Infrastructure investment is central to achieving a sustainable global economic recovery.
The Covid-19 pandemic and resulting global economic crisis represent an enormous challenge for most national infrastructure networks in such key sectors as energy, transport, and water. Governments throughout the world have had to make difficult trade-offs between allocating funds to salvage the health of their populations and economies versus continuing to maintain infrastructure and support some public social programs.
Now that more normal spending patterns are emerging, the pandemic has served to illustrate that the ability to establish reliable and agile infrastructure systems is critical to absorbing unexpected economic shocks, and that infrastructure investment is central to achieving a sustainable global economic recovery.
The leaders of the recent G7 Summit have acknowledged the significant infrastructure needs of low- and middle-income countries, which have been exacerbated by the pandemic because of budget shortfalls and business interruption. The G7 has developed a partnership to build the world “back better” in order to assist these countries to make up for severe infrastructure spending deficits.
The G20 finance ministers and central bank governors recently reaffirmed the pivotal role of infrastructure in its G20 Action Plan, committing to redouble their efforts to promote quality infrastructure investments and mobilize private sources of infrastructure finance and investment. The combined actions of these two groups imply that the world can expect meaningful progress on infrastructure development in the medium-to-long term.
They recognize that the developing world’s infrastructure needs are urgent and growing. In Asia and the Pacific alone, infrastructure requirements will exceed USD26 trillion (or USD1.7 trillion per year) when climate change mitigation and adaptation costs are incorporated into projections. Yet the increased public debt levels resulting from the pandemic will make it more difficult for the public sector in these countries to meet their infrastructure needs on their own. Governments will inevitably explore alternative ways to partner with the private sector, which must play a more significant role in meeting some of these infrastructure needs in the future.
The OECD estimates that major asset owners in the OECD area (comprising pension funds, insurance companies and public pension reserve funds) held USD63.7 trillion of assets in 2017, some of which can potentially be mobilized to help address the infrastructure investment shortfall. Creating more capable local capital markets and unlocking additional forms of private sector capital will substantially reduce the funding gap and complement other efforts to promote infrastructure financing on an individual project level. However, private funds will only flow if bankable projects with high standards are generated, policy obstacles are removed, and the plethora of project-specific risks are adequately mitigated.
This can only be done with enhanced multilateral financial support. International financial institutions (IFIs) are widely recognized as embodying the highest standards for project planning, preparation, implementation, environmental and social safeguards, and analytical capability. In parallel with the G7 and G20 initiatives, they should further enhance their catalytic impact and increase the capital mobilization needed for impactful and sustainable infrastructure investment, including from private investors. These organizations have the right instruments to assist countries by channeling resources from investors, supporting project and policy developments and helping reduce, mitigate, and manage risks.
Among the many tools at IFIs’ disposal are development bonds, local currency guarantees, credit wraps, cashflow securitizations, political and credits risk guarantees, and capital market instruments—all of which have been proven to be effective means of achieving private capital mobilization. However, IFIs must do even more to catalyze private sector investment, such as by devoting greater resources to domestic capital market development, supporting more localized forms of investment to alleviate currency risks and address the sovereign rating ceiling, and supporting programs that utilize migrant remittance resources locally. IFIs should also consider creating more tailored financing vehicles that fill specific market gaps and directly address niche investors’ needs, unbundle infrastructure projects into components with different risk-return profiles, and create new forms of financial products.
One of the few silver linings attributable to the Covid-19 pandemic is the renewed interest of global leaders in ramping up support for enhanced infrastructure finance and investment. The world should build on that momentum. IFIs will continue to promote regional cooperation and partnerships to address development challenges by working closely with each other as well as with the private sector to unlock new capital, new technologies and new ways in which to address climate change. But to be truly successful in this quest, IFIs need to catalyze much greater levels of private sector investment into developing country infrastructure well into the future.
Daniel Wagner is Senior Investment Officer for Guarantees and Syndications and Thomas Walenta is Senior Investment Officer for Private Equity at the Asian Infrastructure Investment Bank in Beijing.