The G20 agenda on infrastructure financing- Key concerns and actionable recommendations

    a-Contenido informativo propioThe G20 agenda on infrastructure financing- Key concerns and actionable recommendations

    Civil 20 Argentina 2018

    Infrastructure is key for achieving sustainable development and for improving
    conditions for people living in developing countries. When it comes to supporting
    economic development, ‘economic infrastructure’ – like roads, clean water and energy
    grids – is as important as ‘social infrastructure’ – such as schools and hospitals. ‘Local
    infrastructure’, which includes local economies and communities, and focuses on
    sustainable tourism or agriculture, for instance, is equally important. Essentially,
    infrastructure is meant to serve the development needs of citizens first and foremost.

    However, badly designed and poorly implemented infrastructure projects can result in
    negative social, environmental and human rights impacts. They can also generate
    excessive fiscal costs that impact on the public purse, with a knock on impact on
    citizens too.

    Many countries have a long history of ‘white elephant’ infrastructure projects linked to
    corruption. Many projects have also suffered from lack of transparency and poor
    monitoring, which undermines democratic accountability. Low state capacity to plan,
    design, negotiate, manage and implement infrastructure projects has also been a
    common problem.

    Promoting investment in infrastructure needs to tackle all these problems in order to
    contribute effectively to the Agenda 2030 and to meet the Paris Agreement. The
    questions we need to ask, therefore, are: How should we fund infrastructure
    investment? Will the financing mechanism help to realise the benefits while avoiding
    the pitfalls? And how should infrastructure be governed to serve people’s needs?

    One of Argentina’s priorities for its presidency of the G20 is ‘infrastructure for
    development’. As part of this, the G20 is currently working on ‘mobilising additional
    private capital to meet global infrastructure needs’. In March, finance ministers
    released a ‘Roadmap to Infrastructure as an Asset Class’. This Roadmap is an attempt
    to frame the infrastructure narrative as being about how to leverage private capital,
    particularly from institutional investors, to fill a perceived financing gap.

    This approach assumes that the private sector can be the natural supplier of capital.
    However, the history of how infrastructure has been financed shows that this is a
    mistaken and problematic assumption. It also leads to the prioritisation of ways of
    enticing private capital, including through promoting costly and risky public-private
    partnerships (PPPs), rather than first evaluating what the best financing option is for
    each project.

    The Challenge

    There are three main reasons why the G20’s approach to infrastructure financing is
    problematic:

    1. It allows the G20 to avoid a discussion on how to increase public investment
    in infrastructure, and how to increase the quality, resilience and efficiency, as
    measured holistically, of the infrastructure being financed. Current proposals
    made by the G20 and multilateral development banks are based on the premise
    that public resources have to be used to leverage private finance, despite the
    problems that an overreliance on private finance entail. Historically, infrastructure
    has been overwhelmingly financed through public investment – 80-85% of the total
    in developing countries. This has been the case often for good reasons (capitalintensive
    projects that tend to be ‘natural monopolies’, long timeframes, high risks
    and often a lack of profit-making options). Importantly, there is a limited number of
    kinds of infrastructure that can be built commercially – meaning that significant
    public investment is required in most sectors, and is expected to be the default
    source in some. In addition, a focus on improving the quality of infrastructure
    should, in many countries, be the top priority. The existing stock and use of
    infrastructure is associated with more than 60% of the world’s greenhouse gas
    emissions, so the world will not be able to curb global warming without climate
    responsive infrastructure. Therefore, channelling more funds towards infrastructure
    in countries with a poor track record is likely to exacerbate rather than solve
    problems.

    2. It can be very costly, and risky for the public sector, and for citizens. The cost
    of financing is usually more expensive in PPP projects than in public sector works,
    and they entail contingent liabilities that can create a heavy burden on public
    finances – Civil Society Organisations have raised their concerns about the
    increased use of PPPs in a Manifesto launched in October 2017. In the case of
    ‘project bonds’, they can increase the cost of projects due to high interest rates paid
    to attract private capital, and they risk increasing public sector debt, as they will be
    publicly guaranteed. Current proposals made by the G20, including by the G20
    Eminent Persons Group, and the World Bank focus on ‘de-risking’ infrastructure
    assets, and on the securitisation of revenue streams from portfolios of infrastructure
    projects. While ‘de-risking’ strategies – mainly through the use of subsidies and/or
    guarantees – are likely to entail shifting risks, and costs, to the public sector, and to
    the users of the infrastructure (in many cases the guarantees will not be called, but
    when something does not go as planned, the public sector will have to rescue the
    project); increased securitisation is likely to lead to speculative activity and cripples
    the capacity of governments to hold such a diverse group of asset owners
    accountable.

