Infrastructure Seminar Series

COVID-19: Impact on Infrastructure

Herb Ladley (IMG Rebel)

<img height= Here are some takeaways from our latest infrastructure seminar on the impact of COVID on infrastructure investment and delivery. See link in title for presentation.

1. Economic disruptions as a result of COVID-19 have meant a collapse of supply chains, cost and time overruns, and cost uncertainty in global infrastructure markets. In the short-term, the disruptions are gradually becoming balance sheet realities in PPPs and risk overwhelming legal systems with contract disputes and create contingent liabilities. In the medium term, delay of pipeline projects and O&M are likely due to revenue uncertainty at subnational level. Also, downgrades of project financing debt, clustered in the lowest investment grade rating (BBB), are likely to create contagion in the corporate bond market.

2. In many PPPs, governments shield senior lenders against payment disruption caused by force majeure clauses that are catchall buckets for unlikely events (Acts of God clause). For example, the Chinese government issued over 4800 force majeure certificates to companies invoking them (in the domestic market) covering contracts worth nearly $54 billion.

3. Where such guarantees are missing or contested, legal disputes between counterparties are likely to exacerbate systemic risks. Force majeure claims like the ones in China are likely to falter on the global stage since contracts between companies and international parties including governments are governed by English law which allows parties to claim force majeure if contracts include specific provisions.

4. Depth and duration of crisis is likely to impact post-COVID infrastructure delivery. Policymakers need to be mindful of policy considerations during recovery. If rapid recovery (U-shaped), then accelerate planning during shutdowns and have more shovel-ready projects available in the future. Additionally, bring forward capex and major maintenance, where doing so can lower overall costs and can be done safely. However, if recovery is gradual (V-shaped), then conditional loan guarantees and direct project support need to be available to mitigate contractor bankruptcy.

5.Adequate PPP fiscal management will be crucial in the post Covid-19-emergency as some countries’ fiscal stimulus measures will include large investment programs. Governments need to assure that adequate conditions are in place for PPPs to succeed such as improving their budgeting and accounting systems and becoming more transparent in reporting PPP operations.

Lifelines: The Resilient Infrastructure Opportunity

Stéphane Hallegatte: World Bank

shallegatteClimate change is a threat to development, especially to the goal of eliminating extreme poverty.  Traditional approaches to climate change assessment have focused on potential climate damage to assets.  The damage of climate change can be expanded by considering the loss of services provided by infrastructure.  For example, a damaged road matters to the extent that drivers use the road with fewer drivers implying a smaller loss.  Further, the impact on users needs to be considered.  Returning to the road example, a damaged road with a nearby alternate may have a relatively small cost because drivers may take an alternative route.  Focusing more broadly on these costs reframes the problem and brings in economists and policy makers whereas the traditional approach largely centered on engineers.

The diagnostics of the problem consists of two parts.  First, the cost of repairing damaged assets, which is the traditional approach.  Second, the potential cost of disruption to households and firms.  This includes both the direct loss of services (e.g. the road use) or indirect costs associate with mitigation efforts (e.g. buying generators because of frequent power outages).  The estimated cost of this latter component is between $391-647 billion, an order of magnitude larger than the first component.

Solutions should focus on identifying exposed assets that are critical to economic activity.  For example, individual roads in Madagascar represent larger potential losses than in Belgium because the transport network depends more crucially on individual routes.  Additionally, these routes differ in their importance for both local and international economic activities.  In total, the estimated cost of building resilience in only exposed assets is an order of magnitude smaller than in all assets. The estimated net benefit is around $4.2 trillion with an average of $4 in benefits for every $1 invested.

Audience questions touched on a range of topics.  Countries with the largest need for resilience building often lacked the necessary resources. Emphasis was that focusing on proper project selection and exposed assets could substantially lower costs. Relatedly, the discussion focused on how to mitigate perverse incentives. Again, this issue relates to master planning and project selection.  Neglecting the planning stage results in ad hoc criteria being used to select projects.  A more damaging case being when a project’s political benefits are used for selection.  There is also a widespread lack of understanding that the economic costs of individual assets may go beyond the engineering costs.

