Infrastructure lacks funding
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.
Despite this evidence and the strong consensus regarding infrastructure investment, statistics demonstrate that the G20 economies have reduced their investments in infrastructure since the global financial crisis in 2008.
And yet, the world is currently suffering from a major financing shortfall for infrastructure investments.
Widening gap between infrastructure needs and funding
Several studies keenly signal the infrastructure funding gap up to 2030 and even beyond.
The annual infrastructure investments stood at about US$2.5 trillion globally in 2016. From 2016 to 2030, an additional investment is estimated is estimated to be US$1 – 2 trillion to meet the 2030 agenda for sustainable development, and the shortage would be widened.1
The GI Hub’s Global Infrastructure Outlook findings indicate that governments will need to spend more than $97 trillion across the globe by 2040 to provide adequate infrastructure to expanding populations.
This requirement for capital clearly cannot be met by public sources of finance alone. According to G20 estimates, the operational commitments of the major regional international Financial Institutions (MDBs/IFIs), the World Bank Group, and the Asian Infrastructure Investment Bank and the New Development Bank (NDB) total around US$ 80 billion annually.
IFI operations thus cover less than 10% of the infrastructure financing gap.
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 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, especial institutional investors such as pension funds and insurers.
Challenges to mobilisation of funds and IFIs as funding catalyst
Since the sovereign debt crisis, the traditional approach to infrastructure funding and finance has face
s real barriers. 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 grew from US$30 trillion in 2007 to US$50 trillion in 2015, and exceeded US$ 75 trillion in 2016. Their majority domicile in advanced economies. 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.2
Furthermore according to the report prepared by MDBs,3 MDBs achieved US$163.5 billion long-term financing including direct and indirect mobilisation via co-financing. Mobilisation for Infrastructure was accounted for US$73.3 billion. However, funds flow to low and middle-income countries still appeared to be limited.
Mobilisation of such funds toward infrastructure in middle-income and emerging economies is therefore crucial to decrease the infrastructure gap effectively and sustainably.
In response to the findings of the reports, MDBs announced a joint statement of their ambitions for crowding in private finance, which was welcomed by G20 Leaders.4 In July 2017 G20 Leaders’ declaration stated in Section 3 (International Financial Architecture) of Hamburg Action Plan 2017; “We endorse the Hamburg Principles and Ambitions on crowding-in private finance, which provide a common framework among MDBs and quantify MDBs ability to crowd-in private funds, including by setting a target of a 25-35 per cent increase in mobilisation over the next 3 years”. 5
Not only funding - Infrastructure seeks quality
In May 2016, the G7 world leaders reaffirmed the sustainable development goals and enunciated; “While recognizing that effective mobilization of resources in quantity is imperative, we highlight that investment without the quality perspective could end up introducing infrastructure with higher lifecycle costs, less durability, inequitable distributive effects, highly negative environmental and social impacts, vulnerability against natural disasters and the impacts of climate change” and encouraged governments, international organisations, MDBs and the private sector to align their infrastructure investment and assistance with the following principles:6
The G7 Ise - Shima Principles for quality infrastructure
Ensuring effective governance, reliable operation and economic efficiency in view of life-cycle cost as well as safety and resilience against natural disaster, terrorism and cyber-attack risks
Ensuring job creation, capacity building and transfer of expertise and know-how for local communities
Addressing social and environmental impacts
Ensuring alignment with economic and development strategies including aspect of climate change and environment at the national and regional levels
Enhancing effective resource mobilization including through PPP
Infrastructure lacks systematic approach
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 role of IFIs in future infrastructure development
While 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 rules 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.
1 “Bridging Global Infrastructure Gaps (June 2016)” by McKinsey& Company in collaboration with McKinsey’s Capital Projects and Infrastructure Practice;