Developed and developing nations need to tap public-private partnership and bonds to finance future development

Both developed and developing countries are facing the dual challenge of deteriorating or inadequate infrastructure and a shortage of fiscal funds. The question of how to take comprehensive measures in the coming years to meet the challenge has thus become a common problem for governments.

The trouble is evident even in the United States, home to the world's first modern infrastructure. People can see the declining quality of its infrastructure, which reflects a generation of under-investment. According to the World Economic Forum's competitiveness report, the US infrastructure ranks below 20 in most of the nine categories and below 30 in air transport and electricity supply.

Interestingly, although the US developed the Internet, its average Internet speeds are barely a 10th of those in Germany and South Korea.

The American Society of Civil Engineers has said that the US needs to spend $2.2 trillion in the next decade just to maintain the existing quality of infrastructure. To strengthen cross-state infrastructure projects, the US has proposed that a public infrastructure bank be set up - much like the European Investment Bank - using $10 billion as seed money to leverage multiple sources of private money.

In the United Kingdom, the government's National Infrastructure Plan estimates that it will require 400 billion pounds ($642 billion) in infrastructure investment before 2020 to maintain the country's competitiveness in the global market.

Developing countries, too, badly need funds to speed up infrastructure construction because of rapid urbanization, rising populations and economic growth. The Asian Development Bank estimates that Asia would need about $8 trillion in infrastructure investment from 2010 through 2020.

Given that the global financial crisis has sapped the resources of many governments, heavy reliance on fiscal spending for infrastructure is unrealistic. Instead, it is necessary to seek assistance from the private sector and effectively mobilize their funds in order to fill the huge gap.

Capital markets play an important role in this regard. As Kim Redding, chief executive of Brookfield Investment Management, described in his article in the Financial Times, with a current market capitalization of about $1 trillion, the global listed infrastructure market will have the potential to reach $3 trillion to $5 trillion in size over the next 10 years through a combination of initial public offerings, fundraising by existing companies and organic growth.

Existing listed companies are likely to increase investment in the infrastructure asset class, participating in the monetization of government assets. While there are varying degrees of dependence on bank loans to finance infrastructure in different countries, the development of local currency bond markets will certainly attract long-term capital and make the national financial systems more resilient.

In recent years, such markets have grown rapidly in emerging economies, with the outstanding debt more than doubling since 2006 (before the global financial crisis), and showing significant potential to grow further.

Besides, infrastructure projects, usually with their long-term nature, are prone to unexpected shocks. Therefore if both bond markets and bank loans can be employed to fund infrastructure in direct and indirect ways, the stability of funding for projects will be improved.

The huge demand for infrastructure financing has provided the private sector with significant investment opportunities. Public-private-partnerships are different from "pure privatization", and allow the private sector to engage in developing, financing and operating infrastructure projects. PPPs could be an essential solution to the lack of funding.

There have been many successful cases in the PPP framework in several countries over the years. The key issue is how governments can effectively maintain a balance between public interests and fair returns for private investors.

In the PPP model, many projects have offered low-risk investment opportunities and stable income for the private sector largely because of a combination of measures taken by governments. For example, governments usually retain a certain amount of the risk associated with the project, and take some tax and subsidy preferential, protecting against inflationary impact on income generated from projects and enhancing the reliability and transparency of regulations in some sectors.

Of course, there are lessons that can be drawn on from the experience of PPP models. It is reported that between 2007 and 2012 in India, $225 billion was invested by the private sector in infrastructure (equivalent to 12 percent of GDP in 2012), much of it through PPPs. Roads, ports and electricity projects accounted for the lion's share.

However, some companies or PPP contracts incurred losses or were not expected to make a profit. The reasons are of course complex. For example some companies delayed construction, wrongly assumed cheap coal or gas prices and, in some cases, even took on too great a burden of debt.

It is worth mentioning that another effective way of financing infrastructure could be through municipal bonds. In the US, municipal bond issuance has a history of more than 200 years. These bonds, including general obligation bonds and revenue bonds, are usually backed by the government's future tax receipts or by revenue from specific projects.

In China, the urbanization rate - measured as the proportion of urban residents in the overall population - reached 51 percent by 2011, but there is still a lot of scope for further development. Urbanization is expected to remain a main driving force of China's long-term economic and social development, and it is a policy priority for the government to actively and steadily progress toward this goal.

Now it is imperative for the country to take further measures to utilize private investment to speed up infrastructure construction, and thus help overcome the shortage of fiscal funding.

After all, the previous model - in which local governments were overly dependent on revenue from land sales - is unsustainable. Many local governments' financing vehicles are facing a great deal of pressure in repaying their debts. This situation requires China to innovate its infrastructure financing model, drawing on international experience, further broadening financial channels and continuing reforms in its financial industry.

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