Infrastructure is the backbone of any functioning modern economy. Telecommunications, transportation, and uninterrupted access to electricity are all vital for countries looking to transform themselves into knowledge-based economies with growing middle-classes. It is in everyone’s interest for this to happen in the developing world: Increasing the world’s infrastructure capacity in a sustainable and transparent manner could amount to US$ 1 trillion in economic value each year.
The bad news is that recent trends tell us that the global financial flows towards infrastructure development are insufficient, with the annual investments stopping well short of the estimated US$ 3.1 trillion needed. Closing this gap will require a reorientation of ongoing development initiatives, especially in the multilateral system. Moreover, attracting private capital will be challenging for some developing countries due to the risks posed by poor governance and weak institutions.
To mobilize trillions of dollars from private investors, donors need to invest significant levels of resources to de-risk infrastructure projects in poorer countries. Donor countries, multilateral organizations, and other development partners will also have to pursue innovative strategies that leverage foreign aid into increasing the ability of developing countries to mobilize private capital more effectively.
The good news is that there is an appetite for closing the global infrastructure gap in a sustainable, ‘quality over sheer quantity’ way. For many years, Japan and the United States have led the world in garnering commitments to principles of “quality infrastructure.” The idea first took form in 2015, when the Japanese Prime Minister Shinzo Abe launched a new US$ 110 billion facility to support Asian countries pursuing innovations in infrastructure development. This facility was launched amid a growing concern the region was pursuing unsustainable infrastructure projects that could undermine regional economic cooperation. Over the next four years, Japan raised the issue at several platforms, including the World Bank (which established the Quality Infrastructure Partnership) and the G7 (which enhanced the concept to lay out the five principles of quality infrastructure). The most recent and significant breakthrough was achieved this summer when the world leaders at the Osaka G20 Summit endorsed the principles that govern investments in quality infrastructure. Through these principles, basic tenets of sustainability and transparency that are indispensable to enabling quality infrastructure, are now enshrined.
While building a global consensus over the definitions and elements of quality infrastructure is important, it is only a first step. Quality infrastructure development won’t come from signatures on a page; it will come from shovels in the ground. The international community — in particular multilateral development banks (MDBs) — must now take concrete steps to operationalize principles of quality infrastructure.
MDBs should lead the development and enforcement of international technical standards for infrastructure. They should provide technical assistance to municipal officials to leverage local debt markets and training for public-sector officials to pursue sustainable and transparent procurement practices. And they should lead efforts to modernize global financial institutions to enable structured financing for quality infrastructure.
MDBs are best positioned to lead these efforts. From the World Bank to regional development banks collectively covering the whole world, MDBs were established to achieve development outcomes and have been a key development partner to many countries. MDBs have a large presence on the ground in low- and middle-income countries. They are also equipped with a mix of financing tools including loans, guarantees, and grants. These design traits make MDBs the ideal leader in the global development community to operationalize the principles of quality infrastructure. To do so, MDBs must prioritize four initiatives.
First, they must focus on government procurement reforms. With rapid urbanization becoming the norm in the next few decades, municipalities and other local entities will bear responsibility for infrastructure development. MDBs should work to build the capacity of millions of public-sector officials in developing countries responsible for urban infrastructure development. A seemingly obscure topic, the goal of these efforts should be to equip officials with the skills and tools needed to test efficiency, feasibility, resilience, viability, and sustainability of proposed projects and to give them the capacity to oversee the operation and maintenance of projects.
Second, MDBs can focus on securitization of infrastructure assets. They can provide financial and technical assistance to commercial banks in middle-income countries to help develop their capacity to create asset-backed securities. Structured financing mechanisms like securitization helps commercially viable banks increase their investments and finance new projects by leveraging hundreds of billions of dollars in national savings. Though highly technical, their ability to do so could unlock the billions — if not trillions — needed to close the infrastructure gap.
Third, they can help create — or at least finance the development of — the improved global data management systems that will be necessary to fully operationalize the quality infrastructure agenda. MDBs also have the resource capacity to compile, consolidate, and host the vast amount of data pertaining to infrastructure development. Ideally, such databases would host information on access, quality, and pricing of infrastructure, financing structures and levels, lending and borrowing history, repayment and loan default trends, planning and delivery schedule, operational and maintenance costs, among other relevant data. Developing and maintaining such a data system as an open-source public good would help investors, project developers, and the wider development community ensure that their decision-making process is rational and transparent. Those with access to private capital willing to invest in emerging economies regularly cite the relative dearth of data related to investment decision making. MDBs know they can’t bridge the global infrastructure gap alone and thus hope to crowd in private capital. More and better data can help.
Finally, MDBs should continue to grow their partnerships — within the MDB system, with bilateral development finance institutions, and with bilateral aid agencies. Such collaborations will not only address the limited availability of ODA resources to deal with the multitrillion dollar challenge, but also help various development partners complement and synergize their efforts. Such collaborations could be effective if focused on areas of mutual interest like increased domestic resource mobilization, the establishment of project preparation facilities, and strategic risk sharing.
In recent years, several failed projects — some financed by traditional and others by new donors like the Chinese — have shown why fiscal, economic, and environmental considerations are critical to enable high-quality infrastructure and to accelerate sustainable economic development. Recognizing this, MDBs with high fiscal, economic, and environmental sustainability standards must seize this opportunity to lead the world in operationalizing and implementing the quality infrastructure agenda.