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Closing the infrastructure gap

The Addis Agenda recognizes that investing in sustainable and resilient infrastructure, including transport, energy, water and sanitation for all, is a pre-requisite for achieving many of the SDGs. Demographic changes, migration, climate change and urbanisation increase the need for infrastructure development, especially in developing economies. Transportation infrastructure, such as roads, railways, ports, airports, is of central importance for economic development. In Land-Locked Developing Countries (LLDCs), it is particularly important as it enables trade. Energy-related infrastructure, in particular renewable infrastructure and an expansion of the electricity grid, is necessary to reach the climate goals. Climate resilience investments are particularly needed in Small Island Developing States (SIDS). Sustainable water infrastructure will improve people’s lives by providing access to water and help management of scarce resources in a sustainable manner.

Regional trends
Quantifying infrastructure needs is complex and necessarily imprecise and estimates of financing needs vary widely, depending on assumptions on growth, the macroeconomic and policy environment, development, and international rules, norms and standards. The cost of achieving sustainable development also depends upon the effectiveness of resources used. Estimates of global infrastructure needs range from $3 to $5 trillion of additional investment annually for a range of sectors including power, transport, buildings and industrial, communication, agriculture, forestry, and water.  

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Estimates for developing countries alone range from $1 to $1.5 trillion, more than double the $1 trillion a year currently spent on infrastructure in these countries. The infrastructure investment gap, the difference between investment needs and current investment levels, equals at least 2.4% of projected GDP for the 5-year period from 2016 to 2020, after incorporating climate mitigation and adaptation costs.

Sectoral infrastructure trends


The above chart illustrates the estimated sectoral infrastructure needs globally. The largest gap is in transportation, followed by the power sector, which is estimated to have a financing gap of around USD 1 trillion a year, or 1.1% of the global GDP.  Investment needs in the power sector emanate from the closing of aging coal plants and the growth of renewable power. Renewable energy also requires new means to carry power to the grid. In general, pipelines and storage remain important. Many countries are also seeking to improve energy security by boosting electricity interconnections with supplier countries. Transportation includes roads, railways, bridges, tunnels as well as seaports and airports. 

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In Sub-Sahara Africa, as shown in the above chart, the greatest infrastructure needs are estimated to be in the power sector.

Private and Public Finance for Infrastructure Investments

Infrastructure investments that include private participation have increased dramatically since the turn of the century, with most of the growth in middle-income countries. However, more recently this trend seems to reverse.  The World Bank Private Participation in Infrastructure (PPI) Database on Emerging Markets and Developing Economies records 242 projects with investment commitments totalling $71.5 billion in 2016. This was a 37% reduction compared to 2015.  While the decline from 2015 can be explained by the presence of one very large project, Turkey’s IGA Airport ($35.6 billion), which had boosted the 2015 numbers, - it is important to note this is also a 41% decline compared to the annual 2011-2015 average. PPI investment commitments in middle-income countries have not been this low since 2004. This reduction in the headline figures is largely driven by reductions in PPI in some large economies, including Brazil, Turkey and India. Investment in infrastructure that includes private participation has remained at minimal levels in LDCs, LLDCs and SIDS. In 2016, PPI in these countries totalled $1.2 billion.  Again, this is significantly lower than the 5 year 2011-2015 annual average of $11.8 billion.

Only 34 countries had some PPI investment in 2016, which also represents a declining trend from a peak of 50 countries in 2011 and a five-year average of 41 countries per year from 2011 to 2015. At $43.9 billion, PPI investment in the energy sector increased by 12 percent in 2016 year-on-year. Volumes in transport and water and sewerage declined by 63% and 65% respectively. Bucking the declining trend, PPI investments in renewables continued to rise in 2016, comprising 88% of the 144 electricity generation projects supported by the private sector. In regional terms, the only region to increase in 2016 was East Asia, which saw 43% rise in commitments. In terms of financing sources, 62% of the $71.5 billion comes from private sources (comprising equity 26%, commercial bank debt of around 35% and institutional investors under 1%).  A significant share of financing – mostly debt - comes from bilateral DFIs (16%) and multilateral development banks (9%), as government-owned institutions (12%).In 2016, multilateral and bilateral institutions (DFIs) participated in 21 percent of all deals, higher than the 17 percent annual average from the previous five-year period.

Best estimates are that the value of infrastructure PPI projects represented an estimated 10-15% of total infrastructure spending in Emerging Markets and Developing Economies in recent years, but that this share has now declined and may be below 10%.

