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 (PPI database). 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 (Criscuolo, Gal, and Menon 2014). 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.<sup>7</sup> 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

> 7 An externality is a consequence of an economic activity that is experienced by unrelated third parties. An externality can be either positive or negative. Externalities associated with an investment project refer to the wider impact of such a project on the economy and society.

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