Aligning Public Investments with Sustainable and Climate Goals

Increasing disaster risks in developing countries call for strategic planning and investments in resilient and low-carbon infrastructure.

The tsunami that caused extensive destruction and loss of life in Tonga in January 2022 stressed the vulnerability of developing countries, especially small island developing states, to disasters triggered by natural hazards, such as earthquakes, floods, droughts, and tropical cyclones. Losses from damage to assets and disruption in services are estimated at $391 billion–$647 billion per year in these countries. Disaster risk is expected to increase with climate change. Poor and vulnerable populations face the biggest impacts.

Aside from service disruption and losses, the short- and medium-term climate and disaster impacts include increased operating costs, shorten the operating life span of the asset, and reduced economic benefits of infrastructure assets. In the longer term, this may impact credit ratings, thereby increasing borrowing costs and reducing the availability of insurance.

From a regulatory capital perspective, lending to riskier projects may in the future lead central banks to assign a higher risk weightage to these projects, further raising the financing costs. Although the coronavirus disease (COVID-19) has receded, research by both the Asian Development Bank and the Inter-American Development Bank suggest that the pandemic will continue to have lingering effects on growth and government revenue and debt.

Governments must invest in reliable and resilient infrastructure or face repeated calamitous impacts. Public infrastructure investments that are not resilient will incur greater maintenance expense over their life cycle and may draw resources away from other productive capital investments. These call for a more strategic public investment management that can address the challenges of climate and disaster risks.

Requirements to achieving the SDGs

Achieving the Sustainable Development Goals (SDGs) and commitments made under the Paris Agreement on climate change and Sendai Framework for Disaster Risk Reduction requires governments and the private sector to mobilize significant additional infrastructure investments toward low-carbon and resilient development. Financing climate mitigation, adaptation, and disaster risk reduction will cost more and will need a rethinking of public investments.

Pre-pandemic estimates of the World Bank suggest that developing countries will need to invest around 4.5% of GDP annually through 2030 to meet the combined SDGs and Paris Agreement goals. Infrastructure investment in these countries will need to grow beyond pre-COVID levels to make up for past underinvestment and to make progress toward net-zero emissions and a resilient, green, and inclusive recovery.

Retrofitting existing infrastructure to make it more resilient usually costs more than the amount it will take to make it climate resilient during the design and construction phase. Evidence shows that the social and economic returns created by well-planned and managed public investment projects can exceed the actual development costs.

The World Bank reported that the average net benefit of investing in more resilient infrastructure in developing countries is $4.2 trillion globally, with $4 in benefits for each $1 invested.

An International Monetary Fund (IMF) analysis shows that a 1% increase of GDP share in infrastructure spending can add 0.4% in annual economic growth or 1.5% over 4 years.

Likewise, clean energy infrastructure delivers high economic multipliers, is labor intensive, and can have higher returns than investments in energy from fossil fuels if the benefits and costs include the accounting of environmental impact.

Why public investment management must be reformed

To meet the large financing requirements for sustainable infrastructure, countries must strengthen their capacity to raise and manage resources from all sources. Public investment management is an approach that helps governments strategically manage these resources and efficiently invests them to public infrastructures in various sectors, such as power, transport, and health.

However, climate change and disaster risks present additional challenges for government in ensuring appropriate and resilient public spending. Public investment management practices must be reformed to meet these challenges. Proper planning and design can help avoid losses especially if adequate fiscal resources are allocated to the right sectors and projects based on a robust understanding of the climate and disaster risk context. Likewise, efforts or programs that help drive low-carbon investments, such as reforming fossil subsidies, carbon taxes, and carbon pricing (which incentivize lower energy consumption and cleaner energy sources), must be encouraged and supported.

The cost–benefit analysis, a significant part of public investment management, should include the added cost of investment in climate and disaster resilience and carbon mitigation as well as the resulting savings from avoided operational disruptions from climate hazards, benefits from greenhouse gas reductions, indirect aids to the ecosystem, and socioeconomic impacts.

What has been done so far

Developing countries are working to improve public investment management, such as fiscal transfers from the national level to subnational governments to promote greater climate-sensitive public investment. For example, in Brazil, 18 of 36 states have implemented a revenue-sharing scheme that considers, among other variables, the amount of land that was set aside, incentivizing states to strike a balance between the environment and public investment. In India, the formula used in grants for poorer states includes as a variable the percentage of forest areas for promotion of environmental conservation and absorption of greenhouse gasses.

Still, most countries do not systematically include climate change and disaster risk considerations in public investment management. Decision-makers need access to diagnostic tools for assessing climate change and natural hazard data, special planning frameworks and climate and disaster risk maps, environmental impact assessments, and established regulatory and economic standards, such as building codes, to understand and address climate impacts.

The IMF is piloting a Climate-Public Investment Management Framework (C-PIMA) that analyzes climate-aware planning, coordination between entities, project appraisal and selection, budgeting and portfolio management, and risk management among institutions that are responsible for planning, allocating, and implementing infrastructure investment spending. This is to address the gap in climate-aware public investment management.

Implications

Green public investment management depends on the fundamentals of public investment governance. The sequencing of climate-related public investment reforms should go hand in hand and build on ongoing reforms in the wider public fiscal management and infrastructure governance spheres. It should begin with an analysis of current public investment management systems and the institutional capacity to implement reforms, especially in the case of government finance and budget departments, which typically do not have installed capacity related to climate analysis.

The following questions can be used to assess the climate aspects of public investments.

Are national investment plans aligned with national climate and disaster risk management objectives, nationally determined contributions, the SDGs, and commitments made under the Paris Agreement?
Are climate considerations integrated with public investment management across the public sector at the national and subnational levels, state-owned enterprises, and public–private partnerships?
Does the public sector include assessment of climate mitigation and climate and disaster resilience in the appraisal and selection of investment projects?
Does the annual budget and other fiscal tools, such as the medium-term fiscal framework, financial statements, asset management, and project audits, take climate and disaster risk into account and does it factor in the benefits of investing in climate related public goods?

As with all public investment management practices, green public investment management requires greater coordination across government institutions that are vital for creating climate-resilient and low-carbon infrastructure. Mobilizing support depends on alignment with the policy priorities of government in the climate area, access to additional climate financing, and institutional capacity to deliver on the promise of green, resilient, and inclusive infrastructure.

This blog was also published by the Asian Development Bank’s Dev Asia Website