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Public Investment in Sustainable Infrastructure

The strategic role of Ministries of Finance to boost sustainable infrastructure investments

July 8, 2020 by Huáscar Eguino - Marcia Bonilla-Roth - Aloisio Lopes 2 Comments


The adoption of the UN Sustainable Development Goals (SDGs) and the Paris Agreement principles on climate change provide a prime opportunity to promote a new form of development in Latin America and the Caribbean (LAC). Public investment in infrastructure and services can play a key role in LAC countries’ efforts to achieve sustainable and inclusive growth.

Sustainable infrastructure comprises works and services designed, built, and operated considering all the sustainable economic, financial, institutional, and socio-environmental aspects –including climate resilience– of the projects throughout their life cycle, according to an IDB Technical Note.

Although there is consensus on the need to expand sustainable infrastructure, one of the main obstacles has been a lack of instruments to embed this perspective in all phases of the project cycle. This is mainly due to the lack of long-term strategies that could serve as a framework to identify and plan new sustainable infrastructure projects.

Public investment management deficiencies hinder investments in sustainable infrastructure

Recent studies show[i] that very few countries in the region have medium- and long-term planning and policy instruments that provide the framework for the proper identification and selection of public investment projects, particularly those for sustainable infrastructure. This deficiency is present in all sectors and at all government levels, and is particularly acute when it comes to integrating climate change and decarbonization issues.

Costa Rica is the only country in Latin America that has published a Decarbonization Plan. Mexico has presented its long-term carbon emission reduction strategy to the United Nations[1], whereas Chile, Colombia, and Argentina are currently preparing their strategies and plans.

The weakness in the planning systems is compounded by the limited capacity of the public sector to tackle the contractual, institutional, methodological, and technical aspects of project preparation and execution. Mobilizing financing for sustainable infrastructure projects is also a daunting task.

Since 2008, LAC countries have invested an average of over 3.5% of their annual GDP on infrastructure. Several studies, including one issued by the IDB, estimates that to close the infrastructure gap, LAC needs to invest about 5% of its GDP over the next 20-30 years. This requires an additional investment of $100 billion a year. If climate change mitigation and adaptation investments are also factored into the equation, an additional $30 billion would be required each year.

Low investment levels have contributed to the deficit and low quality of infrastructure and services in LAC. According to the World Economic Forum, the infrastructure quality indicator reveals that LAC is lagging advanced economies and high growth Asian economies.

The public sector is expected to continue to be the main source of infrastructure financing in the region for the foreseeable future. Sustainable infrastructure is now recognized as a critical factor for achieving inclusive and sustainable growth while making progress on SDG and Paris Agreement commitments.     

Therefore, the public sector has a key role in planning and implementing this type of infrastructure which, among others, includes investments in clean transport, energy efficiency, renewable energies, sustainable management of water and natural resources, land use and protected areas, and green buildings.

Public investment in Sustainable Infrastructure
Public investment in sustainable infrastructure is key to development in Latin America and the Caribbean.

Public policies to promote sustainable infrastructure investments

Given their role in the process of strategic planning and public investment management, Ministries of Finance in the region can implement public policies oriented at promoting greater private and public investments in sustainable infrastructure. In this blog we have focused on four opportunities for action:

  1. Implementing long-term strategies and linking them to investment programming. The programming of sustainable infrastructure works should be carried out within the framework of national development strategies and plans, whether these are of a sectoral, or specific nature, such as decarbonization strategies. This approach should also be consistent with medium-term fiscal frameworks and with the government’s capacity to manage public debt levels that are sustainable in the medium and long term.
  2. Improving the public policy framework and financial regulations. This involves changing incentive structures to promote low-carbon infrastructure, while reducing or eliminating fossil fuel subsidies and incorporating the price of carbon into the assessment of public spending. The financial policy and regulatory framework must also be improved, facilitating investment in sustainable infrastructure under public-private partnerships (PPPs), which will become increasingly important as the public sector alone will not be able to cover the financing and will require private capital.
  3. Strengthening public investment management. Public investment is on a downward trend, widening the infrastructure gap, and underscoring the need to improve investment quality and efficiency. This challenge needs to be tackled by enhancing public management capabilities across all sectors and levels of government.

    Some of these priority management areas include:
    • improving project planning and selection instruments by conducting basic research; revising project selection criteria; and improving investment proficiency and coordination mechanisms;
    • improving investment programming support instruments, such as project banks and preparation of financing requirement plans or programs;
    • enhancing project assessment capabilities, factoring the socio-economic cost of carbon into the ex-ante evaluation, establishing pre-investment funds and considering natural disaster risks and other eventualities;
    • refining project implementation by adopting low-carbon emission technologies and paying attention to the operation and maintenance aspects to expand the useful lifespan of assets; and
    • evaluating the achievement of project development goals to ensure the availability of inputs and best practices required to design new investments.
  4. Mobilizing financing. Through risk mitigation and other project financing instruments, it should be possible to achieve higher degrees of leverage of resources for sustainable infrastructure investments.

The multilateral development banks should play a key role in leveraging resources from large institutional investors who may have an interest in investing in green projects or other ventures that help eliminate or reduce carbon emissions. This is particularly relevant to those countries in the region where it is possible to innovate with financial instruments and deepen the development of domestic capital markets, or whose sovereign risk ratings are good enough to entice institutional investors.