    The G20 also proposes ‘greater standardisation’ – i.e. the creation of financial
    instruments, contracts, documentation, and risk allocation that are easily
    comparable and replicable – in order to make infrastructure assets an attractive
    proposition for institutional investors. This will result in far more flexibility for the
    private sector, which can be a threat to infrastructure quality if it reduces necessary
    public oversight or threatens environmental and social standards. Greater
    standardisation in contracts that govern infrastructure projects will mean that the
    many risks and the costs of changes that will arise during the lifetime of the project
    will be assigned to the public sector. Efforts by the World Bank to standardise PPP
    contracts have, according to a legal analysis, resulted in proposals that are often
    skewed in favour of private interests to the prejudice of the public entities.

    There can also be major transparency and accountability issues associated with
    involving private finance in infrastructure investment. The financial products will be
    engineered so that investors get the return regardless of the performance of the
    investment asset, which means a problematic disconnection between investment
    performance and return – unless there are robust and transparent systems in
    place to address adverse environmental and social impacts, local communities are
    at risk of increased exposure to such threats. Finally, there are potential macroeconomic
    risks, including the increased likelihood of financial crises, and a shift of
    investment from other sectors.

    3. The countries and communities most in need of new, climate-resilient
    infrastructure are the least likely recipients of private investment. The
    possibility of genuine private investment – which is not just disguised borrowing,
    like many PPPs are – applies to a limited set of infrastructure investments, making
    this at best a partial answer to the financing gap. Even these areas are likely to
    require significant complementary public investments. In fact, private investors
    have not shown an appetite to significantly increase their investment in
    infrastructure in developing countries. The trend shows that private participation in
    infrastructure has fallen each year since 2015, and that institutional investors have
    been extremely wary of infrastructure, devoting a very small percentage of their
    investments towards it.

    Importantly, private investors’ natural tendency to seek, and maximise, returns can
    be singled out as one of the key factors constraining investors’ interests. Expecting
    high returns on investments creates a big challenge for developing countries, as it
    is difficult to develop a pipeline of projects that provide investors with attractive
    risk-adjusted returns over the project life cycle without creating a heavy burden on
    public finance, and/or on citizens.

    Finally, this agenda is unsuitable for low-income countries, where capital markets
    tend to be small. Institutional investors such as pension and insurance funds tend
    to be far smaller in size in developing countries compared to developed countries,
    and hold very low levels of assets as a share of gross domestic product (GDP) in
    low-income countries. Therefore, the G20’s strategy is not geared towards the
    countries that most genuinely face an infrastructure financing gap – fragile and
    low-income countries – because these are precisely the countries where
    international private capital is least likely to invest. The most profitable projects can
    attract private investment – in particular telecommunications. However, the
    infrastructure required by the most marginalised communities, and in most fragile
    states — such as water and sanitation — struggle to attract any investment at all.
    Moreover, in many cases private investment in infrastructure has been linked to
    the development of major regional infrastructure plans and the prioritisation of
    ‘mega-projects’, which exacerbate the risks associated with large projects,
    including social and environmental impacts.
    Recommendations

    Civil society organisations agree that the private sector has an important role to play in
    delivering the Sustainable Development Goals (SDGs). However, governments need to
    put in place the right framework of legislation, regulation and incentives to make sure
    that commercial considerations are not made to the detriment of sustainability and
    human rights concerns, and that private investors proactively contribute to sustainable
    development.

    Before pushing ahead with the idea of developing infrastructure as an asset class, the
    G20 should assess the impacts of the current proposals on the quality of the
    infrastructure, and ask whether private financiers will be focused on building
    infrastructure that meets the SDGs (for instance, SDG3, SDG6, SDG7, SDG9) and
    ‘leaves no one behind’. Moreover, it is essential that infrastructure devised in the future
    is low in carbon emissions and resilient to climate change, to avoid generating an
    additional burden and impact on vulnerable communities and social groups, which
    generally are more severely affected by climate change impacts.

