On 12 - 13 October 2017 the European International Contractors (“EIC”) met in Paris to discuss the Global Infrastructure Funding Gap. Jatinder Garcha and Robbie McCrea attended this workshop, we believe, as the sole UK legal representatives.
The Infrastructure Funding Gap defined
Infrastructure is the essential physical building blocks of society, defined by the Collins English Dictionary as follows:
“The infrastructure of a country, society, or organisation consists of the basic facilities such as transport, communications, power supplies, and buildings, which enable it to function” [other key infrastructure includes water, energy, and public services generally].
The “Infrastructure Funding Gap”, put very simply, is the shortfall between the funding deemed to be required to maintain and build infrastructure, and the funding that is actually available. A shortfall in funding for infrastructure is therefore a very serious issue, and the Global Infrastructure Funding Gap is estimated at over US$1 trillion annually, and growing.
The purpose of this workshop was to hear from leading organisations about the scale of the problem and what is being done to address it, and to discuss our own experiences, thoughts on solutions, and opportunities presented by new generations of infrastructure funding.
The issue discussed
The first workshop session focussed on assessing the scale of the issue, globally and within the EU, and discussing potential and current solutions.
Christian Jabre of KPMG and CICA Representative Roberto Morrison each provided their analysis of the scale of the Infrastructure Funding Gap from the global perspective. Mr Jabre highlighted the widening gap particularly in vulnerable regions such as Africa, whereas Mr Morrison focussed in particular on the funding gap in Latin America, which is estimated to increase from a historical underinvestment of 2.3% GDP to 4.3% GDP towards 2030.
The panel also considered the Funding Gap locally, and Salim Bensmail (who heads the French Ministry for Economic and Finance) set out some of the key issues in funding of public infrastructure projects in France, where there is an estimated €10 billion funding gap over the next 5 years for existing commitments in Transport alone.
The position in the EU generally was set out by Alessandro Carano (Member of Cabinet of the EU Commissioner for Transport), which has very successfully begun to address its infrastructure funding gap through the EU Investment Plan (otherwise known as the “Juncker Plan”). The Juncker Plan utilises three pillars to stimulate investment in infrastructure within Europe, as follows:
- Mobilising finance and “crowding-in” private investment through the European Fund for Strategic Investments, which has been endowed with €21 billion of EU funds through which it is expected to leverage €315 billion in private investment by the end of 2017.
- Ensuring finance is targeted and reaches the real economy, and improving the quality of investment projects, chiefly by providing support and expertise to member states and investors, through the European Investment Advisory Hub and the European Investment Portal.
- Improving the investment environment in the EU, including through regulatory reform within the EU single market (such as the Capital Markets Union and the Single Market Strategy and Energy Union) and structural reforms at national level whereby the framework conditions for investment are assessed.
Although there is still a funding gap in the EU, there is cause for optimism under the Juncker Plan through which infrastructure funding is steadily increasing, and its investment target was recently increased to half a trillion Euros by 2020.
The second session focussed on the roles of institutional players in addressing the Infrastructure Funding Gap, with a focus on investment in developing countries. The catchphrase of the day was “crowding-in private investment”, as the new generation of development finance has a strong focus on mobilising the private sector to assist in financing infrastructure and related development projects.
Speakers from the Long-Term Infrastructure Investors Association (Eugène Zhuchenko), the Asian Infrastructure Investment Bank (Ian Nightingale), the French Development Agency (Rima Le Coguic), and the EU’s Directorate-General for International Cooperation and Development (Roberto Ridolfi) all discussed the work they are doing to promote and facilitate infrastructure investment in developing regions. These organisations are all implementing a new-generation of development investment strategy, focussed on better investments, sustainable development, and new and hybrid finance instruments.
The EU’s External Investment Plan
Of particular note, and an example of this new generation of development strategy, is the EU’s new External Investment Plan to promote sustainable development in Africa1 and EU Neighbourhood countries.2 This was kick-started on 28 September 2017 with the European Fund for Sustainable Development (the “Fund”).
The EIP builds upon the same structure as the Juncker Plan, including three pillars designed to crowd-in private investment. The European Commission expects the EIP to attract €44 billion of private investment by 20203, which is a substantial figure notwithstanding its modesty in comparison to the Juncker Plan’s new target of half a trillion Euros, which it hopes to achieve through the following three pillars:
- The European Fund for Sustainable Development has been endowed with €4.1 billion. The Fund will offer a new generation of financial instruments, encompassing guarantees, risk sharing instruments, and blending of grants and loans (building upon the financing being offered under the Juncker Plan).
- A greater level of technical assistance to help partner countries develop financially viable projects and business ready for investment.
- Increased dialogue between the EU and partner countries, and structured private sector dialogue, to improve the investment climate and business environment in partner countries.
Key aims of the Plan:
The EIP is underpinned by the EU’s commitment to the UN’s 2016 Sustainable Development Goals, such as sustainable economic growth, empowerment of women, and ending poverty, the Paris Agreement on Climate Change, as well as the perceived migration crisis of 2016. Consequently projects seeking to obtain funding or guarantees under the EIP will need to contribute to these commitments and migration issues.
This means that whereas more traditional large-scale investments in infrastructure and renewable energy projects are still part of the plan, the EIP will also promote small and medium sized enterprises, both in terms of investors within the EU and enterprises in partner countries, and it will target specific socio-economic sectors and fragile regions of Africa and the Neighbourhood where foreign investment is currently difficult and overlooked.
The nuts and bolts:
Implementation of the EIP will be overseen by the Commission and a “Strategic Board”, which met for the first time on 28 September 2017, who will set specific areas for investment called “investment windows”. The Commission will then allocate funds and a portfolio of projects to partner financial institutions, such as the European Investment Bank and European Bank for Reconstruction and Development4, to be administered towards particular policy objectives/investment windows.
EU businesses will be able to apply for funding from a partner financial institution for projects that fit within an allocated investment window, and which also meet the criteria of promoting sustainable development. The primary thrust of the EIP is to allow more direct access for private investment in development infrastructure, and the Commission has stated that it will consider direct partnerships with businesses in EU and Africa, both project-based5 and with private financial institutions.
The first investment windows are expected to be released at the EU-Africa Summit which will take place on 29 – 30 November 2017, with the aim that the first guarantee agreements with financial institutions will be entered into in the first quarter of 2018. Given the success of the Juncker Plan to date there is also room for optimism about the EU’s ambitious EIP.
The workshop presented some serious issues for discussion, and some worrying projections. The global population continues to rapidly increase and if we cannot address the widening Infrastructure Funding Gap the consequences, in particular for vulnerable regions, will be disastrous.
The Juncker Plan provides a strong model for addressing the funding gap, which has been undeniably successful to date at crowding-in private investment in European infrastructure. This new generation of investment funding has been emulated within the financial institutions that presented in the second session, who all appreciate and are adapting to the need for a new strategy for infrastructure funding, albeit in more challenging regions than the EU.
As a construction and energy law firm Fenwick Elliott works on infrastructure projects both front-end and back, and we are well aware of the difficulties involved in infrastructure investment particularly in developing regions. We will continue to monitor and look forward to participating in the advancement of this new generation of infrastructure funding.