This is the case in Chile, which is promoting the development of green assets to attract foreign investors to prop up its sustainable development plans and meet infrastructure needs. Chile has shown a strong commitment to climate change action as well as international leadership, and was the first green bonds issuer in the Americas and the first non-European issuer of those instruments in Europe.

The strategic role of finance ministries

In sum, the transition towards sustainable infrastructure will become more relevant every passing day for every country in LAC and will require increased institutional and financial capacity to develop projects that contribute to reducing carbon emissions.

This necessitates a major reform of the strategic planning and investment systems. It will improve investment allocation efficiency and promote more efficient use of existing resources. Ministries of Finance, which bear primary responsibility for the optimization of the resources assigned to sustainable infrastructure and green financing, should play a central role in this process.


[1]  United Nations Framework Convention on Climate Change (UNFCCC).

[i] Armendáriz, E., & Contreras, E. (April 2016). El gasto de inversión pública en América Latina: cuánto y cuán eficiente (Not yet published). Lecture given at the Sixth Conference on Public Investment System Management in Latin America and the Caribbean. Costa Rica.

Eguino, H.  (May 2020). ¿Cuán eficiente es la gestión de la inversión pública subnacional? Situación de los países de los países federales de América Latina. BID.


Filed Under: Asociaciones Público-Privadas, Gasto Público, Gestión Fiscal, Política Fiscal, Public Spending

Huáscar Eguino

Huáscar Eguino is a Senior Consultant in the Fiscal Management Division of the IDB. He is an economist specialized in fiscal policies and climate change, subnational public finance, and public investment management. During his more than 20 years of experience as an IDB specialist, he worked directly with 17 countries in Latin America and the Caribbean, advised more than 75 subnational governments, and coordinated the development of two emerging issues at the IDB: fiscal policy and climate change and subnational fiscal management. Currently, he works as a consultant providing advice and supporting the development of financial and knowledge products on fiscal policy and climate change matters. He holds a master’s degree in Development Studies from the Institute of Social Studies of the University of Rotterdam, and postgraduate studies at the Massachusetts Institute of Technology, Harvard University, University of Pennsylvania, and the University of the Andes. In addition, he holds more than 10 professional certifications in fiscal policy and climate change and public finance. He is (co-)author of more than 20 publications in the IDB that have exceeded more than 120 thousand downloads.

Marcia Bonilla-Roth

Marcia Bonilla-Roth is a Lead Sector Specialist with more than 20 years of extensive multi-sector experience at the IDB in credit operations with and without sovereign guarantee. Currently, she works with the Fiscal and Municipal Management Division supporting the incorporation of climate change aspects into the fiscal and financial policies of the countries. Her emphasis is international financing in both the public and private sectors, mainly in development projects and infrastructure financing, including public-private partnership (PPP) schemes. She is a leader in the preparation and structuring of complex infrastructure projects for the private sector and public sector loans in the financial and productive sectors. She served as Operations Advisor to senior management in country programming and strategies, operational policies and procedures, and in loan operations portfolio management and technical cooperation in Belize, Central America, Haiti, Mexico, Panama, and the Dominican Republic. She has relevant IDB experience in the corporate areas of strategic planning and corporate performance, sector strategies, and private sector development. Her leadership was recognized by the international community in project management and financing. She was awarded the Deal of the Year for Infrastructure and Transportation in Latin America by Global Finance. Marcia has also published on the financing challenges to develop urban infrastructure in Latin American cities. Before joining the IDB, Marcia served as Financial Advisor to the Honduran Economic Cabinet and as Head of the External Debt Service Unit of the Ministry of Finance. Marcia holds a master’s degree in finance from the American University, Washington, D.C., and a Bachelor of Business Administration with a minor in finance from Texas A&M University, College Station, Texas.

Aloisio Lopes

Aloisio Lopes is a senior consultant in the Climate Change Division of the IDB. He worked in the development of financing instruments and in the formulation, management, and evaluation of programs for the environment, climate change, agriculture and social development in the Ministry of Finance and other agencies of the Federal Government of Brazil for 19 years. He holds a bachelor's degree in agronomic engineering, a master's degree in economic development and agriculture, and specializations in public policy management and climate change economics.

Reader Interactions

Comments

  1. Pedro B. Ortiz says

    August 22, 2020 at 3:09 pm

    Dear Huascar, Marcia and Alosio. Congratulations for this very ready-witted article. I was specially struck by this paragraph: “Recent studies show[i] that very few countries in the region have medium- and long-term planning and policy instruments that provide the framework for the proper identification and selection of public investment projects, particularly those for sustainable infrastructure. This deficiency is present in all sectors and at all government levels,”
    There are instruments for this, cheap to implement, with billions of dollars of benefits on sellecting the strategic investements to tak forward. Other Multilaterals are using them. Why not the IDB?

    Reply
    • emarenco says

      August 24, 2020 at 2:39 pm

      Dear Pedro,

      See below the response of the authors to your question:

      “Our paragraph is supported by strong evidence. Most importantly two recent research papers made by Armendariz and Contreras (2016) and Eguino (2020). The weakness is found at the country level and does not refer to the best practices promoted by IADB within their programs.”

      All the best.

      Reply

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