There Isn’t Enough Money for Infrastructure—Here’s How to Make it go Further
According to the United Nations, 92% of the Sustainable Development Goals could be achieved through infrastructure investment alone. But fulfilling infrastructure’s great promise requires an enormous increase over current funding levels. Right now, the funding gap exceeds $6 trillion annually—a sum larger than Germany's total economic output. To realize infrastructure’s potential, we need nothing less than a Marshall Plan for infrastructure, an Interstate Highway Network for the world, or an Industrial Revolution for people and the planet.
The obvious solution is to raise more capital. Yet governments face significant barriers to public spending, especially as budget deficits rise and public support for spending money overseas falls. Efforts to mobilize private capital have also underperformed. Despite vast reserves of private capital—and a heavy focus on private-sector mobilization at the G20—infrastructure investment has barely grown over the last decade.
Unfortunately, then, growing the funding pie is not going to happen anytime soon. Instead, we must make better use of existing capital. By getting smarter with our infrastructure investments, we can not only better fund ever-increasing infrastructure needs, but we can also use that infrastructure more wisely to achieve its goals.
Here are three things that will help address infrastructure needs without breaking the bank.
Harmonize Standards
Investors increasingly recognize the importance of high environment, social, and governance (ESG) standards for infrastructure. These standards help guard against reputational risks and deliver more reliable returns over longer periods.
But meeting standards is not straightforward. While there’s broad agreement on the goals of sustainability and inclusivity, a confusing array of standards has proliferated. These include the Equator Principles, G20 Principles for Quality Infrastructure Investment, IFC Performance Standards, and newer initiatives like FAST Infrastructure and the Blue Dot Network. This “spaghetti bowl” of standards can confuse investors, divert resources, and cause delays in project preparation and financing. Although proponents claim some degree of interoperability, the reality is more complicated. We need greater convergence and less divergence in our global approach to infrastructure standards.
Multilateral Development Banks (MDBs), key financiers of infrastructure, can play a leading role in developing common standards. As part of broader reform efforts, MDBs and Development Finance Institutions (DFIs) should accelerate the adoption of a common set of standards and, at a minimum, mutually recognize each other's frameworks. For instance, a single environmental impact study, certified by an international body, could replace the current system of multiple, often redundant assessments.
Deeper Coordination Among Lenders
Not all countries have the same comparative advantages in development finance. Some lenders excel in specific sectors due to their expertise and, just as importantly, their domestic industrial capacity. For example, Japan has a strong track record in high-speed rail and shipping infrastructure, while the U.S. lacks the same domestic base in these areas.
Countries also differ in their approach to sovereign versus commercial lending. Although global initiatives like the Partnership for Global Infrastructure Investment (PGI) and the Trilateral Infrastructure Partnership aim to pool investments, they often fall short in collaborating on project financing and development according to each country’s strengths.
Better coordination among Official Development Assistance (ODA) lenders could help pool resources and eliminate the need for any single lender to cover all sectors.
Activate Private Investment
Given the finite amount of ODA available, every opportunity to activate private investment should be explored. In the short term, this could mean focusing on priority sectors like renewable energy, which has seen significant private investment over the last decade, outpacing growth in every other major category.
While growth in renewables funding has been impressive, it is not yet enough to meet the world’s increasing energy demands. Moreover, the World Bank estimates that only 40% of utilities in EMDEs can cover their operating and debt service costs. The sector is an example where public-private collaboration has shown some success, but it needs deeper, longer-term partnerships to meet sustainability targets.
Whatever our priorities moving forward, we have reached a tipping point where the demand for new infrastructure far exceeds our ability to finance it. The current approach needs to evolve. By harmonizing standards and improving coordination among ODA partners, we can stretch investments further. While these efforts may be tedious, they offer one of the best returns on investment for people and nature until broader economic solutions are found.
About the Authors
Wahba Institute for Strategic Competition
The Wahba Institute for Strategic Competition works to shape conversations and inspire meaningful action to strengthen technology, trade, infrastructure, and energy as part of American economic and global leadership that benefits the nation and the world. Read more