There is no doubt a significant financing gap exists for investments in infrastructure in emerging markets and developing economies, a gap that stands in the way of funding projects crucial to providing basic services to transform living conditions across the globe. We at the Global Infrastructure Facility (GIF) recognize that addressing the infrastructure gap can get us closer to eliminating poverty and boosting shared prosperity.
After attending a discussion with a prestigious panel of finance ministers and senior financiers at the event “Making Infrastructure Rewarding,”—hosted by the GIF on the eve of the IMF-World Bank Group’s 2016 annual meetings in Washington, D.C, I feel there is a lot to be optimistic about in the way infrastructure is viewed and financed using the right instruments to fill the gap.
Given the standing-room-only attendance at the event—which was also live-streamed—and the number of comments and tweets that came in using #investininfra, there is clearly enormous interest in how we get from point A to B.
This is why I am optimistic:
Joaquim Levy, Managing Director and World Bank Group Chief Financial Officer, noted that emerging markets and developing economies are places where infrastructure investments could unlock enormous economic potential and generate long-term income streams for not only these countries but also advanced economies with aging populations and high levels of savings. Levy emphasized that by expanding the frontier of investment opportunities the global outlook brightens and confidence increases. With the right tools and coordination, investing in infrastructure can be an agent for global growth and rewarding for all parties involved.
To get there, Levy indicated three courses of action: governments need to increase transparency and improve policies in order to help unlock investments and manage associated risk; projects need to be well-prepared when they come to market; and we need to find ways to make it easier for investors to compare and assess projects. He pointed to the recently-released World Bank report Benchmarking PPP Procurement 2017 as an example of how the World Bank Group can help investors and countries. The report assesses the PPP regulatory frameworks across 82 economies, evaluating each against international best practices in preparation, procurement, and contract management. To learn more read: Measure it to improve it: How benchmarking government capability for PPPs can help improve infrastructure delivery. Levy goes into more detail in his recent blog post: Field of Dreams: Mapping the Landscape for Investing in Emerging Market Infrastructure.
- Paving the way for investments through example
Nigeria’s Minister of Finance, the Honorable Kemi Adeosun, did not underestimate the funds needed for infrastructure in her country: “Even if we devoted our entire budget for the next three years to infrastructure it wouldn’t be enough.” She said Nigeria’s long-term plan is to mobilize private capital looking for yield, but is leading the way with their own money—including pension funds—and also guaranteeing infrastructure bonds and looking at the regulatory framework that enables investors to come.
Adeosun said the government wants more investment in infrastructure in order to be productive and compete, and especially to “provide a standard of living that keeps young, vibrant Africans in Africa.” Negative interest rates in the west? No problem; she said this can be to Africa’s advantage and in return for investment Nigeria can offer positive interest rates. On Nigeria’s part, she said private capital doesn’t replace the government’s responsibility to provide essential infrastructure, and that to ensure investor confidence—even under a change in government—Nigeria will meet its obligations and play by the rules.
- The challenges are material but the opportunities are significant
Citibank Managing Director, Head of Global Structured Debt, Nasser Malik, stressed the private sector must work closely with governments and development organizations to meet emerging market infrastructure needs. He acknowledged the challenges are material, but the opportunities are significant with a vast amount of money on the sidelines ready to be put productively and creatively to work with bankable opportunities. The question is: how do you harness the cash?
Malik offered some pointers: create projects that are sound, transparent and have a strong, legal framework that underpin them; projects should be robust and well thought through from a competitiveness standpoint; and advised putting in place strong PPP laws to engender confidence and attract investors. In the case of challenging projects that attract fewer investors, think through the cost of letting the private sector take them over. That is a question every government needs to determine—what the tradeoff point is.
Canada’s Minister of Finance the Hon. Bill Morneau, described his experience: coming into office with an ambitious plan to double infrastructure investment in a decade. What followed were resource and demographic challenges, and an infrastructure deficit that is estimated at a half-trillion Canadian dollars to develop both new infrastructure and renew infrastructure developed several generations ago. Decisions were made to invest in projects that would have the most impact in improving the lives of middle-class Canadians and create a more productive society in the long run: including better transit, affordable housing, and keeping climate change in mind—models that he says can be helpful in other parts of the world. Canada is now working to get the most bang for its buck to magnify government investment five times with investor input.
How best to attract private investment? Morneau’s advice: create a pipeline of bankable projects, provide big opportunities for transformational projects, a long-term revenue stream, and mitigate the political risk by having experienced counterparts on both sides.
Macky Tall, Executive Vice-President, Infrastructure, and President and Chief Executive Officer, CDPQ Infra, is tasked with a big responsibility— how to deploy billions of dollars to generate enough revenue to make pension payments to clients. He thinks infrastructure provides an attractive space from a risk-return standpoint because projects are long-term and generate cash yield.
Tall agreed with other speakers about the necessity to have a pipeline of projects and good project preparation, a robust and clear governance framework, and in some cases for governments to undertake significant reforms to facilitate infrastructure investments. He also stressed patience, and as an investor CDPQ spends a huge amount of time analyzing the prospect to ensure it will deliver an expected return.
These are all reasons to be optimistic about a future that involves closing the infrastructure gap in emerging markets and developing economies. This is a mandate the GIF and its partners take seriously.