The Private Sector and Development: Cataloguing A Quarter Century of Mobilization Unscaled

We have rolled around once again to the time of year when climate negotiators stare hungrily at the balance sheets of banks and institutional investors and demand trillions in investment at the Conference of the Parties (COP), while international financial institutions promise to help mobilize that investment at the IMF/World Bank annual meetings. It is a great time to ask, “how’s that going, then?” To help, new analysis by economist James Leigland looks at the three-decade-long donor effort to increase private investment in infrastructure.

Back in the early 2000s, World Bank officials were proclaiming that private investment in utilities and transport in the decade before marked a shift from “the hitherto dominant public sector model,” and the private sector would soon replace subsidized public finance as by far the major source of funding for infrastructure. Leigland’s forthcoming book The Rise and Fall of Public-Private Partnerships documents how donors, led by the UK’s Department for International Development (now FCDO), created a global industry of public-private partnership (PPP) facilities to deliver on that promise. In 2024, even while the hype over trillions in private finance for climate and development infrastructure has reached a pitch that could deafen pets, the public sector model is still very much dominant and the hitherto-advertised private sector replacement has floundered. It is past time for a reality check.

Leigland’s book provides a useful primer on how we got to trillion-dollar development finance targets to be delivered by the beneficent financiers of Wall Street and the City of London. It starts with the fact that the estimated “funding gap” for infrastructure in developing countries has exploded over the past twenty years as development and climate goals have become ever more ambitious. In 2005, the Commission for Africasuggested Africa’s infrastructure financing needs at $39 billion per year, or about $20 billion more than (then) current spending. Three years later, the World Bank’s Africa Infrastructure Country Diagnostic was suggesting needs at $93 billion with a funding gap of $48 billion. In 2019, the World Bank estimated that meeting the infrastructure-related Sustainable Development Goals in sub-Saharan Africa would take spending equal to about 10 percent of the region’s GDP each year from 2015 to 2030. Current market GNI in the region is about $2 trillion, suggesting annual needs of about $200 billion. In 2022, estimates underpinning the High-Level Expert Group on Climate Finance suggested that Africa required “an additional $325 billion per year by 2025 to achieve transformational spending on human capital, nature and sustainable infrastructure.”

One response to such numbers would be to question the plausibility of this proposed spending. A second would be to massively ramp up public financial support to meet reported needs that, for Africa alone, have expanded tenfold or more since 2005. A third would be to suggest the private sector could deliver that finance. That was the approach adopted by the G20 in 2011, building on a 2010 high level report on infrastructure which suggested “the constraint is less one of funding than an insufficient pipeline of bankable projects.”

There was no need for additional international public finance, merely a switch in emphasis at the multilateral development banks from growing their own balance sheet to crowding in private capital. From here it was a short hop, a light skip, and more a stumble than a jump to the cursed idea of “billions to trillions”—mere nine-naught figures of public investment could unlock twelve-naught floods of private finance.

There have been some successes: the private sector has taken a growing role in some parts of infrastructure provision over the long term. Not least, the global telecommunications network has gone from being overwhelmingly the preserve of public monopolies to private, largely unsubsidized, competition—although that mostly happened before billions to trillions became a thing. PPPs have been concentrated in electricity production on greenfield sites, and even though they have a mixed record (along with multilateral development bank –MDB– support in the sector), there is surely a large role for private finance in that part of energy infrastructure provision. But, more broadly, donor support for private infrastructure financing has seen extremely disappointing returns.

The first wave of PPPs, concentrated in Asia, crashed into the 1997 financial crisis, with numerous projects collapsing as a result. But donors revived their interest in time for the 2005 G8 Gleneagles Summit, which called for a considerable increase in African infrastructure investment. By 2012, there were 67 facilities funding infrastructure project preparation in Africa. Given a total PPP deal base of 54 projects across Africa and the Middle East in 2012, the average PPP facility was completing less than one project a year at that point (with an average value below $200 million).

Still, 2012 wasn’t even the beginning of the end of peak PPP facility. Since then, the MDBs alone have set up the Africa50 Fund, the Asia Pacific Project Preparation Facility, the Global Infrastructure Hub, the Global Infrastructure Facility, the Infrastructure Project Preparation Facility, and the IDA Private Sector Window, amongst others. These funds provide project preparation and transaction support, equity, credit enhancements, secured loans, refinancing, secondary transactions, subsidies, guarantees, and more.

The money involved is not insignificant: the Private Infrastructure Development Group alone committed about $4 billion in preparation and financing of projects between 2002 and 2019. And overall lending, grants, and subsidies from donors to support infrastructure PPPs was many multiples of that. Take the World Bank’s support for the energy sector: the primary financing tool is policy lending, and the focus of most of the policy triggers is reform to attract more private sector investment.

Sadly, since 2012, there has been a near-halving of PPP volumes in developing countries. Indeed, commitments (public and private) to PPP projects reached their height in that year, at $158 billion, of which $16 billion was in countries eligible for IDA, the lower-income country-focused arm of the World Bank. In 2023, the total was down to $86 billion, of which about $7 billion was in IDA-eligible countries.

The Private Infrastructure Development Group’s InfraCo Africa and InfraCo Asia, which provided early-stage equity and debt to infrastructure projects, averaged about one financial closure a year over their lifespans to 2021 at a cost of nearly half a billion in financing. The Global Infrastructure Facility finished its five-year pilot phase in 2021 having spent $110 million (nearly a third on administration costs) and delivered only two projects.