 The discussion also touched on the issues of data availability and collection.  Small data collecting projects are likely to have large returns.  Collecting city-level data on hazards and topography is relatively cheap and yields large marginal benefits because it informs future investment decisions.  The problem is that these projects tend to lack funding interest because they do not yield direct results.

Beyond the Gap – How Countries Can Afford the Infrastructure They Need while Protecting the Planet.

October 30, 2019
Julie Rozenberg (World Bank)

<img src=In Beyond the Gap, Rozenberg and Fay (eds) aim to estimate the funding needs required by Low- and Middle-Income Countries (LMICs) to close service gaps in water and sanitation, transportation, electricity, irrigation, and flood protection by 2030. In the preferred scenario, countries will need total investments (not additional) of 4.5% GDP to reach infrastructure related SDGs and remain on course to limit climate change to 2 degree Celsius. On average, LMIC spending in infrastructure investment is 4% GDP– but with wide regional disparities. Averages for SSA and East Asia and Pacific are, respectively, 2.5% and 5.7%. In the preferred scenario, overall spending needs for investment (4.5% GDP) and maintenance (2.7% GDP) amount to 7.2% GDP. The costing exercise is framed around SDG targets (e.g. [a.] what it takes to make progress towards targets 6.1 and 6.2 that set out the goal of universal access to safely managed water and sanitation services [b.] universal access to electricity or [c.] increase the share of rural population who live within 2km of an all-season road). In all scenarios and in dollar terms, about 50% of total capital investment needs are in Asia, 20% in Africa and the Middle East, 20% in Latin America and the Caribbean, and the rest in Europe and Central Asia. However, as GDP shares, Africa and the Middle East have the highest needs—ranging from 2.9% GDP in the low-spending scenario to 12.5% of GDP in the high-spending scenario, with the preferred scenario at 6.4% GDP. Framed around the SDGs, the costing exercise is more household centric and less focused on industry, commerce, and other productive uses of infrastructure for growth. As a result, estimates could be conservative. For example, the energy targets primarily focus on providing ‘access to affordable, reliable, sustainable and modern energy for all’ and defines ‘access’ as getting every household at least 50kWh per person per year. While ‘small-home-systems’ make it increasingly possible to reach this target, industries are likely to require power systems that deliver reliable, affordable energy at scale.

Bringing PPPs into the Sunlight

May 1, 2019
Gerardo Reyes-Tagle (Inter-American Development Bank)

<img alt=The use of PPPs has taken off dramatically following the Great Recession and later following calls to action from the 2015 Addis Ababa Action Agenda, the SDGs, and COP21. Like other PPPs, unsolicited proposals (USPs) may offer benefits to governments in the form of identifying new PPP projects and generating innovative solutions. Yet, it introduces challenges for governments to manage the selection, procurement and implementation. While USPs are a relatively small phenomenon (3.1% of total approved projects), the model is becoming increasingly popular (10% in Brazil, 9% in China, 7% in Peru and 5% in Indonesia). By examining the early evidence, Reyes-Tagle finds it prudent to worry about USPs. Citing experiences from Latin American countries, he showed that USPs have shown a lack of competition in the tendering process. For example, out of 11 projects awarded through USPs in Colombia, 10 were awarded to the initial private originator. In 9 of these projects, bids were won uncontested and contracts were awarded to the originators. Such institutional landscape can have massive fiscal implications when USPs receive up to 30% of total investment in public subsidies during the operational phase. Reyes-Tagle recommends integration of USPs into a country’s medium and long-term national infrastructure plans is the best way forward. Introducing proposal credibility guarantees, hiring experienced transaction advisors, and ensuring competition in the selection process are additional mitigating factors.