    Key recommendations to the G20:

    1. Put delivering and improving public financing of infrastructure centre
    stage. This means taking the actions at international level that are necessary to
    support higher levels of public investment in developing countries, including:
    clamping down on losses of public resources through tax dodging; dealing with
    unsustainable debts through a debt workout mechanism; increasing levels of
    international concessional resources, including through meeting official
    development assistance (ODA) commitments; and examining new ‘innovative’
    sources of public financing, such as the United Nation’s proposal to create
    annual reserve assets for developing countries. It will be critical to recognise
    that the ‘infrastructure financing gap’ is in fact a public financing gap, and that
    there are no magic wands that will allow private financing to effectively supplant
    public financing as the major source of infrastructure investment.

    2. Promote the necessary tools to assess which type of financing is the best
    for a certain project, including a thorough assessment of the fiscal, social and
    environmental benefits, costs and risks of infrastructure projects, including
    equity and human rights considerations, as well as the global need to phase out
    fossil fuels and avoid irreversible damage to biodiverse areas over the full life
    cycle of the project. There should be no institutional, procedural or accounting
    bias in favour of private sector options. For this, full disclosure of information
    from the planning to the implementation of the contract should be available for
    all stakeholders to understand and monitor the project.

    3. Adopt and promote a set of criteria for sustainable and quality
    infrastructure to ensure that projects have widespread benefits, and
    contribute to a reduction in the gender gap, and the gap between rich and poor.
    This should include, but should not be limited to: (a) national policy on
    sustainable infrastructure development; (b) comprehensive laws to safeguard
    the population, particularly the most marginalised groups, and the environment,
    including land and water conservation; (c) rules on fiscal transparency and
    management; (d) rules to ensure fair competition and beneficial ownership
    transparency, and to establish an internal system to prevent and monitor
    against corruption; (e) a framework for disclosing infrastructure plans and
    project details. Sustainability criteria have to be incorporated at each phase of
    project planning and preparation, with the inclusion and prioritisation of early
    system’s planning as a means to ensure integration with the SDGs. This has to
    be complemented by concrete actions that ensure that governments prioritise
    investment in social infrastructure, particularly in care services, and take
    the climate change crisis seriously – for instance, commitments to finance
    adaptation and mitigation in developing countries have to be met.

    4. Decisions on projects must be guided by national development strategies
    and priorities, and shaped through participatory processes. These should be
    consistent with countries’ sustainable development priorities and obligations
    under international agreements in the environmental, climate change and
    human rights fields. The participation of the affected communities, workers and
    other relevant stakeholders must inform the identification, mitigation and
    management of environmental and social impacts of an infrastructure project.

    5. Guidance on contractual provisions for PPPs should take public policy
    considerations into account and should not favour the interests of the private
    investors over the contracting authorities. This means taking into account the
    right and duty of governments to regulate in the public interest. Unanticipated
    impacts should be resolved in a flexible and equitable manner and should not
    be left solely for the contracting authority to address.

    6. Promote radical improvements to transparency and accountability of both
    public and privately financed infrastructure projects. This means: (a) disclosing
    better, timely data of contracts and projects in open and re-useable formats,
    such as the Open Contracting Data Standard and its infrastructure extension in
    partnership with the CoST Infrastructure Data Standard; (b) in the case of
    PPPs, including the contract value and long-term implications of each project in
    national accounts, rather than being off-balance sheet; (c) disclosing full details
    of guarantees and contingent liabilities associated with PPPs, the conditions
    that will trigger them and all PPP-related documents; and (d) ensuring that all
    adversely affected communities have access to effective judicial and nonjudicial
    redress mechanisms, according to the UN Guiding Principles on
    Business and Human Rights and the Organisation for Economic Co-operation
    and Development (OECD) Guidelines for Multinational Enterprises.
    The global community is responsible for working to support the SDGs. The key
    question for Argentina’s G20 presidency is how effectively it will be able to deliver on
    its promise of tackling ‘infrastructure for development’.

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