Summary and recommendation

The role of PPPs and institutional investors in driving sustainable transport investment is still quite early in its development curve; thus, on the one hand the sustainable transport community is faced with limited examples and a lack of clear trends, while on the other hand the community is presented with an opportunity to maximizing potential advantages in these emerging investment areas. In this section, we draw general conclusions on the current state of PPPs and institutional investors vis-à-vis sustainable transport investments, with the goal of optimizing these alternative financing sources to achieve broader climate change and sustainable development objectives.

First, sustainable transport infrastructure and services investment needs are too great to be borne by the public sector alone; thus, alternative sources of financing must be a critical component.

Global transport-related annual capital expenditures are estimated between $1.4trn and $2.1trn annually, which consists of slightly more private investment than public. Currently 60% of global annual transport infrastructure investment is directed to OECD countries, and 40% of investment is directed to non-OECD countries. Yet, per IEA, in order to meet a 2DS or 4DS scenario, it is necessary that 60% of investment be directed to non-OECD countries and 40% to OECD countries (i.e. the current ratio must be reversed). Thus, funding for needed investments in non-OECD countries must increase 50% from current levels, and it is unlikely that the public sector is in a position to increase funding by this amount. Therefore, greater emphasis on private sector financing will be required to meet development goals in the transport sector.

Second, PPPs have shown potential in a limited set of transport subsectors, but the current trend is insufficient to keep pace with needed investments in sustainable transport

Although PPPs offer the potential to allow rapid scale-up of sustainable transport under ideal conditions, this strategy may also increase overall project costs if not done right. While global demand for sustainable transport infrastructure and services continues to rise, transport PPPs have shown a sharp downturn in recent years, and the bulk of transport PPPs continue to be concentrated in less-sustainable sub-sectors such as airports and toll roads. According to the MDB Working Group on Sustainable Transport, more than half of the transport operations of the members of the working group are in the road sector in 2013 (115 projects). This trend will have to be reversed if PPPs are to make a substantive contribution to the estimated US$3 trillion net transitional investment required to increase the sustainability of both existing and new transport systems and to mitigate climate change for the period 2015-2015, of which over 80% is related to low-carbon modes such as railways and mass transit.

Third, institutional investors hold a considerable share in the world’s capital assets and are a potentially significant source of long-term financing for sustainable transport infrastructure and services.

Institutional investors are influential in the global capital and investment market due to their considerable asset holdings. According to OECD statistics, institutional investors in the OECD region hold more than US$ 70 trillion in assets; in the case of Canada, the Netherlands, the United Kingdom, and the United States, assets of pension funds and insurance companies account for more than 60% of GDP in their respective countries. In addition, the growth of the capital assets of institutional investors have continued to grow rapidly in the last decade due to the rising attention on retirement plans and welfare policy reforms in both developed and developing countries

Fourth, while institutional investors have signaled a growing interest in green investing, they have followed with little concrete action on sustainable transport

Various investor groups have demonstrated a significant degree of interest in investing in sustainability and climate change. Studies show that even though financial returns remain the main measure for evaluating investments, institutional investors have begun stressing non-financial performance, and Environment, Social, and Governance (ESG) factors have started to take a more prominent role. Nonetheless, there is still a significant gap between efforts to measure ESG factors and the application of these factors among institutional investors, largely due to challenges in connecting ESG factors to the financial performance of investment projects. In addition, the Global Investor Coalition provides a global platform for dialogue among investors and governments on international policy and investment practice related to climate change; however, dialogue in this area has not yielded concrete investment activity to date.

Ceres is one of the largest investor networks in the world, and transport is one of its seven industry initiatives to promote new solutions for countries to transition to a low carbon economy in part through transport sector initiatives. However, Ceres’ transport initiatives to date are mainly research projects focused on improving fuel economy standards, which have not been followed with direct investments in transport infrastructure and services. Interest in sustainable urban transport is also briefly mentioned in investment strategies of other institutional investors such as the Environment Agency Pension Fund (UK) and India’s YES Bank, yet these cases provide little concrete information on current and planned involvements in the transport sector.

Finally, concerted efforts to leverage alternative funding sources are needed to scale up sustainable transport infrastructure and services to achieve transformational change and meet crucial global priorities

The sustainable transport community must seize opportunities to increase involvement from PPPs and institutional investors to meet rising global needs for sustainable transport infrastructure and services. To optimize the contributions of PPPs, governments must provide stable legal frameworks to help outline roles and responsibilities of all parties within PPP projects, and enforceable dispute-resolution mechanisms must be established to protect the rights of all parties. To ensure a greater use of PPP in transport there is a need for a much larger pipeline of investment projects (which may be addressed in part by growing activity of PPFs). It is also essential to ensure coordination among planning and operating entities to establish robust revenue and ridership models based on sound assumptions. Finally, to meet the goals of global transport development needs with required scale and speed, it is important that PPP leaders deepen their commitments, and that PPP followers make strides to catch up to the leaders.

On the other hand, increased involvement from institutional investors in sustainable transport is likely to be driven by a combination of internal and external factors that can affect supply and demand for such investments (e.g. top-down implementation of carbon pricing through the UNFCCC framework, bottom-up expansion of sustainable transport project pipelines through PPFs and IFFs, municipal and institutional fossil-fuel divestment efforts). Such involvement can also be catalyzed by aligning institutional investors to fund transport PPPs, either through direct investments (e.g. through aggregation of projects to achieve needed critical mass for institutional investors) or indirect investments (e.g. through the use of labeled green bond financing for projects in the sustainable transport sector). Finally, ongoing efforts by the SLoCaT Partnership to reach out directly to institutional investors to reveal more specific investment preferences may also help to further clarify their potential to scale up sustainable transport infrastructure and services to meet climate change targets and achieve sustainable development goals.