Energy & Africa’s Future: Why small Is not beautiful

December 12, 2018
Todd Moss (Center for Global Development)

<img alt=Data on electricity consumption per capita and income per capita show a strong positive correlation, with virtually no high-income country with low electricity consumption, thus underlying the importance of energy for development. Unsurprisingly, energy access has been a focus area for the Sustainable Development Goals (SDGs), but Moss argues that SDG 7 sets an unrealistically low bar on energy needs for low income developing countries. The energy targets/goals primarily focus on providing ‘access to affordable, reliable, sustainable and modern energy for all’. Also, ‘access’ is defined narrowly as getting every household at least 50kWh per person per year. This household-centric definition pays little attention to industry, commerce, and other productive uses of energy for growth. Running a globally competitive economy requires power systems that deliver reliable, affordable energy at scale. Factories do not run on ‘small-home-systems’. While some countries have skipped landlines, leapfrogging modern power systems is not possible. Finally, even if the industry era is over and services become the dominant sector, energy needs are less likely to be small. A medium sized office building needs about 1 MW of installed capacity to function. A 100 or so medium sized office buildings require more power than the whole installed capacity of Liberia. In thinking about Africa’s energy future, small may be the answer for rural communities to get power at home. But urban spaces, industrial zones, and data centers will need large scale energy that can deliver reliable and affordable power at scale. They need energy for growth.

Infrastructure Investment in Emerging Markets: Trends, Structures, and Challenges

September 26, 2018
Jordan Schwartz (World Bank)

Jordan SchwartzThere are large infrastructure needs in low and middle-income countries. In any given year, total expenditure in infrastructure is about USD 1.5 trillion, with about USD 60-100 billion coming from Multilateral Development Banks (MDBs), and total private participation around USD 100-180 billion. But the infrastructure spending gap is estimated to be about another USD 1 trillion. To fill this gap, mobilizing domestic revenues will not be sufficient. While there is wide interest around the world on how to bring private financing into infrastructure, there is no single way to match capital looking for high yields and demand for financing for infrastructure. To attract private capital a stronger infrastructure governance is called for. Indeed, there is evidence of a strong correlation between sovereign risk and private participation in infrastructure (PPI) compared to FDI overall. PPI increases with freedom from corruption, rule of law, quality of regulation, third party oversight. Development Finance Institutions (DFIs) and MDBs can play a catalytic role. Even as DFI contribution have dropped from 30 to 19 percent of debt, share of DFI involvement has continued to rise sharply as a share of number of PPI projects, from less than 1 in 5 three years ago to nearly half of all projects in the first half year of 2018. Moreover, MDBs involvement contributes to decreases likelihood of cancelation, through guarantees, insurance products, and direct financing.

Financing Infrastructure: An Unfinished Agenda

June 27, 2018
Amadou Sy (IMF African Department)

A. SyInvestment in infrastructure is a priority for African and global policymakers. Yet Africa’s infrastructure gap remains large, amounting to about $170 billion per year over the next decade (AfDB). The recent rise in debt vulnerabilities in most African countries, highlights the need to sustainably broaden the sources of infrastructure financing. Several initiatives to finance infrastructure investment in Africa are under way such as the Joint MDB Statement of Ambitions for Crowding in Private Finance. Other financing options could help close Africa’s infrastructure gap. Many African countries have pension funds with sizeable resources (e.g., South Africa ($322 billion), Namibia ($10 billion)), which could be leveraged to finance infrastructure development. Infrastructure investment could also be increased through better governance, which boosts domestic revenue mobilization, although the effects on external financing is mixed. Effort to attract private investors to Africa could be improved by considering infrastructure projects’ stages (planning, construction, early exploitation) and type of risks to create simple and standardized deals. Overall, there is a need to better measure and manage the risks involved in project finance and other instruments. Fund staff could integrate project finance analysis in its Debt Sustainability Analysis.

Infrastructure as an Asset Class

March 12, 2018
Donald Kaberuka (former President, AfDB)

D. KaberukaInvestment on infrastructure offers unique opportunities and, in recent years, has grown in appeal with institutional and private investors alike. Yet, long-term investment in infrastructure remain relatively limited. This is partly because identifying, quantifying, and pricing the risks associated with infrastructure projects present challenges for institutional investors who wish to invest in emerging market infrastructure, and for secondary market participants who wish to buy and sell infrastructure-related securities. Developing infrastructure as an asset class could remove most of these constraints. This seminar highlights the challenges of developing infrastructure as an asset class and suggests ways forward.

China's Infrastructure Experience and Its Applicability to the Belt and Road Initiative.

