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  • Sustainability, Bankability, Risks: Insights from the 2017 Global Infrastructure Forum

    15
    Jun
    2017

    By

    2017 Global Infrastructure Forum Plenary

    Presidents and vice-presidents of the organizing MDBs discussed infrastructure challenges during the Opening Plenary of the 2017 Global Infrastructure Forum.

    The annual Global Infrastructure Forum (GI Forum) aims at enhancing the coordination among multilateral development banks (MDBs) and their development partners in the financing and development of infrastructure projects that support the Sustainable Development Goals (SDGs). This aim was reflected in the theme of the 2017 GI Forum, “Delivering Inclusive and Sustainable Infrastructure”, jointly organized by the MDBs in close partnership with the United Nations (UN).

    Throughout the forum’s plenary and breakout sessions, three main infrastructure challenges emerged: sustainability, bankability, and risk mitigation.

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    Sustainability

    One might ask “What is sustainability, what makes sustainable infrastructure?” and get many varying answers. To support the SDGs and work towards infrastructure projects whose long-term impact can be measured, MDBs need to create a shared definition of sustainable infrastructure.

    One aspect needed for sustainable infrastructure that needs to be included in this definition is adaptability. In the context of increasingly frequent extreme weather events, building adaptable infrastructure that can withstand a range of conditions is increasingly important. The IDB Group co-financed Caracol Industrial Park in Haiti is just one example: anticipating the risk of floods, extensive flood mitigation features were incorporated. This paid off only shortly after, when floods inundated the region, but the design of the park allowed it to quickly re-open for business.

    Forum participants agreed that sustainability can sell itself. Investors do have a limited appetite for infrastructure projects that often are perceived as risky, but adding green certification can tip the scales when considering two similar products, because it contributes to the corporate social responsibility package.

    Bankability

    The consensus at the forum was that the money needed to overcome the infrastructure gap exists, the problem is bridging the gap between projects and investors. It is estimated that currently over 30 trillion dollars are earning very low or even negative interest rates from investments in government bonds. These resources could finance infrastructure if governments–with the support of Multilateral Development Banks (MDBs)–delivered well-structured, bankable projects.

    One central issue to assess bankability is data availability. Fund managers need historical data to understand the characteristics of the assets they are investing in, and they need to have a universally accepted method for valuing assets once the holdings are in their portfolio. In the infrastructure sector, a database like Bloomberg is lacking. Besides this lack of financial infrastructure data, quantifiable information on past and current infrastructure investments is lacking as well. Several efforts such as the Global Infrastructure Hub and INFRALATAM are underway to provide a solution. In addition, standardization of projects by the MDBs could help to lower research costs for potential investors and therefore make smaller projects more attractive.

    In general, projects with built in cashflows are most attractive for investors. When contemplating whether a project is bankable, MDBs should ask themselves “Will people pay to use it?”. Investors are far more confident in returns, when projects are proven to have users who are willing to pay for it, such as power plants, airports, or ports.

    However, a major investment concern when it comes to infrastructure projects is the long period before a project produces revenues. Infrastructure projects take time to be fully developed and even once they are completed, it often takes years before they generate positive cash flows. This extended payback period diminishes its liquidity and amplifies political risk as the project might span multiple election cycles. One way MDBs could help solve this problem is by developing lending instruments that ensure the flow of funds during the planning and investment phase of the project, as done in the Elazig Hospital in Turkey. In this project, the European Bank for Reconstruction and Development (EBRD) provided liquidity facilities for the bonds funding this public-private partnership (PPP), covering both the construction phase and the litigation phase of any potential investor dispute. Another way to overcome this problem is for investors to invest in projects that combine brownfield and greenfield assets, such as a gas field in Mexico that the Partners Group (PG) invested in. The field had already existing capacity and a pipeline that generated a continuous revenue stream form the initial investment, while PG invested money in expanding the extraction and pipeline capacity to increase the value of the asset.

    Risk Mitigation

    As mentioned above, infrastructure projects, due to their long-term nature and high upfront costs, carry higher risks than other projects, especially political risks. By mitigating both political as well as project risks, MDBs can help reshape infrastructure investments to mimic the types of risks investors understand and already carry in their portfolios. One way to do so is by combining resources, leveraging diverse expertise, and sharing risks among the MDBs and the private sector to build innovative infrastructure projects that address growing economic demands in a sustainable way. Many projects are simply too large, too risky, or too complex to be funded by a single multilateral. By joining forces, the MDBs and the private sector can stem mayor sustainable infrastructure projects, and mitigate their risks more effectively.

    Addressing Possible Roadblocks during Project Preparation

    Adequate project preparation might just be the ideal tool to address the sustainability, financing and risk mitigation challenges.

    If thought through from the start of a project, sustainability can be achieved as the IDBG’s Reventazón Hydroelectric project shows. Costa Rica’s strong commitment to sustainability made protecting the country’s rich biodiversity a key priority from the earliest project stages. Considering environmental concerns early in the planning process allowed innovative features, such as the Jaguar corridor, to be built into the project design.

    The same goes for the financing of a project. If investors are involved from the preparatory stages on, it can be ensured that the agreements of the project and the financial structure matches with the investors’ needs.

    Project preparation is also the stage in which a stable and long-term government commitment needs to be founded, ideally spanning the political spectrum.

    And lastly, project preparation offers the opportunity for the standardization of projects–a core cross-cutting issue for private investors. If MDBs want to mobilize investors to think about infrastructure as an asset class and invest in volume, investors need standardized ways to compare, evaluate, and value assets. This means standardization of project agreements, preparation processes, reporting, and historical data availability. In turn, standardization not only allows investors to evaluate a project, it also provides opportunities to replicate projects.

    The challenges in sustainable infrastructure are significant, but so are the opportunities as the 2017 Global Infrastructure Forum showed.

    To learn more about the Global Infrastructure Forum visit: https://pppknowledgelab.org/2017giforum

     

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