Principles for blended finance

The Addis Ababa Action Agenda emphasizes the importance of infrastructure investment for achieving the SDGs. It notes that both public and private investment have key roles to play in infrastructure financing, including mechanisms such as blended finance and public-private partnerships (PPPs). Nonetheless, these have become fairly controversial in debates on implementation of the SDGs, with views ranging from the essential need for them to achieve the agenda to concerns that they will be used to privatize public services and subsidize the private sector.  The Addis Agenda recognizes both the potential and challenges associated with these structures.  It notes that “careful consideration should be given to the appropriate structure and use of … blended finance, including PPPs, [and that projects] should share risks and reward fairly, include clear accountability mechanisms and meet social and environmental standards.” To facilitate effective use of PPPs, the Addis Agenda identifies a number of principles, which should guide PPP activity. 

Box: Principles for blended finance and PPPs extracted from the Addis Agenda. 
1. Careful consideration given to the structure and use of blended finance instruments (paragraph 48). 
2. Sharing risks and reward fairly (paragraph 48). 
3. Meeting social and environmental standards (paragraph 48). 
4. Alignment with sustainable development, to ensure sustainable, accessible, affordable and resilient quality infrastructure (paragraph 48). 
5. Ensuring clear accountability mechanisms (paragraph 48). 
6. Ensuring transparency, including in public procurement frameworks and contracts (paragraphs 30, 25 and 26). 
7. Ensuring participation, particularly of local communities in decisions affecting their communities (paragraph 34).
8. Ensuring effective management, accounting, and budgeting for contingent liabilities, and debt sustainability (paragraphs 95 and 48). 
9. Alignment with national priorities and relevant principles of effective development cooperation (paragraph 58).

 

International cooperation

The World Bank Group and the International Monetary Fund have a number of diagnostic tools.

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Diagnostic tools

>The Country PPP Readiness Diagnostic Toolassesses a country’s readiness to implement PPPs by reviewing the PPP environment and comparing it to global best practice standards, so as to determine areas that need improvement.

The PPP Fiscal Risk Assessment Model (PFRAM) developed jointly by IMF and World Bank Group, is an excel-based tool that aims to identify the fiscal risks of PPP projects including contingent liabilities. 

The prioritization tool developed by the World Bank Group as an alternative approach to selecting and prioritizing PPP projects, uses a multi-criteria methodology incorporating social, environmental, financial, and economic factors.

The IMF’s new Public Investment Management Assessment (PIMA) framework evaluates key institutions that shape decision-making at the three key stages of the public investment cycle (planning sustainable investment across the public sector; allocating investment to the right sectors and projects; and implementing projects on time and on budget).

The Global Infrastructure Hub’s market framework tool is expected to be released in 2017. It will allow a country’s infrastructure environment to be assessed over time in order to help identify leading and best practices, target efforts to build capability, and highlight the most beneficial areas for reform.

Strengthening Project Preparation
There are a number of platforms and funds available for project preparation:

The Global Infrastructure Facility (GIF) is a global open platform that facilitates the preparation and structuring of complex infrastructure public-private partnerships (PPPs) to enable mobilization of private sector and institutional investor capital. Currently GIF is working on a business plan for downstream financing and credit enhancement to help mitigate risks in projects and to make more projects investible for private sector investors and financiers.

Source, a platform created by the Sustainable Investment Foundation, offers governments a global standard, reliable, and user- friendly project preparation software that aims to maximise public sector users’ ability to expand their financing options through preparing and presenting projects in a consistent and transparent way to the international community of contractors, investors and lenders.

African Development Bank has set up a Project Preparation Support Facility which will operate through the Africa 50 Infrastructure Fund.  

The Asian Development Bank has set up the Asia Pacific Project Preparation Facility that will encourage private sector participation in infrastructure by adopting a more consistent and higher-quality approach to public private partnership project preparation development and transaction advice across the region.

The Inter-American Development Bank’s InfraFund is a fund for preparation of climate resilient and sustainable infrastructure projects.

The EBRD’s Infrastructure Project Preparation Facility offers an improved support mechanism focused on bankable project preparation, coupled with a coordinated approach to infrastructure policy dialogue.

JASPERS (Joint Assistance to Support Projects in European Regions) is a technical assistance partnership managed by the EIB and co-sponsored with the European Commission (EC) and EBRD.

The European PPP Expertise Centre (EPEC) is an initiative involving the EIB, the European Commission and European Union Member States and Candidate Countries. EPEC helps strengthen the capacity of its public sector members to enter into Public Private Partnership (PPP) transactions.

