global infrastructure funding gap is estimated at around $15 trillion by 2040. To provide basic infrastructure for all over the next two decades, the world would need to spend just under $1 trillion annually. dollars more than the previous year worldwide. infrastructure sector.

Most of these expenditures must be made in low-income economies. Nearly eight hundred million people in the world do not have access to electricity and basic drinking water services. About 1.8 billion people worldwide do not use basic sanitation services. The vast majority of these people reside in low-income economies, including regions of sub-Saharan Africa and South Asia. Moreover, approximately 3.2 billion people in the world do not use the Internet and only sixteen people out of a hundred have a broadband subscription. As Figure 1 shows, in low-income countries, only 21% of people have Internet access, and only one in two hundred people have broadband. Figure 1 can be explored for more detailed statistics on various forms of basic infrastructure gaps, such as access to electricity, clean water, sanitation, internet, and broadband.

From 2015 to 2020, assets under management (AUM) of sovereign wealth funds (SWFs) and private pension funds grew from $11 trillion to $15 trillion. By the end of 2020, total global pension assets (public and private) exceeded $56 trillion, nearly double the amount in 2010. Having more than $65 trillion in assets (see Figure 2 and Figure 3), institutional investors (such as sovereign wealth funds and pension funds) are particularly well placed to bridge the infrastructure financing gap of low-income economies over the coming decades. This is primarily because the investment horizons of institutional investors are often long-term with low but secure expectations of return, characteristic of large-scale infrastructure projects. As shown in Figure 2, Asia and the Middle East are home to some of the largest sovereign wealth funds in the world, accounting for 40% and 34% of total global sovereign wealth fund assets, respectively. Available data suggests that cross-border investments by sovereign wealth funds from these regions mainly target the financial and real estate sectors of advanced economies, accounting for around 40% of all their cross-border transactions.

As Figure 3 shows, advanced economies are home to the largest pension funds and retirement savings accounts in the world. The United States accounts for approximately two-thirds of assets under management in this industry. While highly liquid, low-risk assets such as bonds and stocks have traditionally been the two main asset classes invested by pension funds and retirement savings accounts, they are slowly beginning to invest in classes less liquid assets with longer return horizons, such as infrastructure and real estate. This could be a game-changer by closing the global infrastructure financing gap. However, despite their growing importance in the global economy and financial markets, institutional investors such as sovereign wealth funds and pension funds account for less than 1% of private participation in infrastructure in developing economies, largely in because of the risks of long-term investments in these countries.

It has long been clear that traditional mechanisms for public financing of infrastructure projects are insufficient to meet the growing demand for infrastructure. This requires new and innovative mechanisms to attract investment from institutional investors and the private sector. To make this possible, infrastructure must be defined as an asset class in which private and public entities can easily invest. The creation of the Global Infrastructure Facility (GIF) by the World Bank is one effort in this regard. These efforts have also been complemented by growing activity in public-private partnerships. For example, in 2012, the World Pensions Council and the Organization for Economic Co-operation and Development convened for the first time a meeting focused on promoting the exposure of pension funds to long-term assets such as investments in infrastructure.

The Bretton Woods Institutions (BWIs) are uniquely placed to encourage infrastructure investment in developing countries by providing various guarantee and insurance mechanisms, thereby reducing risks for private investors. In other words, BWI’s involvement in infrastructure projects in developing economies can attract institutional and private investors by reducing risk and increasing confidence and transparency in these projects. While the creation of the GIF by the World Bank is a significant step forward, the following two reports identify other areas where the World Bank and International Monetary Fund could engage with private capital, non-state and quasi-state actors. (such as sovereign wealth funds and pension funds) to bridge the infrastructure financing gap over the coming decades: Modernizing the Bretton Woods Institutions for the 21st Century and Changing the Bretton Woods Institutions: How non-state and quasi-state actors can help advance the global development agenda.

Amin Mohseni-Cheraghlou is a macroeconomist at the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 project. He is also an assistant professor of economics at the American University in Washington DC. @AMohseniC

Naomi Aladekoba is a consultant at the GeoEconomics Center focusing on sub-Saharan Africa, Chinese foreign policy and international development. @NAladekoba

At the crossroads of economics, finance and foreign policy, the Geoeconomics Center is a translation center whose goal is to help shape a better global economic future.

Associate specialists:
Amin Mohseni-Cheraghlou

Michael J. Birnbaum