Financing Sustainable Infrastructure: What happened in 2018 and expectations for 2019

This year, the World Bank Group reminded us that, to edge closer to the Sustainable Development Goals (SDGS),  emerging countries need to invest $836 billion per year on expanding and upgrading public infrastructure.

The international Monetary Fund warned that a global financial crisis is looming. Following almost a decade of low interest rates in industrialised nations, the total value of global debt has risen by 60 per cent, now totalling  US$182 trillion. This sheds light on a number of questions, including:

• If monetary policy can be an effective remedy to keep economic activity afloat in the event of a crisis?   
• Can central banks further lower already low interest rates?  
• And can governments lower taxes and increase public spending when they are already burdened with debt?  

Sovereign debt in Sub-Sahara Africa also skyrocketed. Over 22 countries recorded debt levels over 50 per cent of their gross domestic product (GDP).  

However, the Blended Finance Task Force taught us that “momentum is building in the $50+ billionblended finance market,” with marketing projected to double in the next few years. This is because of investors taking advantage of risk mitigation tools as more development capital becomes available for blending.

To address these various challenges and continue contributing to infrastructure finance for sustainable development, we created the Credit Enhancement Inventory to help policy-makers, infrastructure planners and project sponsors improve the financial feasibility of infrastructure projects. 

The entire development community is busy trying to increase institutional investor interest in infrastructure in emerging countries.  A challenge persists, though: there are few investment grade infrastructure projects in these countries, and even fewer citizens that are able to pay for the costs of using them.    

What do all these trends suggest for us, the advocates for sustainable infrastructure?  

We think the 2019 mantra for financing sustainable infrastructure should be discipline. 

Discipline in how public policy makers approach the preparation of infrastructure projects.  We will advocate governments move from compiling infrastructure project “wish lists” and approach the planning of infrastructure in a systemic manner.  This will help the prioritization of projects based in part on the inevitable trade-offs with other economic interests, social cohesion and environmental stewardship.  Our Sustainable Asset Valuation (SAVi) tool, which assesses the extent to which environmental, social and economic risks and externalities affect the financial performance of infrastructure needs, will be of much value here.   

Discipline in how the financing of infrastructure is approached. The accuracy of demand and revenue forecasts and strategies to address commercial and credit risks are paramount.  

Discipline to not view all public private partnerships (PPPs) as the finite solution, and that off-balance sheet financing still presents significant risks for the public sector.  Not all public infrastructure projects are suitable to be deployed as PPPs and many projects may indeed be best deployed as public investments. To this end, we welcome the International Monetary Fund’s PPP Risk Assessment Model (PFRAM) to helps stress test public balance sheets against the obligations made under PPP concessions or contracts.  

Discipline to crowd in domestic investors as we seek to scale-up blended capital.  Even in the poorest of countries, there are pools of capital that can well be deployed in infrastructure projects.  These investors know the country context and can take the political, legal and current risks that foreign investors will not. Involving these actors in the building of public assets will inherently build deeper capital markets, lower sovereign borrowing and do wonders for the investment profile of the country.  It will also provide governments with the vested interest to look longer term as domestic capital – their own capital -  is at stake.  

Discipline to not just scale up blended finance and direct capital to the most appropriate investments.  Experts suggest infrastructure is the next frontier for blended finance and this is indeed welcome news.  The question is: are governments in emerging countries up for the task and able to discern the appropriate opportunities for the use of this capital?  

Across 2019, IISD will work to provide the much-needed guidance to make disciplined infrastructure planning a reality.  Together with the MAVA Foundation, we will continue to roll out the Sustainable Asset Valuation (SAVi) tool, explore risk mitigation, focus on currency risks and promote the investment case for sustainable  infrastructure.  As we continue tracking markets and trends, we invite you to keep visiting the Infrastructure Knowledge Portal for regular updates on news and views in the months to come.