Can Public Infrastructure Banks Solve Market Failures and Catalyze Private Investment?

From: Sebastien Betermier
To: Economy observers
Date: March 5, 2025
Re: Can Public Infrastructure Banks Solve Market Failures and Catalyze Private Investment?

Large-scale public and private infrastructure investments are required to meet a wide range of Canada’s current needs. For example, new transport systems, water and wastewater infrastructure are needed to resolve our housing shortage.

Challenges to Canadian sovereignty require expanded port infrastructure to open new trade routes. And decarbonizing the economy will require billion-dollar investments in green infrastructure, from battery energy storage systems to green building retrofits.

However, private developers often face an investment catch-22: They need private capital to launch, mature and grow new infrastructure projects. But at the same time, private investors are reluctant to provide capital because of concerns that the return on investment does not outweigh the risks. The result is a market failure, a situation where the private market cannot resolve the problem by itself.

In upcoming research, I explain how infrastructure banks can provide a cost-efficient policy tool to address market failures, catalyze private investment in infrastructure markets and accelerate policy goals. Although governments around the world have been launching infrastructure banks over the past decade, their purpose and value are hotly debated. I contribute insights to this debate through the detailed interviews and case studies of six infrastructure banks in Australia, California, Canada, the Nordic-Baltic region, Scotland, and the UK. The case studies provide an “under the hood” view of how infrastructure banks can help to resolve market failures and accelerate policy goals in a broad range of infrastructure markets.

So, why do private developers struggle to secure financing for new infrastructure projects? The problem is that private investors consider new infrastructure projects to be complex, unfamiliar, and high risk. It is not like building a bridge or a hospital that have established performance histories and therefore a practicable risk-return evaluation framework. Additionally, new infrastructure markets may need to establish an entire supply chain before launching, and creating new supply chains requires exceptional coordination between stakeholders.

New infrastructure projects are also capital-intensive and require large-scale commitments that involve multiple lenders, which leads to more complex financial coordination. Finally, new infrastructure markets may be underdeveloped and subject to market fragmentation. Consequently, the private sector must do high levels of due diligence for small transactions that do not offer the scale to be profitable.

Infrastructure banks can resolve this dilemma in a cost-effective way. As investment organizations, infrastructure banks expect to recoup their investments and continually re-invest the proceeds into the next new project, which makes them a self-sustaining policy tool. And as government agencies, infrastructure banks can be designed to take on more risk and have longer time horizons than private investors while also having a unique set of financing levers. These include the ability to lend at below-market rates and the ability to transfer the risk of the projects from private investors to taxpayers. Infrastructure banks can act as anchor investors and coordinate the stakeholders along the supply chain, as well as provide additional financing from private investors. They can also establish market leadership by launching projects and establishing track-records for these projects.

Not every infrastructure market requires the same degree or form of government involvement. Markets that generate high private sector interest do not need government involvement. Markets that would generate high private sector interest but do not because of the high risks result in a market failure. Infrastructure banks can resolve the market failure and bring investors back. Finally, markets that generate low to no private interest need additional government support (such as grants and subsidies) to develop.

For infrastructure banks to be most effective, Canada needs to establish a unifying policy framework that clarifies the scope of each infrastructure-oriented organization and limits the inefficiencies caused by competition between them. Over the past decade, Canadian governments have launched multiple investment-based funds such as the Canada Infrastructure Bank, the Canada Growth Fund, the Building Ontario Fund, and are planning to launch new funds to support the development of AI data centre projects and venture capital investments. Coordination rather than competition between these organizations and other government agencies will be critical in order to generate maximum engagement from the private sector.  

There is also an opportunity for the Canadian government to increase institutional domestic investment by using infrastructure banks. A major reason why Canadian pension funds have decreased their domestic investments over the past decade has been the lack of strategic assets like infrastructure available for sale in Canada, while these assets are increasingly available in other countries. Canada can use infrastructure banks to catalyze new infrastructure markets and generate domestic investment opportunities for large institutional investors. This type of strategy can result in win-win outcomes for the Canadian economy and institutional investors.

Sebastien Betermier is an Associate Professor of Finance at the Desautels Faculty of Management at McGill University, and the Executive Director of the International Centre for Pension Management (ICPM).

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The views expressed here are those of the author and do not necessarily represent the views of McGill and ICPM. The C.D. Howe Institute does not take corporate positions on policy matters.