How Sovereign Wealth Funds Can Spur Infrastructure Development

Finding the money to build vital infrastructure in the developing world is best done by sovereign wealth funds, as private investors by themselves lack the capacity, according to a paper by three Stanford-affiliated scholars, including Ashby Monk, executive and research director at the university’s Long-Term Investing initiative.

The trick, they contend, is to construct a wealth fund with the ability to attract “private and public investors from other nations to invest in domestic industries” in emerging markets and other less-developed countries.

The report offered a blueprint on how to create a well-run sovereign wealth fund that can attract sufficient capital. It focused on the success of India’s National Investment and Infrastructure Fund, set up in 2015 by its government. To the authors, the NIIF has helped propel the subcontinent over the past decade to 7.1% of the global economy from 4.5% previously. It has done so by adopting a collaborative policy that harnesses relationships with private enterprise and asset allocators.

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While India’s government set up the fund, seeding it with $3 billion, it operates independently from New Delhi. The NIIF sets up separate funds to attract outside capital, and these have been over-subscribed, the paper indicated.

The report outlined how infrastructure investing worldwide has remained “stagnant for the eighth year running, despite almost returning to pre-pandemic levels in primary markets.” Private investors committed $172 billion to infrastructure projects in 2021, but that “falls far below what is needed to close the infrastructure investment gap,” the paper explained.

For sure, developed nations are pumping up their infrastructure investing lately, growing 8.3% in 2021 and constituting 80% of global infrastructure investment, the paper stated. Witness the $1 trillion U.S. infrastructure package that Congress passed two years ago. Yet elsewhere, the paper warned, the picture is bleak, as “investments made in middle- and low-income countries have fallen by 8.8% and now make up only 20% of total investment volumes.”

The paper argued that less-developed nations can tap large institutional investors, namely pension funds, endowments and family offices. The trouble is, it continued, “governments sponsoring long-term investment opportunities, especially in infrastructure projects, struggle to tap into institutional investor capital.” A professional sovereign wealth fund with an eye toward bringing in outside money is the answer, in the paper’s view.

As Monk and his colleagues put it, “Bringing public and private capital together therefore requires a proactive yet structured approach with aligned coordination between governments, industry leaders, and global asset owners.”

Well-organized infra-oriented sovereign wealth funds generate good returns, the report declared, citing Singapore’s Temasek’s 40-year annual return of 16% and United Arab Emirates’ Mubadala Investment Co., with a 12.2% gain since 2017. “This means strong investment performance and national development priorities are not mutually exclusive,” the authors wrote.

The paper was written by Monk, along with two other Stanford-affiliated scholars, Rajiv Sharma and Carter Casady.