national development banks and sustainable infrastructure financing · 2016-08-12 · 2015 – a...

NationalDevelopmentBanksandSustainableInfrastructure

FinancingGEGI-BrookingsJointResearch

RogerioStudart(coordinator),AmarBattacharya andKevinGallagherSummaryoftheFinalReport

7/11/16 FinalReport- GEGI/Brookings 1

Part I.TheproblemMovingtowardsacarbon-freeworldandkeepingglobalwarmingwithinthe2degreeslimit.


2015– aturningpointforinternationalclimatenegotiations• Theyear2015hasbeenamilestoneyearforboththedevelopmentandclimateagendas.

• July2015:AddisAbabaActionAgendaonFinancingforDevelopmentwasadoptedinattheThirdUNConferenceonFinancingforDevelopment.

• September2015: attheAntalyaSummit,G20leaderscommittedtotheimplementationoftheSDGsandtotakingvigorousactionsonclimate.

• December2015: inParisworldleadersadoptedahistoricagreementonclimatechangebasedonmoreambitiouscommitmentsandarecognitionthatmuchmorewillbeneedtodonetoprotectthefutureoftheplanet.

• Acentralthemeemergingallthesediscussionsisthattheworldwillneedtosimultaneouslytackletwoofitsgreatestchallenges:overcomingpovertyandcreatingbetterlifeforallwhileatthesametimerespondingtoclimatechange.Sustainableinfrastructure investmentsarecriticalforthewholeagenda.


SDGsandsustainableinfrastructure


Sustainableinfrastructurerequires goingbeyondBusinessasUsual


From BAU Tobetterinfrastructure

Inadequate investmentsinsustainableinfrastructureinmostcountriesconstraininggrowthanddevelopment

Scaledinvestmentinsustainableinfrastructure globally,leadingtoimprovedeconomicdevelopmentandgrowth

Inadequate provisionofaffordableinfrastructure for poorpeople,riskingreversalinfightfordevelopmentandpoverty reduction

Increasedinfrastructure accessandaffordability forthepoor,leadingtoimproveddevelopmentoutcomes

Highproportion ofhigh-carbon infrastructure investmentsandinefficientuseofinfrastructure,creatingdangeroflock-inandirreversibleclimatechange

Increasedpreferenceforinvestmentsinlow-carbon infrastructure,mitigatingclimatechangetobelow2degrees

Lowresilienceinfrastructure, creatingvulnerabilitytorisksofclimatechange(especiallyamongpoorpeople)

Moreresilientinfrastructure thataccounts forclimaterisksandprotectspopulationsmostvulnerabletoclimatechange

Not onlythequalitymatters:thevolumeofinvestmentdoestoo


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LatinAmericaandtheCaribbean

Sub-SaharanAfrica

EuropeandCentralAsia

MiddleEastandNorthAfrica

SouthAsia

EastAsiaandPacific(includesNIEs)

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Telecom

WaterSupplyandSanitation

Transport

Energy

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7000 2014 USD billions

Advanced China EMDEV - China


Not onlythequalitymatters:thevolumeofinvestmentdoestoo


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Projectedcumulativeinfrastructuredemand,2015-2030

Source:Bhattacharya,Chattopadhyay,andNagrah(forthcoming)

Note:Projectionsbasedonmid-pointofrangeestimates.Excludesfossilfuelextractionanduse,expendituretoenhanceenergyuseefficiency,andoperationandmaintenancecosts.7/11/16 FinalReport- GEGI/Brookings 9

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DevelopingeconomieswilldemandmostoftheSIfinancing


Figure 2 Global demand for infrastructure by country development categories, 2015-2030 (USD billions, constant 2015 USD)

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Source: Authors’ calculations based on IMF World Economic Outlook (October 2015) data and authors’ projections

How muchtoturnBAUtoSI?


Figure Infrastructure investment needs under alternative carbon scenarios, 2015-2030 (USD trillions, constant 2010 USD)

Source: Bielenberg et al. (forthcoming) using GCEC (2014)

Mainimpediment toraisingsustainableinfrastructureinvestment• Fundamentalpricedistortions– relatedtofossilfuelsubsidiesandlackofcarbonpricing mechanism;

• Inadequatepublicinvestmentframeworks whichaffectbothpublicandprivateinvestmentdecisions.Thatincludeslackofenablingenvironmentandrobustcapacityfordesigningandimplementingpublic-privatepartnerships(PPPs)arekeypriorities.

• Financingimpediments overtheprojectcycleandbringingdownthecostsoffinancingwillbeessentialforenablinginvestmentsandtiltingincentivestowardsmoresustainableprojects.

• Investmentsintechnologyandtechnologydiffusion - neededtoenhancesustainabilityandexploitthesynergiesbetweengrowthandalow-carbontransition.


Viciouscycle


Riskandprojectlifecycle

7/11/16 FinalReport- GEGI/Brookings 14Source:Bhattacharya,Romani,andStern(2012)

TheroleofNDBs

• NDBsshouldhavesignificantcomparativeadvantagesin:• Findingpotentiallocalprojects• Betterunderstandingpotentialsocialandenvironmentalrisks• Understandingtechnologicalandfinancingconstraints• Promotingprojectsthatthatgreaterlocalsocialanddevelopmentimpacts

• NDBsarepublicpolicyinstruments;thereforetheirSIstrategiesandpoliciescanbeintegratedintoanationalSIstrategy,articulatingwithfocalministriesandagencies

• NDBsarefinancialinstitutions,whichfacilitatesinnovativefinancialengineering,coordinatingwithprivatefinancialinstitutionsandpromotingthedevelopmentofnewinstruments


Part2 - AssessingNDBsNDBsalreadyinvestinsustainableinfrastructure(SI),butiftheyaretohaveawiderimpactintheclimatefinanceagendatheseinvestmentsneededtobesignificantlyincreased.


