Strategic Investment Funds

Over the past 15 years, at least 26 SIFs have been established, and another 13 are planned (figure 3).6 Examples of existing SIFs include Bahrain's Mumtalakat (2006), Italy's Strategic Investment Fund (2011), Kazakhstan's Baiterek (2013), the GEEREF (2008), InfraCo Asia (2010), and the AREF (2014).

Figure 3. Growth in the Number of Strategic Investment Funds, 2000 onward

While there are undoubtedly many factors affecting the establishment of an SIF, the widening of the financing gap for long-term investment that followed the 2008 financial crisis is likely one of them. Indeed, 17 of the 26 SIFs presented in appendix A were established after 2008. SIFs like InfraCo Africa and the Indonesia Infrastructure Guarantee Fund were set up to crowd in private sector financing to infrastructure. Others, such as the Macquarie Mexico Infrastructure Fund and PINAI, funded by a combination of public and private capital, aim to improve government capacity to efficiently invest in public-private partnerships (PPPs). PPPs have historically been used to engage private capital in infrastructure projects that are too complex or too expensive to be financed by public capital alone. Global PPP investment in infrastructure reached $1.2 trillion in 2015. Although SIFs may be responsible for a significant portion of this investment, the lack of publicly available information on investment deals makes it difficult to estimate their contribution.

Governments have also established SIFs to support the domestic capital market. Particularly in EMDEs, local financial markets may lack the range of financial products or intermediaries required to sustain economic development, or the density of financial intermediaries may be too low to ensure effective competition between providers. As a government-sponsored financial intermediary, an SIF may offer financial services and products that are not yet being commercially provided, either for the economy as a whole or for certain sectors. The Indonesia Infrastructure Guarantee Fund is an example of this type of SIF.

In advanced economies and EMDEs alike, governments are increasingly preoccupied with enhancing the competitiveness of the local private sector, by nurturing the creation and growth of innovative SMEs. According to a recent Organisation for Economic Co-operation and Development (OECD) study, young SMEs are globally the primary source of net job creation. The disproportionate contribution of young firms to employment creation holds across all economies, sectors, and years considered. In countries with underdeveloped capital markets, SMEs frequently lack access to financing. Nonetheless, promising results such as those obtained in Israel and Brazil (box 2) could provide useful information for SIFs that invest as minority limited partners in hybrid PE and VC funds.

Finally, the increasing number of SIFs may be indicative of their sponsors' growing confidence in the capacity of these funds to address market failures and economic externalities.7 SIFs' dual financial and economic objectives allow investments to be guided by market imperatives (measured in terms of internal rate of return) as well as higher-order policy imperatives (measured in terms of the economic rate of return, ERR, or other parameters) (see section 5). Externalities can cause the ERR to be higher or lower than the financial rate of return. For example, an infrastructure project might have positive economic externalities that are not fully captured by its financial return. A power plant, while paying for itself, can also improve access to electricity for local industry, and therefore strengthen domestic productivity. If the power plant is a wind farm, carbon emissions associated with a given level of energy production will be lower, generating a benefit (positive externality) that goes beyond the investment project itself. Over the past few years, SIFs such as GEEREF, Asia Climate Partners, and EFSI have emerged to address urgent investment needs in climate finance. SIFs' ability to crowd in private sector financing is of particular interest to climate finance, given the large estimates of the financing gap, and the limited resources available to the public sector.