The developing world is crying out for greater private investment in sustainable infrastructure
- Now more than ever, we need private investment in sustainable, quality infrastructure to boost growth and promote resilience against public health crises and climate-related risks, as well as unforeseen shocks
The destructive force of climate change, visible in more frequent and severe natural disasters, highlights the urgency to better protect our communities against catastrophic losses while drastically reducing carbon emissions.
Without exaggeration, whether we will be able to avert the worst consequences of climate change and withstand future shocks largely depends on the kind of infrastructure we invest in today.
According to the Global Infrastructure Basel Foundation, 75 per cent of the infrastructure projected to be in place by 2050 does not yet exist. This means we have an opportunity to course correct and construct a world that will be greener, more resilient, more sustainable and more inclusive.
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This gap is brought into particularly stark relief in emerging markets and developing economies, which represent two-thirds of global infrastructure demand but where financing deficits are often largest.
Given growing fiscal constraints across emerging markets and developing economies, private investment – particularly some US$80 trillion in assets under management held by institutional investors – is paramount. Yet these investors’ participation in infrastructure projects in emerging markets and developing economies remains very low, at less than 1 per cent of global portfolios.
In recognition of both the financing gap and the urgency to build back better as part of economic recovery efforts in a post-pandemic environment, we outline key action areas to move this needle in a joint report by the Swiss Re Institute and the Global Infrastructure Facility, titled “Closing the Infrastructure Gap: Mobilising Institutional Investment into Sustainable, Quality Infrastructure in Emerging Markets and Developing Economies”.
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We know that, given the long time horizon of their liabilities and enough long-term capital to commit, institutional investors such as pension funds, banks or insurance companies are ideally positioned to play this role. We also know, because they have told us directly, that an increasing number are willing to do so given the right conditions.
A chief obstacle noted in the report is the lack of bankable projects, attributed to the often limited capacity of governments in emerging markets and developing economies to prepare, plan and prioritise those that would be attractive to private investments.
This makes upstream project preparation a key action area. Cracking this nut will ensure appropriate allocation of risk between the public and private sectors, a critical first step in attracting institutional investors.
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Infrastructure projects are often accompanied by bespoke financing structures that require careful due diligence. Transaction costs can increase quickly, especially relative to the typically small ticket sizes involved for individual transactions.
We feel strongly that standardising loan contracts to reduce costs – both in terms of time and capital – and creating aggregation platforms to help institutional investors deploy larger amounts of capital in a single transaction will go far to offer improved risk-return profiles.
Yet, many topics highlighted by the virus will persist beyond containment and recovery. Global health, social welfare, climate change and sustainability – all these will remain at the top of the global agenda and will not be resolved any time soon.
Institutional investors, like many, need to get up to speed quickly here, so ensuring ESG compliance through adherence to time-tested standard practices and robust regulations will be a significant boon to these efforts. Our last recommendation is therefore to further enhance the disclosure of ESG requirements associated with infrastructure projects.
Now more than ever, we need private investment in sustainable, quality infrastructure to boost economic growth in emerging markets and developing economies and promote resilience against public health crises and climate-related risks, as well as unforeseen global and national shocks.
The window of opportunity is narrowing to affect the climate change trajectory. This will in turn have broad effects on people’s resilience, including their health and security across the globe. Creating new opportunities for institutional investors is a specific and highly achievable goal that we look forward to advancing collaboratively.
Jerome Haegeli is group chief economist at Swiss Re. Makhtar Diop is vice-president for infrastructure at the World Bank