Keeping the PPP pipeline alive, especially in lower-income countries, appears to have taken ever-more public financial backing, with extremely low leverage ratios. In the poorest countries, a dollar of multilateral and development finance support attracted just 37 cents in private equity and debt. The overall demonstration effect of donor efforts, concludes Leigland, is that without a development institution partner and subsidies, infrastructure PPPs are difficult if not impossible in low-income countries.

Meanwhile, the project selection process—even when backed by preparation support and subsidized finance—has remained opportunistic and only distantly related to government priorities. Most of the financing is going to ringfenced individual investments like power plants that do little to help broader sectoral issues from governance to pricing and beyond. Such investments have little hope of being “transformative” or “market building.”

And it is depressing to see how much donors are willing to ignore the evidence in their efforts to sell private infrastructure solutions. They are not beyond half-truths to claim a success for the PPP model, as the Scaling Solar imbroglio suggests. The official line of the IFC, the World Bank Group’s private sector arm: no explicit or implicit subsidies to solar power deals. The reality: $2 of subsidized finance for each $1 of private investment. Again they are quite happy to ignore their own guidance on governing infrastructure to close another deal: the majority of IFC’s largest energy investments were to back projects awarded uncompetitively.

There are good reasons that private finance isn’t flooding into infrastructure projects: not least the record from the past decades suggests higher costs and lower profits than originally anticipated. That’s not to say that host countries have benefited as a result: there are many cases of being locked into paying above cost for under-utilized services. Both problems help account for a very high rate of PPP contract renegotiation. Meanwhile, despite all of the talk of potential pension fund largesse, between 2011 and the first half of 2017, institutional investors contributed 0.67 percent of the total private participation in infrastructure investment in low- and middle-income countries. The project pipeline is too small to make infrastructure an investable asset class, and the long term, high political risk and uncertainty of investments makes infrastructure unattractive. Surely rich country institutional investors could invest more with the right regulatory changes, but not a lot more.

And so the source for the considerable majority of global finance for infrastructure remains, as it has long been, the public sector. The first comprehensive survey of finance for infrastructure in developing countries found that 83 percent of that financing was still public in 2017. In sub-Saharan Africa the private share was five percent. And even in infrastructure projects involving the private sector, 55 percent of the funding came from public sources.

Even the World Bank Group itself, host to many of the donor-funded PPP facilities and active champion of the private infrastructure model, demonstrates the lasting reality of infrastructure finance. In 2023, the IFC provided $2.5 billion in long-term finance to infrastructure, about 15 percent of its business. That compared to the World Bank public sector financing to infrastructure of $10.5 billion, or 27 percent of its business.

It’s worth noting that picture isn’t much different in the average OECD country: in 2018 less than five percent of infrastructure investment took place via PPPs in 19 out of 24 OECD economies surveyed. Again, The Rise and Fall of PPPs points to UK’s DFID—now the Foreign, Commonwealth & Development Office—as a major force behind the finance and prioritization of infrastructure PPPs for development, based in part on the country’s domestic experience in public-private partnerships. But just like the problems we have seen in low and middle income countries, the bloom is off a number of those UK domestic efforts.

Leigland suggests the track record “hardly justifies the allocation by development organizations of billions of dollars to pay for policy advice and transaction support for projects that contribute less than about 5 percent of infrastructure investment in a region like Sub-Saharan Africa.” He proposes refocusing efforts on improving the quality of efficiency of the 95 percent financed and managed by the public sector. It is hard to disagree.

Leigland’s exhaustive history matters. For three decades, rich countries have been throwing money and influence at the challenge of private finance and operation of infrastructure. Thousands of smart and willing minds have been cogitating, trying to figure out how to unlock the flood gates and release a gusher of private cash for the sustainable provision of roads, water, ports, and transmission lines. They’ve tried everything from upstream project development and transactions support to subsidies, guarantees, and equity injections. The three-decade return to that effort has been considerably disappointing, not just in developing countries but worldwide.

To be fair, the limits to the role of donors in mobilizing private finance to deliver development outcomes is increasingly acknowledged. A recent World Bank working paper with the Bank’s chief economist among its co-authors suggests that we don’t know if guarantees are backing truly additional finance, that MDB participation in syndicates does not mobilize private capital for future investment infrastructure (there is no demonstration effect), and that the pipeline of investable projects and partially successful complementary sector reforms limits the use of PPPs. (I’d add that there’s no evidence MDB finance for private projects in infrastructure actually grows the infrastructure sector involved.)

The World Bank paper suggests private finance still does have a role to play but that “private capital mobilization efforts been judged harshly, at least in tone, because of their failure to meet what was, in retrospect, an unrealistic goal.” It is good to know that it is becoming a consensus that billions to trillions is a fantasy. But that might be worth clarifying to a World Bank (even more) senior leadership that is still talking as if the private sector can bring in trillions if we just make a few more tweaks to the system of donor support.

It amounts to hubris to believe that this time will be much different, however capable the VIPs in the Glasgow Financial Alliance for Net Zero and the World Bank’s Private Sector Investment Lab. In turn, that suggests we’re going to have to rely on public finance and public provision for most of the infrastructure to meet climate and development goals. It is time to fund the national budgets and the public sector arms of the multilateral development banks that can help deliver.