Closing the infrastructure gap
The Addis Agenda recognizes that investing in sustainable and resilient infrastructure, including transport, energy, water and sanitation for all, is a pre-requisite for achieving many of the SDGs. Demographic changes, migration, climate change and urbanisation increase the need for infrastructure development, especially in developing economies. Transportation infrastructure, such as roads, railways, ports, airports, is of central importance for economic development. In Land-Locked Developing Countries (LLDCs), it is particularly important as it enables trade. Energy-related infrastructure, in particular renewable infrastructure and an expansion of the electricity grid, is necessary to reach the climate goals. Climate resilience investments are particularly needed in Small Island Developing States (SIDS). Sustainable water infrastructure will improve people’s lives by providing access to water and help management of scarce resources in a sustainable manner.
The below chart illustrates the estimated sectoral infrastructure needs globally. The largest gap is in transportation, followed by the power sector, which is estimated to have a financing gap of around USD 1 trillion a year, or 1.1% of the global GDP. Investment needs in the power sector emanate from the closing of aging coal plants and the growth of renewable power as well as investment in power transmission and distribution. For instance, many countries are also seeking to improve energy security by boosting electricity interconnections with supplier countries. Transportation includes roads, railways, bridges, tunnels as well as seaports and airports.
Infrastructure investments that include private participation have increased significantly since the turn of the century, with most of the growth in middle-income countries. However, private investments in infrastructure has been on a declining trend since 2012 according to the World Bank Private Participation in Infrastructure (PPI) Database. While the 2017 PPI data shows an increase of 37 per cent compared to 2016, it remains the second lowest level of investment over the last 10 years. In 2017, private investment commitments in energy, transport, ICT backbone and water infrastructure in low- and middle-income countries totaled US$93 billion across 304 projects in 52 countries (up from 34 countries in 2016). The increase is mainly due to some megaprojects in China and Indonesia as well as a recovery in South Asia, led mainly by Pakistan. From a regional perspective, the levels of investment were relatively low in Latin America and the Caribbean, and Sub-Saharan Africa while Asia attracted most investments. According to the World Bank report, private sources financed 45 percent of investment, public sources financed 25 percent, and development finance institutions—which are both multilateral and bilateral—financed 30 percent.
The Addis Ababa Action Agenda emphasizes the importance of infrastructure investment for achieving the SDGs. It notes that both public and private investment have key roles to play in infrastructure financing, including mechanisms such as blended finance and public-private partnerships (PPPs). Nonetheless, these have become fairly controversial in debates on implementation of the SDGs, with views ranging from the essential need for them to achieve the agenda to concerns that they will be used to privatize public services and subsidize the private sector. The Addis Agenda recognizes both the potential and challenges associated with these structures. It notes that “careful consideration should be given to the appropriate structure and use of … blended finance, including PPPs, [and that projects] should share risks and reward fairly, include clear accountability mechanisms and meet social and environmental standards.” To facilitate effective use of PPPs, the Addis Agenda identifies a number of principles, which should guide PPP activity.
Box: Principles for blended finance and PPPs extracted from the Addis Agenda.
1. Careful consideration given to the structure and use of blended finance instruments (paragraph 48).
2. Sharing risks and reward fairly (paragraph 48).
3. Meeting social and environmental standards (paragraph 48).
4. Alignment with sustainable development, to ensure sustainable, accessible, affordable and resilient quality infrastructure (paragraph 48).
5. Ensuring clear accountability mechanisms (paragraph 48).
6. Ensuring transparency, including in public procurement frameworks and contracts (paragraphs 30, 25 and 26).
7. Ensuring participation, particularly of local communities in decisions affecting their communities (paragraph 34).
8. Ensuring effective management, accounting, and budgeting for contingent liabilities, and debt sustainability (paragraphs 95 and 48).
9. Alignment with national priorities and relevant principles of effective development cooperation (paragraph 58).
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There have been many initiatives to support for infrastructure financing since the adoption of the Addis Ababa Action Agenda, which notably established the global infrastructure forum. For instance, the World Bank, in conjunction with other multilateral development banks and international organizations, created the PPP knowledge lab, which contains several tools and knowledge resources, and provides a joint platform for sharing analytical work.
Overall, initiatives in this area have targeted to strengthen domestic enabling environments, build institutional capacity and facilitate the development of well-prepared investable projects. More details on selected initiatives are provided below.