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    This blog highlights effective ideas in the fight against poverty and exclusion, and analyzes the impact of development projects in Latin America and the Caribbean.
  • How platforms could help bridge the global infrastructure gap

    11
    Apr
    2017

    By

    By Pablo Pereira dos Santos

    Platforms following business models similar to those of Uber, Lyft, or Airbnb could be the answer to closing the global infrastructure gap by connecting infrastructure projects with potential investors.

    IDB_How platforms could help bridge the global infrastructure gap

    IDB-financed infrastructure project in Brazil: North Section of the Mario Covas Beltway of the City of Sao Paulo

    What do Uber, Lyft and Airbnb have in common? They are platforms, using software to connect supply and demand of goods or services not owned by the platform provider. Business models like these are increasingly popular and for good reason: they have enabled the use of idle capacity in the economy and the provision of services in a faster, safer, and cheaper way for its users.

    But what do these services have to do with infrastructure? In infrastructure, we have a disconnection similar to the one that these platforms solved.

    On the one hand, there is a clear need for greater investments in the sector. It is estimated that to close the infrastructure gap, Latin American and the Caribbean need to invest 5% of their annual GDP over several years. However, between 2008 and 2013, they only invested 3.6% of GDP on average, as a recent study by the Inter-American Development Bank (IDB) shows.

    On the other hand, despite its recent uptick in the wake of the US elections, long-term interest rates have remained close to their historic lows. Average 10-year interest rates of treasury bonds in developed markets such as Japan and Europe are close to zero, which poses significant challenges to their pension systems. An alternative to improving the solvency of pension funds would be to invest more in infrastructure, precisely where long-term assets and higher profitability are found. However, the OECD‘s Annual Survey of Large Pension Funds shows that of the many trillions of dollars managed by institutional investors around the world, only 1.1% are invested in infrastructure. If only the assets managed by institutions that reported to have any investment in infrastructure were considered, infrastructure represents 3.5% of their investments.

    So, if there is an obvious need for greater infrastructure investment and a large pool of potential investors, why does this seemingly great business opportunity doesn’t come to fruition? The connection is missing: there is no platform that allows investors to connect to infrastructure projects. This market failure is commonly related to the fact that projects are not adequately prepared for private investors.

    Preparing projects properly would mean to plan the sector in the long run, providing political and legal stability, allocating risks appropriately, and promoting competitive and transparent bidding processes. In addition, all players need to be involved throughout the different stages of the project. After all, infrastructure is built with people, for people, connecting them and providing access to goods and services. Increased stakeholder engagement is not only a necessity, it would also significantly increase the chances of the project to succeed and would help to make it environmentally and socially more sustainable and therefore more attractive.

    A successful infrastructure platform needs to be based on a business model with a client focus (citizens, users, and investors), connecting them to the projects, but also engaging them in their design, development and maturation. Infrastructure assets are particularly complex because there are significant short-term costs that recover only over the long run. A key to overcome this challenge is to channel information through platforms, therefore providing transparency, sharing and standardizing information and, in parallel, allowing for better and faster project preparation.

    For this reason, the IDB, as well as the other multilateral development banks (MDBs), have invested in the development of such infrastructure platforms. Two of them, the GVIP and the Source (formerly International Infrastructure Support System – IISS), have the IDB’s support for their use by governments in Latin America and the Caribbean through technical cooperation operations.

    The first one, GVIP, already implemented in Brazil, is an open virtual environment in which information on worldwide infrastructure projects can be published, viewed, and commented on. At the same time, it offers users to interact with a network of almost 2,500 of the most renowned international infrastructure experts.

    The second one, Source, is an interactive online project preparation tool. It is a platform with restricted access, which allows specialists to participate in the financial and economic modeling of projects. In addition to giving full transparency to the technical elements of feasibility studies, it allows the standardization of parameters, without which it becomes difficult and costly to investors to properly understand the risks and profitability of the business.

    The use of Source to improve project preparation and the role of MDBs in developing project pipelines will be the main theme of a breakout session led by the Asian Development Bank at the upcoming 2017 Global Infrastructure Forum.

    However, no matter how much MDBs support these tools, they will only be successful if governments embrace them and actively support the creation of infrastructure platforms in the broad sense: a policy that incentivizes long-term planning, proper project preparation, good bidding and regulation practices with the effective engagement of citizens and investors. There has been progress, but unfortunately, no country in Latin America and the Caribbean has done so fully. The international context provides a unique opportunity to reduce the region’s chronic infrastructure gap. Let’s not lose this opportunity by acting too late!

    About the Author:
    Pablo Pereira dos Santos is Special Advisor for Infrastructure at IDB’s Office of Strategic Planning on Development and Effectiveness at the IDB.

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