There is a growing consensus among G20 countries as to the importance of infrastructure, the permanent assets that a society needs for the orderly operation of its economy, as a driver of growth, jobs and competitiveness.
Whenever a well prepared new railway line, road or water treatment plant is completed, the economy benefits directly through job creation during construction and firms and users’ productivity tends to improve over time as a result of enhanced economic and social output.
New Bosphorus tunnel in Istanbul to connect Europe and Asia
The EBRD is participating in a landmark infrastructure project in Istanbul – the Eurasia Tunnel. The road tunnel is built under the Bosphorus Straits and links the European and Asian sides of the city.
OECD and IMF analyses have shown that for every dollar of investment in infrastructure, such as motorways, bridges, power plants and grids, communication systems, ports, airports, housing, water, sewers and social infrastructure, there is a x1.6 multiplier in the form of a boost to short-term employment combined with a longer term productivity gain to the economy.
And yet, despite this evidence and the strong consensus regarding infrastructure investment, the world is currently suffering from a major financing shortfall. The additional infrastructure investment needed in the developing world alone to meet the 2030 agenda for sustainable development is estimated to be US$1 trillion to US$1.5 trillion annually over the next 15 years.
This requirement for capital clearly cannot be met by public sources of finance alone. According to recent G20 estimates, the operational commitments of the major regional International Financial Institutions (IFIs), the World Bank Group, and the newly created Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) total around US$ 80 billion annually.
IFI operations thus cover less than 10% of the infrastructure financing gap for emerging markets.
Bridging the infrastructure gap is a top priority of the G20 investment agenda, and is a critical component of the Addis Ababa Action Agenda on Financing for Development, the 2015 Paris Agreement reached at COP21 on climate change, and the approved UN Sustainable Development Goals.
The G20 Finance Ministers and Central Bank Governors have encouraged the IFIs to promote joint action to foster infrastructure investment. The proposed joint action might include formulating quantitative ambitions for high-quality projects, encouraging multipartite cooperation financing models, catalysing private resources, fostering collaboration between new and existing IFIs, and strengthening project preparation to improve quality and bankability. The EBRD is deeply involved on all these fronts.
The gap between IFIs’ ability to provide funding directly and the latent and real demand in emerging markets has focused debate on how IFIs can catalyse more third-party financing, particularly private finance from commercial banks and non-bank financial institutions, especially institutional investors such as pension funds and insurers.
The traditional approach to infrastructure funding and finance faces real barriers. In recent years, high government indebtedness in many if not most emerging market countries has deterred public-debt-driven delivery as a scalable alternative to build urgently needed infrastructure.
In addition, the fundamental shift of liquidity from banks towards institutional investors in the wake of the global financial crisis has added further challenges to the traditional financing model for emerging-market infrastructure.
Over the past few years, institutional investors have become the dominant source of liquidity globally with assets under management exceeding $50 trillion in 2015, compared to $30 trillion in 2007. A 2016 survey by EDHEC and the G20 Global Infrastructure Hub (GIH) revealed that 65% of institutional investors seek greater levels of investment in the infrastructure sector and that one-third of institutional investors not yet engaged in emerging markets want some exposure to them.
While the IFIs represent only a small percentage of the financing for infrastructure, they play a critical role in improving project design and structure in order to attract private capital. IFIs lower transaction costs, risk and risk perception and they support the institutional and legislative reforms needed to encourage the rule of law and ensure that projects are sustainable and welfare enhancing.
It is now imperative to find ways in which the IFIs, in addition to their role in helping build capacity, strengthen institutions and assist with project pipeline development, can help direct this flow of funds from institutional investors to emerging market infrastructure.