Is there a tradeoff between debt sustainability and infrastructure investment?

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tradeoff between debt sustainability and infrastructure investment?
Hand of engineer playing jenga | Photo credit: Qoppi, Shutterstock

Last December, during a panel discussion about rising levels of global debt between World Bank President David Malpass and Kenneth Rogoff (Professor of Public Policy and Economics and Harvard University), I came to a startling realization: we are only a decade away from the 2030 Sustainable Development Goals (SDGs). And, while it’s no secret that developing sustainable infrastructure is a critical pillar in meeting the SDGs, many low-income countries (and also not-so-low ones) are struggling to build and improve their infrastructure assets at a very fundamental level.

As the panel highlighted, the challenge is further complicated by increasing debt levels at both the sovereign and corporate levels in developing countries. This has been driven not only by increases in debt, but also by lower growth rates that, in part, reflect lower productivity. Investment in infrastructure as well as well as human capital are key to increasing productivity and growth.  That means that we easily see a vicious cycle by which underinvestment, ironically, can exacerbate the debt crisis.

So, in a world of limited debt headroom, how exactly can countries continue to invest in infrastructure to boost their productivity and growth while balancing fiscal budget constraints with social goals?

Within the World Bank, our group has the mandate to help governments achieve sustainable infrastructure investment through crowding-in the private sector, with particular attention to robust project and financial structuring and limiting risks to governments from related contingent liabilities. We’re on the front line of this work, and walking a very fine line.

Depending on the nature of any given infrastructure investment, projects can be delivered through either public or private methods (or a combination of the two). The critical element for success is that these investments are planned, prioritized, procured, and implemented transparently and based on sound economic principles—and within the framework of an asset life-cycle approach.

Needless to say, a public project always creates a direct liability for the government or state-owned enterprise (SOE) since the asset, as well as any associated financing and risks, is wholly owned. If the responsible public entity does not have enough planning and implementation capacity, it could see delays in implementation, poor service quality, and, ultimately, higher costs. 

This is one reason to bring in the private sector through public-private partnerships (or PPPs)—an approach that does not create new government debt and can improve service quality by bringing in private sector efficiencies.

By design, PPPs create contingent liabilities on host governments. This is because PPP contracts typically contain termination clauses that require governments to make large termination payments in cases where they are responsible for project failure. If private sector projects are not properly thought through, contingent liabilities can become direct liabilities, with governments holding the bag. For example, a private power generation plant where the government has taken on but failed to build the transmission line can quickly become a stranded asset, with the government on the hook to make large capacity payments without being able to evacuate the power.

That’s why there needs to be the highest level of attention, expertise, and cooperation to ensure we get infrastructure development right. By supporting the development of bankable and affordable PPP projects that offer value for money while minimizing such risks from contingent liabilities, the World Bank can play an essential role. 

Here are several key points to consider:

  1. Selecting projects: Governments need sustainable, transparent, and informed ways to work on infrastructure projects—whether publicly or privately funded. They need to have an overall public infrastructure management plan that takes growth and SDG targets into account and sequences potential projects within the plan’s parameters.
  2. Sector sustainability: Governments must think holistically about the funding of the entire sector receiving the investment. This includes the creditworthiness of utilities and SOEs that act as counterparts in these projects (or invest in them).
  3. Understanding risks versus rewards: Is the government sufficiently equipped (concerning financial, planning, and implementation capacity) to deliver? What is the likelihood of the government failing under different delivery methods (public versus private) and with what consequences?
  4. Hiring the experts: Infrastructure projects and PPP contractual arrangements are complex and governments should avail themselves of world-class support in preparing and negotiating projects. At the same time, governments should actively improve their own capacity to oversee this work and take a programmatic, long-term approach.

When properly prepared, procured and implemented, the private sector can bring additional resources and efficiencies to developing countries, and there needn’t be a big trade-off between debt sustainability and smart infrastructure development. But there’s a caveat here that cannot be understated: governments must build appropriate debt and investment frameworks to reap the benefits of this dynamic resource and avoid the pitfalls.  For many countries, there is still much more work to do in this regard. This is the key to turn a vicious cycle into a virtuous one.

Our department stands ready to help governments address the four points outlined above and more: from building PPP frameworks to working with SOEs towards financial creditworthiness as well as project preparation, structuring, and credit enhancements to attract the private sector. 
 

Şebnem Erol Madan is a Manager within the World Bank’s Infrastructure Finance, PPPs and Guarantees global practice. She oversees the Financial Structuring & PPPs unit, which comprises specialists in PPPs, infrastructure finance, and financial structuring. The unit supports client countries to crowd the private sector into infrastructure investments—in a sustainable and affordable manner—through capacity building, project structuring, and tailored credit enhancements.   
 

Related posts:

Maximizing concessional resources with guarantees—a perspective on sovereigns and sub-nationals

Facing substantial investment needs, developing countries must sustainably manage debt

Public-private investment to close the infrastructure gap


This blog is managed by the Infrastructure Finance, PPPs & Guarantees Group of the World Bank. Learn more about our work here.

Authors

Sebnem Erol Madan

Manager, Financial Structuring and PPPs

Join the Conversation

Prashant V Hamine
February 10, 2020

Requesting you to kindly please share statistical data of government debt, borrowing and finances raised through other resources to fund infrastructure projects, especially in countries like India. The long term implications of delays in project implementation, delays due to protests and other delays.
How to overcome all kinds of delays in implementation of the infrastructure projects and their funding.

MD SHAKIL MOLLA
February 10, 2020

Request to provide self support Digital procurement