Financing a Transformative Post-2015 Agenda – how does infrastructure finance fit in?

1. Challenges in infrastructurefinancingDr. Peter WolffGerman Development Institute /Deutsches Institut für Entwicklungspolitik (DIE) Financing a Transformative Post-2015 Agenda – how does infrastructure finance fit in? University of Athens, 3 June 2014

2. Outline • Infrastructure needs – financegap • G20 – Attemptstowards global coordination • Roleof Development Banks and DFIs • ImpedimentsforInstitutionalInvestors • Way forward – overcomingthecoordinationfailure

3. Infrastructure – keyenablerfor post-2015 transformation • Economictransformation - alleviategrowthconstraints • Socialtransformation - accesstowater, sanitation, energyforthepoor • Environmental transformation- fromhightolowcarbonenergy

4. Estimatedinfrastructureneeds in developing countries Source: World Bank, 2013 (AFR=Sub-Saharan Africa, EAP=East Asia & Pacific, ECA=Eastern Europe & Central Asia, LAC=Latin America & the Caribbean, MNA=Middle East/North Africa, SAR=South Asian Region)

5. Financegap - infrastructure Financial needs for closing the infrastructure gap, $ bn annually

6. Effectiveprovisionofinfrastructure- lowercost Infrastructure productivity: Howto save $1 trillion a year(McKinsey 2012) • governments: clarityaboutrolesandpriorities • streamliningdelivery • improvedoperations (maintenance) • benchmarkingconstructionand operational costs • brownfieldvsgreenfieldinvestments => Policyframeworkandinstitutionalcapacitiesdeterminefinancingneeds

7. Challengesofinfrastructurefinancing High upfrontcapitalrequirements – investment in fixedassetsunderuncertainty Complexriskprofile (macroeconomic, political, technical, construction, revenue) • High returnexpectationsby private investors – affordability? • High contingentliabilitiesforthepublicsector

8. G20 – attemptstowards global coordinationforinfrastructureinvestment Seoul Multi-Year Action Plan on Development (2010) -„…overcomingobstaclestoinfrastructureinvestment…“ Cannes Summit (2011) – Report of HLP on infrastructureinvestment Los CabosSummit (2012) – emphasis on engagingthe private sector in infrastructureinvestment St. Petersburg Summit (2013) – establishmentof WG on long-terminvestment Brisbane Summit (2014) – „movebeyondtherhetoric…delivertangibleoutcomes“ (PM Abbott)

9. HLP on Infrastructure Investment – Recommendations (2011) • Ensuring a strong and sustainable supply of bankable projects - “…the constraint is less one of funding than an insufficient pipeline of bankable projects.” • Contributing to building an enabling environment – “…the private sector will not invest in the dark…” • Making funding available under appropriate terms - local currency debt markets (infrastructure bonds), local financial intermediaries, MDBs: crowding in private capital through the use of risk mitigation instruments, co-financing by Institutional Investors, SWFs • Working with MDBs to identify a set of exemplary projects – identify exemplary regional projects

10. Multilateral Development BanksInfrastructure Action Plan (2011) 1. Improving Project Preparation Funds (PPFs) Effectiveness 2. DevelopingCatalytic Regional Projects 3. Expanding Technical Assistance throughexpanded PPP practitioners‘ networks 4. Increasingincentivesfor MDB stafftoengage in PPP transactionsand regional projects. 5. Piloting an Africa Infrastructure Marketplace 6. ImprovingProcurement Practices toFacilitateCollaborationwiththe Private Sectorandamongst MDBs. 7. Launching a Global Infrastructure Benchmarking Initiative 8. ScalinguptheConstructionSectorTransparency Initiative (CoST)

12. Capacityof Development Banks and DFIs isunder-utilized • Commercial banks face consolidation challenges and regulatory boundaries => restrained credit growth – short-term horizon • Development Banks and DFIs to provide the necessary credit enhancement products for project financing => grants, equity, long-term debt, subordinate debt, first loss in structured funds, securitization of future revenue streams, credit guarantees, viability gap funding • Development Banks and DFIs are instrumental in ensuring effective project selection and development as well as positive developmental effects of infrastructure investments => environmental, social, governance standards, “safeguards”, pricing and regulatory policies

13. Infrastructure projectsrequirea mix offundingsources Source: Martin, Matthew (2014): Public-Private Partnerships: a Desirable Way to Fund Development?

14. Challenges and Barriers to Infrastructure Investing G20-OECD working group on long-term financing Source: OECD Pension Fund Investment in Infrastructure: Policy Actions, Working Paper 2011

15. Reporting standards • Benchmarking • Performance measurement • Regulation (Solvency II): • Infrastructure Investment in Developing Countries = alternative investment (highcapitalrequirements) Impedimentsforinstitutionalinvestors Waysofinvestment: Direct Indirect • listedfunds • unlistedfunds

16. Way forward – overcomingthecoordinationfailure • Developing local capital markets – more effort to create incentives for local financing/local currency bond markets • Closing the funding gap for project development – combine domestic and external funds (grants) • Closing the knowledge gap – MDB/OECD/private sector collaboration (data, benchmarking, monitoring, learning platforms) => creating a new asset class for long term investors • Collaboration between MDBs/DFIs/ECAs/SWFs – combine risk taking capacities in co-financing arrangements; exposure exchange agreements between IBRD and RDBs; IFC Asset Management Company (AMC); World Bank Global Infrastructure Facility (GIF)

17. Thankyou ! peter.wolff@die-gdi.de