Prosperity, Cities & Urbanisation, Asia Pacific, Peace & Partnership

New solutions for closing the global infrastructure gap

Lotte Schou-Zibell | Nov 13, 2018

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This article was originally published by Asian Development Blog and is republished with permission.

A well-known ancient Indian parable has three blind men brought into a room containing an elephant, and asked to describe what they are touching. Separately, each man talks about the part of the elephant he can feel—trunk, tail, legs—and as a result describes a different creature.

The Global Infrastructure Forum 2018 in Bali, Indonesia instead allowed delegates grappling with the global need for vastly more infrastructure, estimated to be as much as $3.7 trillion annually for years to come, to share their description of the elephant in the room. The 13 October gathering, the third annual since the forum’s 2015 founding in Addis Ababa, demonstrated that closing the infrastructure gap requires nuance, innovation and cooperation, and revealed dozens of solutions for doing so.

A fresh perspective on the African experience helps illustrate these points. The African Development Bank (AfDB) ambitiously aims to bring electricity to 200 million new remote or poor customers on that continent, 75 million of them off-grid – a situation not unlike that found in Asia’s developing countries.

But financing and costs were big hurdles. Conventional grid systems cost about $2,500 per connection and people in rural areas were unable to pay.

Africa shows the way for Asia to electrify off-grid rural communities

By using mini-grids and new technology, however, AfDB has been able to bring down the cost to $500–$1,000.

AfDB’s recent approval of a partial credit guarantee covering part of a guaranteed loan facility paved the way for them to provide access to approximately 100,000 rural households with pay-as-you-go solar home systems by 2020. This operation is the first large-scale local currency financing structure using the securitization technique for the off-grid renewable energy sector in Africa.

Complex issues were involved in achieving such last-mile infrastructure, including involving a Europe-based financier.

One of the main challenges was how to bundle the “off-grid kit” technology used to deploy the 50,000-100,000 units in multiple countries needed to make such a deal profitable, and work with small and medium-sized enterprises (SMEs) to do so. Often startups, SMEs bring with them “new counterparty risks” that need to be handled effectively, yet they also offer nuanced understanding of local conditions that make such projects possible.

Closing infrastructure investment gap is about project bankability

In short, the project demonstrates the innovations available in new technologies, the cooperative organizing power of a multilateral development bank, and the needed nuanced perspective of a private financier and its partnership with local SMEs to get the job done.

The discussions at the forum also made clear that what is being talked about in closing the infrastructure gap is not really an issue of shortage of funds. It is not a financing issue.

Money is out there. Rather, it is about making bankable projects happen.

A significant challenge in doing so is in how you assess and dissect the risks of a project, and who is in the best position to take that risk. This raises issues of better project preparation and planning that can attract institutional investors, ease financial engineering—which the investment banks and financiers can do—and improve the procurement process and regulatory frameworks.

MDBs’ credibility can mobilize private funds for infrastructure projects

Delegates repeatedly pointed to the important role in this for the multilateral development banks, ten of which were represented at the forum. Private sector participants stressed that by serving as agents for change, MDBs can help smooth the way for private sector involvement in difficult infrastructure programs.

MDBs bring credibility to projects, encouraging pension funds and other institutional investors to invest. In that role, MDBs should focus on identifying barriers—weak project preparation, unsupportive policy and regulatory environments, and insufficient financial preparation—and removing them so that private investment can flourish.

The forum each year brings together the many different actors that need to work together. Investment banks and other financiers know now how to handle the financial preparation and have been standardizing models for doing so, governments are working to improve policy and regulation, and private sector players can pinpoint the needed technologies and deal with the intricate issues that must be overcome. 

Designed to build each year on the previous year’s efforts, the Global Infrastructure Forum will take into account the myriad experience shared on stage and in the hallways, help disseminate the results, and continually improve and expand on efforts to close the global infrastructure gap.

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