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G lobally, the cumulative infrastructure investment requirement up to calendar year 2030 is estimated at $57 trillion (McKinsey Global Institute [2013]), which implies the share of infrastructure financing in GDP would have to increase from the current 3.8% to 5.6% by 2030. Public investment is unlikely to be able to meet the required infrastructure investment, and infrastructure financing would need to increasingly come from the private sector. Currently, infrastructure investment is lagging at the global level (McKinsey Global Institute [2016]). Although there is an adequate supply of long-term finance, infrastructure projects and their assets do not attract enough global long-term capital (Ehlers [2014]). As an example, less than 1% of pension funds globally are directly invested in infrastructure projects (Della Croce [2011]).
Infrastructure projects are usually financed through project finance structures, and infrastructure accounts for the major share of global project finance transactions. Most commercial infrastructure projects are developed under some form of concession from public authorities and developed through dedicated special purpose vehicles (SPVs). Started as private finance initiatives (PFIs) in the United Kingdom in the mid-1990s, such projects are now more commonly known as public-private partnerships (PPPs) in infrastructure. Infrastructure constitutes a major share of global project finance loans, accounting for more than 60% of such loans (Della Croce and Gati [2014]).
A number of reasons have been advanced for the mismatch between global long-term finance and private infrastructure investments, which include, among others, lack of investable projects, improper risk allocation between the private and public sectors, the complex nature of infrastructure projects, unclear credit risk assessment, and lack of appropriate financing instruments. Credit risk (the risk of default in repayments), measured by credit ratings, influences pricing and capital allocation to different asset classes including infrastructure. Lack of clarity on credit risk assessment in project finance has been discussed by many authors in the past, including 1) discussions on defaults, expected losses, and loss given defaults in project finance loans being lower than corresponding corporate finance debt (Beale et al. [2002]), 2) followed by discussions on reducing spreads on structured project finance loans with increasing maturity not being accounted for by credit ratings (Sorge [2004]), and 3) subsequent questions being raised on international banking regulation (Basel II) approaches to risk assessment in...