What is the return on investment in preparing good infrastructure projects? The answer is immediate: save unnecessary future expenses, cost overruns, delays and other inefficiencies throughout the development, operation and maintenance that endanger the benefit of assets and their associated services when it comes to improving the quality of life of citizens, social equity and economic growth.
The current fiscal restrictions and uncertainty generated by the pandemic make the tools and facilities that focus on the preparation and structuring of good projects even more necessary.
We recently participated in a series of webinars on resilient public-private partnerships (PPPs) and how to consider and mitigate climate risk in preparing sustainable projects. The IDB presented a toolkit for generating resilient PPPs focusing on the different considerations of climate resilience throughout the stages of project development.
The risks and consequences derived from climate change affect everyone and everything. For example, in the 2017 floods in Peru, more than 240 bridges and thousands of kilometers of roads were destroyed. The reconstruction bill was estimated at around USD 6 billion, more than 3 percent of Peru’s GDP.
The consideration of the risks associated with the development of sustainable infrastructure cannot be limited to a specific component of project preparation but instead should form part of a comprehensive analysis of all phases.
The importance of facilities and tools that improve project preparation
The identification and quantification of risks is a key element to generate PPPs that allow an efficient and sustainable assignment of responsibilities (risks). Specific tools of practical application for the evaluation of climate and natural disaster risks are essential for the preparation of infrastructure projects.
However, the application of solid and robust tools, as well as the consideration of resilience components in the preparation and development of projects throughout the entire process entails using resources. These are normally public, although there may be contingent recovery alternatives to the development of projects that allow the public sector to recover costs incurred during preparation. These resources are always scarce and now even more so during the pandemic. The key question is: does it pay off?
The preparation of sustainable infrastructure projects has a cost, but the benefits are greater
The correct preparation of sustainable infrastructure projects is a critical and complex activity, which requires significant resources. According to the Global Infrastructure Hub (GIH), an initiative of the G20, which aims to connect the global infrastructure community including the IDB is a strategic partner, the costs of preparing infrastructure projects in developing countries generally range from 5 and 10% of the total project investment, and about 3-5% of the project costs in developed countries.
These amounts are considerable, even more so considering the volume of resources required to develop resilient infrastructure. However, they should be understood as an investment: a pre-investment investment. And as always when you invest, you expect a return. In a recent article, we quantified these inefficiencies at around 1% of GDP in Latin America and the Caribbean, which represents more than 30% of public investment in infrastructure in the region. Avoiding these inefficiencies is the return that society perceives when investing in pre-investment, that is, when the necessary resources are allocated to prepare projects well.
And how is the region doing today in terms of its ability to adequately prepare sustainable infrastructure projects? In our evaluation with the Economist Intelligence Unit, we identified the adequate preparation of projects as one of the main bottlenecks for the development of sustainable and efficient infrastructure. An important part of the countries analyzed still show a lack of capacity, experience and / or resources for project preparation.
How do the MDBs support the preparation of projects?
As stated by the MDB Infrastructure Cooperation Platform, under the appropriate governance schemes, MDBs provide the disinterested advice that governments seek from the project preparation and structuring facilities, independent of their provision of financing.
The MDBs have been active in recent years in developing facilities for the preparation and structuring of sustainable infrastructure projects with a focus on PPP projects. Since 2015, 10 project facilities have been established in MDBs. It is estimated that around USD 600 million has been committed for these facilities, which have allowed the development of initiatives of around 200 projects with a total value of projects in excess of USD 50 billion.
The Global Infrastructure Facility (GIF), where the IDB acts as a technical partner, also represents an excellent partnership between governments, MDBs, private sector investors, and financial entities in order to provide a way to collaborate more efficiently in the preparation, structuring and implementation of projects.
The IDB has been a pioneer in the participation of facilities for the preparation of PPP projects. In 2006, the Infrafund represented the first experience where we set the objective of mobilizing private capital for the infrastructure sector. Through this fund, and in collaboration with the Brazilian Development Bank (BNDES) and the International Finance Corporation (IFC) in Brazil, 14 projects were supported that mobilized more than USD 11 billion.
Building on these experiences, the IDB PPP Team is currently participating in three other PPP Project Preparation Facilities with Caixa Económica Federal (Brazil), Banco de Desenvolvimento de Minas Gerais (BDMG- Estado de Minas Gerais) and Financiera de Desarrollo Nacional (FDN) and the Infrastructure Project Authority (IPA-UK) in Colombia.
It is necessary to act on the generation of a portfolio of socially profitable and bankable projects, as well as on various mechanisms and facilities for preparing and structuring projects that allow channeling a better and greater mode of financing towards infrastructure.
This becomes even more necessary with the current fiscal restrictions and uncertainty generated by the pandemic, and where it is increasingly likely that a double “flight to quality” will be verified in terms of private investment in infrastructure in Latin America and the Caribbean. Investors will prioritize well-structured projects in sound regulatory and fiscal environments.
From the IDB PPP Team, we will continue to support sustainable project preparation. The evidence shows us that the result pays off. The benefits of preparing projects correctly far outweigh their costs. Let us continue betting on policies, tools and mechanisms aimed at making the best possible use of public resources in a sustainable way.
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