The relentless quest to mobilise private investment in infrastructure: more de-risking is not the answer
While G7 leaders argue that they "aim for a step change" in their approach to infrastructure financing, a market-led approach is still at the heart of the G7’s plan to "build back better" for the world. In the following blog, María José Romero, Farwa Sial and Flora Sonkin analyse the proposals, the risks and an alternative way of thinking about infrastructure.
By María José Romero, Farwa Sial and Flora Sonkin (Policy Research Officer on Financing for Development, SID)
Infrastructure is placed at the centre of global Covid-19 recovery plans. At the recent G7 Summit, leaders of the richest countries in the world announced ‘a partnership to build back better for the world (B3W)’. This proposal is not so different from what the G20 has been trying to do for many years, although this time it is framed as a values-driven agenda. The key principle underpinning the G7’s plan for infrastructure financing is ‘market led’, which means that they commit to ‘support and catalyse a significant increase in responsible and market-based private capital in sectors with anticipated returns.’ The deepening of private finance in infrastructure development is thus an ongoing and problematic trend driven by rich countries, together with development finance institutions (DFIs), where they are in the driving seat.
The proposal on the table aims to upscale the use of public finance, including official development assistance, and DFIs’ tools to leverage private finance in infrastructure. To meet investors’ objectives, this agenda transforms infrastructure into a privatised asset, embedded in international financial markets, which comes at the expense of the concept of infrastructure as a public good.
The G20 and G7 proposals for infrastructure finance
In 2018, the G20 launched the ‘Roadmap to Infrastructure as an Asset Class’, which set the stage for mobilising private sources of infrastructure finance. This problematic agenda continues to determine recovery efforts in the context of the ongoing pandemic. At the beginning of this year, the Italian presidency reiterated its commitment to private infrastructure finance and aimed at “making infrastructure more resilient and inclusive, improving maintenance of existing assets and promoting future digital and sustainable infrastructure”, by continuing the dialogue between public and private investors.
As part of this, the 2021 G20 Infrastructure Investors Dialogue, organised earlier this month, called for an expansive role for institutional investors and asset managers in the global infrastructure sector by advocating innovative partnership models which extend the role of investors from mere financiers to joint owners of public utilities with the public sector. The dialogue built on the proposals included in the 2020 G20/OECD Report on the Collaboration with Institutional Investors and Asset Managers on Infrastructure. These proposals include a detailed de-risking approach for states in emerging and developing countries. Some notable recommendations include deregulation of regulatory and investment frameworks and provision of subsidies to attract private investors, risk mitigation tools including state guarantees and the standardisation of contracts.
While G7 leaders argue that they “aim for a step change” in their approach to infrastructure financing, this market-led approach - driven forward by the actions of G7 countries’ own DFIs and other international financial institutions (IFIs) - is at the heart of the G7’s plan to B3W.
Framing private finance as an effective and sustainable source of financing for infrastructure belies the inadequacy of the amounts mobilised so far and their nature. According to a 2020 report by the Global Infrastructure Hub, “in 2019, private infrastructure investment in high-income countries was triple that in low-income countries”. This has led the G20-led initiative to raise specific concerns: “at these rates, the mobilisation of private investment in developing countries falls short of international ambitions, with both the scale and amount of investment falling short of what would be needed for transformation.”
Also problematic is the fact that - according to the same Global Infrastructure Hub report - private investment in infrastructure projects (or in primary markets) was low at US$106 billion constituting 0.13 per cent of global gross domestic product. In contrast, the trading of existing infrastructure investments (or in secondary markets), accounted for 75 per cent of all private financing in 2019. The stark disparity in figures shows that while actual mobilisation of capital to achieve transformational impact remains insignificant, private financing as a tool for value capture and enhancement of yields through the trading of existing infrastructure assets, such as roads and airports or hospitals in secondary markets, is high.
For this agenda to deliver, states will effectively need to have a constant supply of profitable projects at hand, which transforms their developmental agenda, often leading to prioritising mega-projects that aim to integrate developing countries into global value chains. Meanwhile, this puts the needs of investors (i.e. maximising profits) before the rights of their citizens, also contributing to locking countries into export dependency and preventing economic diversification. The state then becomes defined by its capacity to protect investors’ profits from risks attached to commodified infrastructure assets, and to policies that would threaten cash flows, including higher minimum wages, climate regulation and from liquidity and currency risks.
Moreover, the call for standardising the infrastructure project cycle across the world, including contracts, as a way of mitigating risks for investors, threatens infrastructure quality by reducing essential public oversight/accountability, and weakening environmental and social standards. It further exacerbates the unequal power relations between countries of the global north and south, diminishing the sovereign rights of the latter, including to self-determination.
All this contributes to the systematic erosion of state capacity to regulate in the public interest, and to ensure that high quality public services are provided equitably and democratically, respecting the social contract between citizens and their state. The scale and complexity of private infrastructure projects also leads to a lack of transparency, indebtedness, ecological damage and displacement of communities.
It's important to remember that there is no proof that private financing is either more efficient or cost effective in comparison to public finance. In fact, in the event of breach of contracts or disputes in general, developing countries are mired in expensive arbitration cases.
An alternative way of thinking about infrastructure
While the private sector has a relevant role to play in delivering on the SDGs, mobilising private capital should not be seen as a goal in itself. A narrow focus on financing gaps neglects the longer term systemic issues underlying uneven global development, and does not cover the “other infrastructure gap,” which specifically refers to sustainability and human rights considerations.
As the pandemic forces us into a deep re-evaluation of current systems and policy choices that have not delivered on their promises, it can also serve as an opportunity for transformative change.
A forthcoming report resulting from the joint work of Eurodad and Society for International Development (SID) and from case studies and discussions with partners from the global north and south, attempts to advance collective thinking on these issues.
It is time to rethink the role of public development banks and the importance of industrial policies for countries in the global south, keeping the democratisation of global economic governance and the right to development at the centre.