When we as consumers decide to invest our money—whether through shares, bonds, or other instruments—we look at whether our investment will deliver a solid financial return. It makes sense then that the same risk-return principle is applied to investments in infrastructure.
In part two of our six-part blog series on Financing Cross-Border Infrastructure Projects, we take an in-depth look at planning and prioritisation of infrastructure projects.
One of the key bottlenecks to infrastructure investment is the shortage of well-prepared projects, i.e. projects that are well-planned and that address a clear need or gap in the market. Without these aspects, the project risks being a ‘white elephant’, where the project’s low utilisation doesn’t justify its substantial investment.
If a project fills a need or gap in the market, and has a strong economic return, it is more likely to produce a sustainable financial return for investors.
Coordination between central ministries of multiple governments involved in cross-border projects is crucial to coherent regional planning, prioritisation and the development of a pipeline of projects. Although regional planning involves high transaction costs and is time-consuming, a lack of coordination and/or consensus among the different national governments involved in such projects can be a key contributing factor to project failure and sunk investment costs.
Regional infrastructure requires proper planning—from early identification of the need being addressed and the analysis of options, through to the detailed technical, financial, environmental and social appraisal. The governance systems, regulations, human resources and skill sets required to build, maintain and operate the assets will also need to receive adequate attention during planning.
To overcome challenges in planning and prioritisation, countries involved in cross-border projects need to demonstrate a commitment to achieving the overall objective of regional coordination[1] from an early phase. This may require one or more of the following actions:
- Time invested at the preliminary stage in establishing a relationship with relevant government representatives and forming a consensus-building dialogue.
- The formation of a coordinating committee that brings together all relevant parties and would also establish a clear and credible point of contact for potential investors.
These methods should help to strengthen the institutional foundation for cooperation between the relevant neighbouring countries, as well as provide clarity to financiers.
Ideally, broader regional infrastructure concerns should be compatible with national political interests. However, there can be a general failure by governments to prioritise regional projects due to—amongst other things—concerns about the preservation of sovereignty and potential backlash from taxpayers. At the very least, cross-border projects should be prioritised in national long-term infrastructure development plans, and funding for key regional infrastructure projects must be safeguarded in national budgets.
Centralisation of planning and oversight can also help in addressing problems with prioritisation. The Global Infrastructure Hub’s Infracompass tool measures the ability of governments to plan, coordinate and select infrastructure projects, and helps them to identify areas of infrastructure planning and delivery where they can improve.
A clear pipeline of well-planned, and economically and financially viable priority projects will help to attract investors. The Global Infrastructure Project Pipeline is an open-source project pipeline database that captures early stage project information from governments, enabling the coordination of both domestic and multi-jurisdictional infrastructure projects, clearly flagging to investors which projects span over multiple country borders.
An example of coordination between multiple governments to develop a pipeline of priority projects is COSIPLAN[2], the South American Council of Infrastructure and Planning. Regional planning is conducted at the Integration and Development Hub, where infrastructure projects for regional integration are identified and agreed upon under a common vision for the 12 South American member states. The Republic of Argentina currently holds the presidency for COSIPLAN and has stressed the importance of infrastructure planning in regional development and integration, which also complements its focus on the need to improve project preparation; a key theme of Argentina’s G20 Presidency under its Roadmap to Infrastructure as an Asset Class.
Later this year, the Global Infrastructure Hub will develop a reference tool on leading practices in National Project Preparation Processes which will examine important leading practices in the interfaces between institutional arrangements, entities involved in planning and delivery, and funding sources, from the lens of country-level governance and implementation.
Part three in this blog series—Political cooperation and coordinated enabling environment—is available here.
[1] The Global Infrastructure Connectivity Alliance (GICA) website provides a useful mapping of relevant regional initiatives which can be accessed at: http://www.gica.global/maps
[2] For the most recent list of COSIPLAN priority projects (2017), please see: https://www.flipsnack.com/IIRSA/informe-de-la-cartera-de-proyectos-del-cosiplan-2017.html
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