Tolling, P3s Could Unlock Trillions in Private Capital for Infrastructure

Public-private partnerships may be the key to unlocking more than $100 trillion in capital that is available around the world and, in the case of many institutional funds, open to the possibility of investing more heavily in infrastructure.

In a post last month for McKinsey & Company, Christopher Heathcote, CEO of the G-20’s Global Infrastructure Hub, noted that only 1.6% of the $106 trillion available in pension and sovereign wealth funds is currently directed to infrastructure, according to the Organisation for Economic Co-operation and Development (OECD). But without action by governments to open up the P3 market, he writes, “the problem is the dearth of financeable projects, not of ways to divvy up risks.”

The UK’s Three Steps to Success

Heathcote says the British government took three key steps when it set out to encourage P3s: It “placed building physical infrastructure at the heart of its economic strategy,” required all new major projects to be assessed for P3 suitability before being considered for public funding, and assigned a single agency to select and plan projects and standardize contracts.

The results were dramatic: After five years, the UK has the world’s biggest P3 infrastructure market, with 900 projects under construction or at an advanced stage of bidding.

While the process welcomes the private sector, Heathcote stresses that no one is getting a free ride.

“The private sector competed hard,” he reports. “Debt terms went from seven years to as many as 30 as the market matured. Over the same period, the cost of finance fell.” And the public is seeing the benefit—private capital is largely behind the 25-kilometre Tideway tunnel beneath the Thames River, and “the private sector also successfully participated in such major projects as Crossrail and the Olympics.”

Private Capital Supports the Public Good

With economic growth stalling out and interest rate near all-time lows, Heathcote points to P3-driven infrastructure projects as a great way to jump-start the global economy.

“According to the IMF, a 1% increase in spending on infrastructure leads to an average of 1.5 percentage points in GDP growth over four years,” he writes. “In countries where infrastructure is well planned and well executed, the return is even greater—2.6 percentage points over four years. The difference suggests how important government is to ensure that infrastructure delivers the biggest possible dividend.”

And that, in turn, points to the indispensable role of user finance in supporting the share of new infrastructure activity that goes to our highways, bridges, and tunnels.

“Public-private partnerships depend on reliable, long-term cash flow,” says IBTTA Executive Director and CEO Pat Jones. “Options like tolling and mileage-based usage fees help meet that challenge by connecting the cost of the end product—safe, reliable mobility—to the users who need and choose it.”

For a fresh look at international transportation finance and technology, register today for IBTTA’s Summit of the Americas, October 16-18, 2016 in Mexico City.