1. Challenges in infrastructure financing Dr. Peter Wolff German 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 – finance gap G20 – Attempts towards global coordination Role of Development Banks and DFIs Impediments for Institutional Investors Way forward – overcoming the coordination failure 2

3. Infrastructure – key enabler for post-2015 transformation Economic transformation - alleviate growth constraints Social transformation - access to water, sanitation, energy for the poor Environmental transformation - from high to low carbon energy 3

4. Estimated infrastructure needs 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) 4

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

6. Effective provision of infrastructure - lower cost Infrastructure productivity: How to save $1 trillion a year (McKinsey 2012) governments: clarity about roles and priorities streamlining delivery improved operations (maintenance) benchmarking construction and operational costs brownfield vs greenfield investments => Policy framework and institutional capacities determine financing needs 6

7. Challenges of infrastructure financing High upfront capital requirements – investment in fixed assets under uncertainty Complex risk profile (macroeconomic, political, technical, construction, revenue)  High return expectations by private investors – affordability?  High contingent liabilities for the public sector 7

8. G20 – attempts towards global coordination for infrastructure investment Seoul Multi-Year Action Plan on Development (2010) -„…overcoming obstacles to infrastructure investment…“ Cannes Summit (2011) – Report of HLP on infrastructure investment Los Cabos Summit (2012) – emphasis on engaging the private sector in infrastructure investment St. Petersburg Summit (2013) – establishment of WG on long-term investment Brisbane Summit (2014) – „move beyond the rhetoric…deliver tangible outcomes“ (PM Abbott) 8

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 9

10. Multilateral Development Banks Infrastructure Action Plan (2011) Improving Project Preparation Funds (PPFs) Effectiveness 1. 2. Developing Catalytic Regional Projects 3. Expanding Technical Assistance through expanded PPP practitioners‘ networks 4. Increasing incentives for MDB staff to engage in PPP transactions and regional projects. 5. Piloting an Africa Infrastructure Marketplace 6. Improving Procurement Practices to Facilitate Collaboration with the Private Sector and amongst MDBs. 7. Launching a Global Infrastructure Benchmarking Initiative 8. Scaling up the Construction Sector Transparency Initiative (CoST) 10

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12. Capacity of Development Banks and DFIs is under-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 12

13. Infrastructure projects require a mix of funding sources 13 Source: Martin, Matthew (2014): Public-Private Partnerships: a Desirable Way to Fund Development?

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

15. Impediments for institutional investors Reporting standardsBenchmarking Regulation (Solvency II): Infrastructure Investment in Developing Countries = alternative investment (high capital requirements) Performance measurement listed funds unlisted funds IndirectDirect Ways of investment: 15

16. Way forward – overcoming the coordination failure 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) 16

17. 17 Thank you ! peter.wolff@die-gdi.de