January 17, 2018
Ted Chu (International Finance Corporation)

T. ChuChina’s growth model over the past four decades has not solely been state led. Also central were collaborative and competitive relationships among administrative regions and private sector actors. Cities competed for resources to climb-up the tier-ladder, for recognition and investment. Through this process, strategic infrastructure development was key to the success of this growth model and evolved over three phases. The first phase focused on providing infrastructure sufficient to relocate the rural poor to coastal industrial hubs. Income growth spurred urbanization into the hinterland and with it emerged a construction boom in the second phase. This also meant differential growth of cities and regions (e.g. those with rough terrain and no industrial-base developed much later when technological development lowered costs). Today, rising land and labor costs are opportunities to chart a new course of infrastructure development towards smart cities. The BRI is intended to promote China’s own city-led growth model to a large group of emerging market economies by buoying competition, advancing trade ties and catalyzing innovation. The initiative has the potential to be the largest platform for collaboration over the next 25 years. Thus, the role of IFIs should be to encourage this coordinated effort to develop infrastructure over many EMs rather than leave such development to occur at different speeds or not occur at all.

Mobilizing Private Investment for Infrastructure Development in Emerging Markets & Developing Economies

September 8, 2017
Laurence Carter and Neil Gregory (International Finance Corporation)

L. CarterAttaining the Sustainable Goals will require a major increase in infrastructure investment. With public resources strained, attention has increasingly turned to mobilizing private investment in infrastructure. The presentation highlighted some of the obstacles private investment and ways to overcome those obstacles. Specifically, joint MDB commitments to strengthen the governance of infrastructure planning, budgeting and disclose plays a key role to crowd in private finance for infrastructure. On its part the IFC continues to provide access to its Managed Co-Lending Portfolio Program (MCPP) in a bid to mitigate lack of investor capability or expertise in the infrastructure sector. This process is a co-investment platform that requires an IFC investment on the same terms as the investor. IFC engagement extends to providing improved access to data on infrastructure asset performance including credit default rates, rating migration and recovery rates of defaulted projects. The GEM database is composed of over 7000 counterparts that mostly participate in the private sector across a wide industry group. It is a key risk mitigation mechanism intended to remove the gap between perceived risk and real risks of infrastructure investment. The seminar highlighted a broad range of forward looking ways of catalyzing the market and unlocking investment for private sector projects.

Infrastructure in Africa: Lesson for Future Development

July 26, 2017
Mthuli Ncube (University of Oxford)

M. NcubeThe seminar presented a discussion of the current state of infrastructure in Africa. The discussion included economic and political aspects of infrastructure development, financing and the mobilization of domestic resources, and the potential for social inclusion. More specifically, it recommended tapping into non-traditional forms of financing infrastructure projects. One such approach is using infrastructure assets that are increasingly being viewed by investors as sources of reliable long-term cash flow, often with some form of inflation protection. Innovative financing need not be limited to accessing Sovereign Wealth Funds or expanding PPPs, but should also consider the use of 'soft MDB windows', and new bilateral and multilateral windows such as the 'China Silk Road' and G20's compact with Africa. MDBs and the IMF should consider introducing an Infrastructure Assessment Program  (IAP) to assess infrastructure resource needs and efficient deployment of PPP capacity and regulatory reforms. Listen to podcast.

How Effective is Chinese Development Finance? Evidence from a New Dataset

November 22, 2017
Bradley Parks (AIDDATA)

B. ParksThe seminar introduced a new dataset of official financing from China to 140 countries between 2000 and 2014. The same data was used to investigate whether and to what extent Chinese aid affects the economic growth of recipient countries. The results showed that Chinese official development assistance, i.e., aid in the strict sense, boosts economic growth in recipient countries. For the average recipient country, one additional Chinese aid project produced a 0.7-1.1 percentage point increase in economic growth two years after the project is committed. As a second step the study benchmarked the effectiveness of Chinese aid vis-à-vis the World Bank, the United States, and all members of the OECD’s Development Assistance Committee (DAC). Our results indicate that Chinese, US and OECD-DAC aid yield similar economic growth impacts. By contrast, we find no robust evidence that World Bank aid promotes growth. We also find that, irrespective of the funding source, less concessional and more commercially-oriented types of official finance do not boost economic growth. Finally, we test the popular claim that significant financial support from China impairs the effectiveness of grants and loans from Western donors and lenders. Our results do not support this claim.