It’s not always easy to convince the private sector to participate in public infrastructure projects—especially in developing countries and emerging economies. Why is this a problem? Because there simply is not enough public money to meet the growing demand for infrastructure, which is a key element of development and poverty alleviation. The need is great, numbering in the trillions of dollars.
But there is good news—the market has both the trillions and the expertise to use it, if the conditions are right. And the World Bank Group has a number of instruments that can help create an environment that meets the needs of the private sector in financially, environmentally, and socially sustainable ways. Guarantees are one of those instruments, a tool that is highly effective in leveraging limited resources for mobilizing commercial financing for critical infrastructure projects.
maximizing finance for development
Photo: LWYang | Flickr Creative Commons
Since the 1980s, investment in Brazil’s infrastructure has declined from 5% to a little above 2% of the country’s Gross Domestic Product (GDP), scarcely enough to cover depreciation and far below that of most middle-income countries (see figure below). The result is a substantial infrastructure gap. Over the same period, Brazil has struggled with stagnant productivity growth. The poor status of infrastructure is broadly believed to be a key reason for Brazil’s growth malaise.
Photo: Ashim D'silva | Unsplash
From “Billions to Trillions”, to the Hamburg Principles and Ambitions, to Maximizing Finance for Development (MFD), Realizing that constrained public and multilateral development bank (MDB) funding cannot fully address the critical challenges that developing nations face, the World Bank Group is pursuing private sector solutions whenever they can help achieve development goals, in order to reserve scarce public finance for when it’s needed most. This is especially true in the delivery of infrastructure.
Those following the discussions during the IMF and World Bank Group Annual Meetings held in Washington last week will have noticed that our approach toward international economic development is changing in a major way—and, I believe, for the better.
Saturday’s panel discussion on Maximizing Finance for Development set the context that many in the development community now know well, but bears repeating: It will take not billions, but many trillions of dollars to meet rising aspirations for better infrastructure, health and education. Specifically, we are talking about $4 trillion every year needed to meet the Sustainable Development Goals to which the international community agreed in September 2015.
With the World Bank Group focusing on maximizing finance for development, understanding the role of private participation in infrastructure is drawing a lot more attention.
In emerging markets and developing countries, the largest source of infrastructure investment is still domestic public spending. However, government budgets are tight, so crowding in private finance is necessary to meet large infrastructure needs. The World Bank has a tool to help understand private investments in infrastructure in the developing world: the Private Participation in Infrastructure (PPI) Database. With 27 years of data on PPI investments in emerging markets,
Whilst the enthusiasm for private sector participation in infrastructure gains pace, it is also important to look at the trajectory of PPI over the past decades. The numbers are, in fact, quite sobering.