Global infrastructure issues
One of the biggest challenges for global financial markets today is how to channel the vast pools of savings that are now invested in low or (even negative) yield fixed-income assets to the higher return sustainable, infrastructure investments in emerging markets. Achieving the Sustainable Development Goals (SDGs), the objectives of the Rio Conventions and recovery from the COVID-19 pandemic requires localised approaches and transforming towns and cities into inclusive, resilient, and sustainable growth centres. This is particularly the case in less developed regions but also holds true for urban centres. The lack of productive, service-oriented infrastructure in urban and rural areas is a key obstacle to local development and economic transformation. Yet flows of public and private development and climate finance reaching local governments remain scarce.
Another related infrastructure concern is disasters in the era of climate change. SDG 11 is about Sustainable Cities and Communities, which focuses on making cities and human settlements inclusive, safe, resilient, and sustainable. It directly addresses disaster risk reduction by emphasising the need for resilient infrastructure, disaster preparedness, and effective response to natural and human-made hazards. Natural and human-made disasters are expected to increase, with a major threat to developing countries.
Barriers to investment
Economists have long puzzled over the question of why so little capital from advanced countries (with saturated capital markets and limited investment opportunities) is flowing to emerging market countries (which offer high growth potential and abundant investment opportunities). The fact is that the economic characteristics of infrastructure make it special, for various reasons. Firstly, infrastructure investments result in indirect effects (known as externalities) that benefit the economy but may not necessarily benefit private investors. Secondly, infrastructure can be a natural monopoly and subject to regulation that comes with political risk. Thirdly, the cash flow profile is back-loaded, risks are front-loaded, and the investment is illiquid. This means that while infrastructure investment might be profitable for the economy, private returns are not always sufficient without public support.
For example, the United Nations Environment Programme (UNEP, 2024) has indicated that the cost of adapting to climate change in developing countries could range from US$140 billion to $300 billion annually by 2030, escalating to $280-$500 billion annually by 2050. These figures underscore climate change's significant financial burden on the world's most vulnerable nations. That is why building strong local capacity for infrastructure will help immediate and sustained international cooperation and investment in adaptation and mitigation strategies when disasters hit (United Nations, 2021).
Current efforts and related considerations
Various mechanisms are currently being used to stimulate private investment in sustainable infrastructure. Most of these efforts involve some form of ‘blended finance,’ the use of concessional or near-concessional funding to reduce private sector risks associated with infrastructure projects, especially via public-private partnerships (PPPs). But the significant subsidy funding needed to make many of the PPPs in developing countries commercially viable raises several questions, such as:
What are the implications, in terms of costs and risks, of using large subsidies to attract private sponsors, operators, and investors to sustainable infrastructure projects? Should such projects be structured as PPPs, or as traditional public sector projects, owned and managed by the public sector? What kinds of hybrid decision-making processes for project structuring are possible? And how cost-effective will this use of ‘blended finance’ be in attracting private sector support for the achievement of targets like the SDGs?
A further consideration is that the amount of work required to create an investment-ready infrastructure project can be substantial, particularly since many local governments in developing countries lack the internal technical expertise to undertake the necessary feasibility studies, project structuring reviews and approvals. Consequently, specialised technical expertise is often required from external organisations, such as consultancies and engineering firms, which can be very expensive.
A potential solution
Our recommendation is to focus on capacity building that enables a bottom-up approach, in which development finance practitioners can scale up sustainable infrastructure investment with the active involvement of local partners. The global public goods literature suggests a participatory governance to be carried out at the lowest possible level at which the challenges of project development can effectively and efficiently be dealt with. Thus, capacity building initiatives are catalytic in blending both financial engineering insights and financial capabilities with allocation and management of capital considerations. An innovation economics perspective will add value to assessment matrices, benchmarks for market participants and future project structuring that could enrich the creative cooperation with local actors. The collaboration of experts from local, national, and international levels results in enhanced opportunities for learning, flexibility and periodical adjustment considering shared information. In addition, enhanced local management capabilities can lower investment and implementation risks for bottom-of-the-pyramid applications.
The proposed bottom-up perspective for localised policy initiatives adds value at three key levels:
- A better understanding of local credit and risk capital conditions, since generic awareness and a template for the assessment of gaps facilitates the interface and information sharing between financial intermediaries and firms.
- Streamlining the selection of financial instruments for local development with market-based criteria or objective-oriented priorities, as this process leverages existing experience in financial institutions and has a strong capacity-building element with improvements of financial reporting, more options for risk mitigation and the introduction of new funding instruments (for example, social bonds).
- Proactive adjustment to capital reallocation driven by top-down policy initiatives. For example, the assessment of project cycles in the framework of building back better initiatives feeds in better policy sequencing supported by local/regional coordination platforms.
This approach allows investment priorities to be tested, adapted, and co-created at a small scale to evaluate their scale-up potential. Local governments gain a sense of the technical, financial, and economic parameters before entering the investment phase and local actors accumulate knowledge to develop and fine-tune investment projects to local conditions. In this scheme of things, local institutions are enablers rather than regulators of local social and economic development.
References
UNEP. 2024. Annual Report 2023: Keeping the Promise. New York: United Nations Environment Program.
United Nations. 2021. Managing Infrastructure Assets for Sustainable Development: A Handbook for Local and National Governments. New York: United Nations.
The policy brief that this article draws on is titled ‘Knowledge Capacity for Sustainable Infrastructure: a bottom-up approach’, written by Anthony Bartzokas (Professorial Fellow at UNU-MERIT) and Dilek Cetindamar, Professor at the University of Technology Sydney (UTS) in Australia. Published by the T20 (a G20 engagement group that brings together think tanks and research centres from G20 members and guest countries and organisations), the document was prepared for the Brazilian Presidency of the G-20.
