Meeting the climate agenda’s infrastructure investment needs when public finances constrain: Getting more for less

Even as the world handles the ongoing pandemic, it is already responding to the challenges presented by climate change. We know we need investments in adaptation that support lives and livelihoods as well as investments in mitigation with both local and global benefits. At the same time, people continue to need vaccines and children need education; people who had no access to reliable and affordable electricity, internet, or roads before the pandemic mostly still don’t have them.

Yet, rising public debt means that fiscal constraints are tightening; the average debt ratio was 63% in developing countries at the end of 2020. What options do countries have in the face of competing demands? A degree of fiscal rationalization and improved fiscal management, together with policy and sector reforms, can reduce financing needs and are essential ingredients to a manageable transition. 

Spending fiscal proceeds better is a sine qua non of managing financing needs. The farther each dollar goes, the less you need to borrow. A recent IMF study provides evidence that, on average, 30% of spending on infrastructure creation and maintenance is “lost” due to poor governance. Several studies highlight the impact of poor governance on infrastructure investments. Fiscal savings and better outcomes can be achieved through reduced corruption and better sector planning. Less corruption directly reduces the cost of investment by reducing bribes and other inefficiencies and translates into more infrastructure services. It can also translate into better infrastructure by reducing the probability that a project will be chosen without regard to its economic/ financial merits—that is, better infrastructure per dollar. Of course, there is no quick fix to corruption, but there is surely an imperative to strengthen accountability for every public dollar spent. Initiatives to improve transparency and introduce checks and balances in decision making do not have to wait for the future.

Two areas that are particularly prone to mismanagement and can substantially reduce the effectiveness of infrastructure spending are project appraisal and implementation.  Poor economic and financial analyses have led to project choices that do not deliver the expected service outcomes or revenues and/or cost much more than expected. Apart from corruption, other reasons are haste in decision making, over-optimism in demand projections, capacity constraints, or politics. Even when a project is well conceived and the relevant analyses done, management and implementation may fail due to poor government capacity and coordination. Clearly, improved capacity for project appraisal and implementation will support expenditure rationalization. A good public investment program can be built, and bad ones dropped or stopped, saving resources. Capacity building is a long-term process, but it can certainly progress now and needs more attention.

Yet, this is not all. Another set of actions—under the heading of “sector” reforms—are necessary and would defray fiscal burdens.  For instance, rationalizing subsidies so that only the poor get them; using demand management policies to contain consumption of energy, water, and other services; fostering competition to encourage efficiency and innovation in sectors where fiscal resources are spent; and improving corporate governance of state-owned enterprises and banks fall in this set.

Finally, governments seeking to engage private sector financing must remember that private investors exercise choice in terms of country and sector. For riskier macroeconomies and politics, commensurately higher returns will be sought. Or they will look to risk mitigation, for example through donor guarantees or collateralized lending. The return required by private investors will fall when macroeconomic conditions are stable, when governments protect private property rights well, and when they have stable legal and regulatory frameworks. The cost of financing any infrastructure project will fall commensurately.

There is no better time than now to accomplish the reforms that will reduce the need for funding to support the climate agenda.  First, this is because development goals will be better served. Second, this is because fiscal resources are tight in the ongoing pandemic. The UNDP’s Vaccine affordability dashboard shows that low-income countries need to raise their health care spending (based on a total vaccination cost of $35 per person, through COVAX) by around 57% to vaccinate 70% of their population, while high-income countries only have to increase their expenditures by 0.8%.

Luckily, governments can take action to reduce their financing needs for green and resilient infrastructure investment and reduce emissions at the same time.  Admittedly, substantial concessional funding from donors to poor countries will still be needed, but the urgency of taking actions that increase the return on every dollar spent and help economize on total costs is clear. Moreover, improving public investments, macroeconomic stability, service efficiency, and property rights are the ingredients to a development story, not just a climate one.  

Here are some additional resources:

Book: Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment

Blog: How Strong Infrastructure Governance Can End Waste in Public Investment

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