The European Investment Advisory Hub aims to strengthen Europe's investment and business environment. The Hub is a joint initiative by the European Commission and the European Investment Bank, and is part of the Investment Plan for Europe.

The International Infrastructure Support System (IISS)

The International Infrastructure Support System (IISS), which became operational in June 2016, is a new digital platform by the AfDB, ADB, EBRD, IADB, IDB and the WBG that is dedicated to speeding up the delivery of infrastructure in Emerging Market Economy Developing Countries through a standardized approach across the infrastructure project cycle.

Infrascope, a bi-annual benchmarking exercise to assess country readiness for PPP, was first launched by IDB’s Multilateral Investment Fund (MIF) and the Economist Intelligence Unit (EUI) in 2009 and now includes EBRD and the Asian Development Bank as well. MDBs are planning to build on these experiences to scale up the exercise to more countries and to provide a more regular assessment of the enabling environment for PPPs. The latest Infrascope was published in 2017.

Domestic Actions

This section describes selected case studies on measures undertaken by different categories of countries to finance infrastructure. Case studies are included for Bangladesh a least developed country (LDC), Zambia a landlocked developing country (LLDC), Fiji a small island developing state (SIDS) and Uruguay a middle income country.

 

 

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Case study Middle Income Country, Uruguay 

The Uruguayan government has set infrastructure policy as one of the cornerstones of its economic policy. The chart above illustrates the actual and planned levels of investment in key infrastructure sectors between 2000 and 2019. Energy and transport investments together account for over 50% of the total estimated investment needs (which amount to about 300 billion Uruguayan Peso or 12 billion United States Dollars) in the 2015-2019 period.  Efforts to improve social and economic infrastructure have the following objectives:

  • Improving the conditions of extremely poor and rural residents without access to necessary public services
  • Enhancing business competitiveness
  • Decentralization
  • Improving the quality of life of citizens

 The funding allocated by the government to infrastructure amounted to 21.5 per cent of Uruguay’s growth domestic product (GDP) in 2014. Uruguay has also been implementing public–private partnership projects  (PPPs) for infrastructure, but progress has been slower than anticipated.  To make PPPs more efficient, increased efficiency of public investments and a strengthening in the management capacity of public companies is needed. 

Case Study LDC: PPP initiative Bangladesh

As an LDC, Bangladesh has scarce financial resources for infrastructure development. The government estimates that about $ 410 billion financing, twice the size of the country’s GDP, will be needed for developing the country’s infrastructure. This implies increasing the infrastructure investment effort from an average of 2.7% of GDP to 6% of GDP. It is envisaged that a substantial part of additional infrastructure financing should come from the re-invigoration of the PPP initiative. The chart above shows a strong uptake in PPP projects between 1996 and 2013. The latest  aims to increase the amount of PPP infrastructure investment from an average of about 0.5% of GDP in the Sixth Plan to 2% of GDP. To support this new national policy, the PPP Authority was established as a separate, autonomous office under the Prime Minister's Office to support sector line ministries in facilitating the identification, development and tendering of PPP projects to international standards. A PPP Unit under the Ministry of Finance was established to ensure fiscal responsibility and sustainability in PPP projects. 

Case Study LLDC, Zambia’s investments in accessibility 

As an LLDC, infrastructure development to ensure accessibility to basic services is a priority area for Zambia. Efficient and reliable infrastructure connections are critical for ensuring the effective functioning of the economy and increased accessibility should also reduce the costs of trade. The emphasis is on road, rail and airports, but also on energy generation and grid infrastructure, as well as telecommunications. As illustrated in the above chart, the Government is aware that resources from the public sector and development partners are limited and can only cover part of the financing needed. The Government currently works on mobilizing private sector financing to support public infrastructure development through PPPs as an alternative financing model for infrastructure development.

Case Study Small Island Developing State, Fiji’s investments in resilient infrastructure 

Fiji faces challenges similar to other Small Island Developing states, including its remoteness and vulnerability to natural disasters. It is in particular prone to cyclones and floods, which periodically destroy essential infrastructure. The Fiji Government's investment in infrastructure makes up 40 per cent of total expenditure in the 2016-2017 budget. To increase infrastructure investments, the government plans to actively explore opportunities for greater private sector investments in sustainable and resilient infrastructure, with consideration also given to public–private partnerships.Opportunities for private investors have been identified in energy, transport, and water, as well as in other urban infrastructure and services. Tourism can also be utilized to generate private investments in infrastructure such as roads, port and airport, which can also benefit local communities. Moreover, investments in agriculture, which continues to be a significant pillar of the economy, also offer opportunities for private investors.