DEVELOPMENT AGENDA
A BRIDGE FOR INFRASTRUCTURE
Yamini Sequeira heeds the call by development bank heads to bridge the global infrastructure gap
The theme of the Global Infrastructure Forum 2018 – ‘Unlocking inclusive, resilient and sustainable technology driven infrastructure’ – was addressed by heads of leading multilateral development banks on 13 October in Bali.
Organised by the Asian Development Bank (ADB), the event comprised two opening sessions: the first looked at how technology such as solar energy systems, blockchain and big data can be used to make infrastructure more sustainable; the second session discussed how private infrastructure finance can be increased.
Subsequent sessions looked at using technology to achieve the crucial but difficult ‘last mile’ of getting services to end users, good practices in scaling up investments in infrastructure, ways of financing the global infrastructure gap and maximising innovative climate finance for sustainable infrastructure.
The ADB noted that infrastructure needs across the world are huge. An estimated one billion people have no access to electricity while over 660 million have no access to clean drinking water. New technologies and approaches, such as smart transport systems and innovative climate finance, can help fill the infrastructure gap. They can also help build infrastructure that could withstand climate change and natural disasters.
Persistently high levels of inequality pose a challenge to robust economic growth and sustainable development. Declining private investment in infrastructure and a renewed increase in global carbon emissions in 2017 are stark reminders of the inability so far to sufficiently align investment with long-term sustainable development.
The current cyclical upturn in the world economy provides an opportunity to focus policy-making on addressing longstanding concerns and accelerate the pace of progress towards the Sustainable Development Goals (SDG). Without long-term investment on the horizon, certain risks such as those from climate change will
not be incorporated into decision making.
Technology has the potential to support progress across the SDGs. Jiang Yang is an entrepreneur from China who has developed a map based public participation platform focussing on space quality and livelihood. He emphasised that “data is essential to the process of creating opportunities for doing business, inclusiveness and improving the livelihoods of people”.
African Development Bank’s Director for Energy Financial Solutions, Policy and Regulation, Wale Shonibare averred: “Smart technologies and creative financing models could facilitate business, inclusiveness and improving livelihoods across the continent. We have to look for more ways of scaling up access.”
The potentially higher returns over the long lifetime of infrastructure projects are an ideal match for institutional investors – if only they can be convinced that well-structured developing country projects are close enough to an allowable asset class.
Meanwhile, the ADB notes that for its part, governments have come to accept the lesson that they should no longer incur further direct debt on their balance sheets. And most politicians are loath to impose new or higher taxes on present users, or potential customers of future infrastructure projects.
Private sector investors do have an appetite to take on a project if they trust the country’s political risk and legal environment, believe the issuer is reliable and creditworthy, and estimate that the revenue derived from users is sufficient to service their debt.
The ADB revealed that the consensus at its 2017 edition of the forum was that the money needed to bridge the infrastructure gap exists. But it noted that the problem lies in bridging the gap between projects and investors.
A central issue to assess bankability is data availability. Fund managers need historical data to understand the characteristics of the assets they’re investing in and a universally accepted method for valuing assets once the holdings are in their portfolio. In general, projects with built in cash flows are most attractive to investors. They are far more confident about returns when projects such as power plants, airports or ports are likely to have users who are willing to pay for them.
However, a major investment concern surrounding infrastructure projects is the long period before it generates revenue. Infrastructure projects take time to be fully developed and even when they’re completed, it often takes years before they generate positive cash flows.
This extended payback period diminishes liquidity and amplifies political risks as the project might span multiple election cycles. Many consider this as simply another way of passing the ultimate payer responsibility back to impoverished governments without tapping new private sector money.
Closer to home, these are issues that Sri Lanka faces as it forges ahead with its infrastructure development plans to upgrade the sea, air, road, power and the telecom backbone of the island. How it structures the financing of these mega developments without mounting debt remains to be seen.
Incidentally, Sri Lanka’s success in developing basic infrastructure such as a road network density of 98 percent is the highest in South Asia. And according to the Global Competitiveness Index 2017, Sri Lanka is ranked 73rd out of 138 countries for infrastructure development.
A matter of bracing sustainability, braving the challenges of inequality (of economic growth) vs. inadequacy (for bridging the gap between projects and investors). Economic cycles are changing and so is the political situation, in a totally different way. In such a context, availability of data itself becomes a bottleneck. Global changes are affecting the world in a manner where universally accepted economic theories, financial models, intellectual wealth and exercising judgement seem to be tested again. The project deliverables and ROI ( return on investments) become daunting. In such situations, investors too are faced with multiple complexities, inability to make decisions in terms of viability of projects, prioritizing of resources to invest (selecting what projects to invest in).
A major investment concern would be that if the gap widens, this would again pressurize the cut-off rate to increase and the cost of capital rises in an infrastructure project. This means a longer time to break even and make profits, and higher the period, more risks can stand in the way. Diversifying risks remain a concern for both – the investors and the public, over simply passing the ball of payer responsibility.
Facts & figures can be so frail! How do you fathom the reality behind it? Figures depicting an annual revenue of Rs. 100 million and service income of Rs. 60 million may seem like an availability of data. But what about the assumptions that are built in and the estimated risk levels that can distort our dependability on data? A classic illustration is that, say the above figures envisage annual revenue with a 40% likelihood of being realized and 15% likelihood of services utilized by customers. Without addressing the probability and risk of markets/customers, bridging the gap remains a concern. Understandably, this may be a leading cause to the problem of bridging the gap between projects and investors. Investors may not go into general assumptions that airports or ports can generate higher yields as there are exceptions where revenue to be derived from users and air traffic did not materialize. Considering all other data and forecasts as reliable, one significant factor that has potential to create impact (such as Mattala airport, port) can make the entire infrastructure project a failure. When the debt piles up, the recovery of such infrastructure projects reach a status that is irreversible. Again, the way out is data, but with a comprehensive approach.
Agree with this post. Facts and figures can certainly be frail!