Brooking/GEGIstudy

•towhatextentareNDBsplayingasignificantrole

•towhataretheyinvolvedininfrastructure•towhatextentare theycommittedtosustainability•NewGEGIfulltable(KGtosendonTuesday)•Table3inABpresentationGEGI/Brooksummary


NDBs:farfrombeingmarginalactors

Table 1 Diversity in the size and infrastructure contribution of prominent NDBs

Country NDB

Total Assets USD

billions

Total Loans USD

billions

GDP 2014 USD

billions

Total Assets % of GDP

Total Loans % of GDP

Infrastructure financing priority

China China Development Bank 1664 1281 10357 16.07

% 12.37

% Limited; 9% of loans

Brazil BNDES 373 80 2347 15.89%

3.40% Yes; 36.7% of loans

India

IFCI Limited 6 3 2051 0.27% 0.17% Yes Industrial Credit and Investment Corporation of India (ICICI) 106 31 2051 5.15% 1.49% No

Industrial Development Bank of India (IDBI)

58 20 2051 2.84% 0.96% No

Infrastructure Development Finance Company (IDFC)

14 8 2051 0.69% 0.38% Yes; >85% of loans

India Infrastructure Finance Company Limited (IIFCL) 6 4 2051 0.31% 0.22% Yes; 100% of loans

Total 5 (for India) 190 66 2051 9.27% 3.21%

South Africa

Industrial Development Corporation (IDC)

10 2 350 2.86% 0.51% Yes; 34% of new loans

Development Bank of Southern Africa (DBSA) 6 5 350 1.66% 1.40% Yes; >90% of loans

Korea Korea Development Bank 263 136 1410 18.67% 9.66% No

Germany KfW 650 585 3874 16.77%

15.10%

Limited; through KfW-IPEX Bank

Algeria Algeria Fonds National d'Investissement 9 7 214 4.43% 3.22% Yes; >90% of loans

Angola Angola Banco de Poupannca e Credito 2 1 129 1.78% 0.73% No

Nigeria Bank of Industry 3 3 574 0.59% 0.52% Limited to Telecommunication sector

Source: Authors’ computation using respective NDB Annual Reports


Projectfindings

• NDBsareunderappreciatedcomponentofglobaldevfinancesystem

• lotsofnewdebbanks(WBslide)• totalassetsincrease(GEGIslide)• distributionuneven:

• a.geographical• b.levelofdev.

• Infranotacentralfocus,buttherearebright• SInotyetafocusinallbanks,butfewexceptions•NDBshavethepotentialtotoplaycatalyzingrolein

orchestratingGDFforforSI7/11/16 FinalReport- GEGI/Brookings 19

Table 1 Diversity in the size and infrastructure contribution of prominent NDBs

Country NDB

Total Assets USD

billions

Total Loans USD

billions

GDP 2014 USD

billions

Total Assets % of GDP

Total Loans % of GDP

Infrastructure financing priority

China China Development Bank 1664 1281 10357 16.07

% 12.37

% Limited; 9% of loans

Brazil BNDES 373 80 2347 15.89% 3.40% Yes; 36.7% of loans

India

IFCI Limited 6 3 2051 0.27% 0.17% Yes Industrial Credit and Investment Corporation of India (ICICI) 106 31 2051 5.15% 1.49% No

Industrial Development Bank of India (IDBI)

58 20 2051 2.84% 0.96% No

Infrastructure Development Finance Company (IDFC)

14 8 2051 0.69% 0.38% Yes; >85% of loans

India Infrastructure Finance Company Limited (IIFCL)

6 4 2051 0.31% 0.22% Yes; 100% of loans

Total 5 (for India) 190 66 2051 9.27% 3.21%

South Africa

Industrial Development Corporation (IDC)

10 2 350 2.86% 0.51% Yes; 34% of new loans

Development Bank of Southern Africa (DBSA)

6 5 350 1.66% 1.40% Yes; >90% of loans

Korea Korea Development Bank 263 136 1410 18.67%

9.66% No

Germany KfW 650 585 3874 16.77%

15.10%

Limited; through KfW-IPEX Bank

Algeria Algeria Fonds National d'Investissement

9 7 214 4.43% 3.22% Yes; >90% of loans

Angola Angola Banco de Poupannca e Credito 2 1 129 1.78% 0.73% No

Nigeria Bank of Industry 3 3 574 0.59% 0.52% Limited to Telecommunication sector

Source: Authors’ computation using respective NDB Annual Reports


Projectfindings

• NDBsareunderappreciatedcomponentofglobaldevfinancesystem

• lotsofnewdebbanks(WBslide)• totalassetsincrease(GEGIslide)• distributionuneven:

• a.geographical• b.levelofdev.

• Infranotacentralfocus,buttherearebright• SInotyetafocusinallbanks,butfewexceptions•NDBshavethepotentialtotoplaycatalyzingrolein

orchestratingGDFforforSI7/11/16 FinalReport- GEGI/Brookings 21

Part3– ConclusionsandpolicyrecommendationsTherearechallengesincreatinganewinternationalfinancingarchiteture forsustainabledevelopmentcenteredinacoalitionof“green”NDBs,RDBsandMDBs,butitmaybethebestwaytoreachtheSDGsclimate-relatedgoals.


ImpedimentstoSIindevelopingeconomies• Pricedistortions,wrongincentivesandpoorplanning

• Fossilfuelsubsidies andlackofcarbonpricing mechanismscreateadisincentives towardsunsustainableenergyandtransportationmatrixes;

• Sunk costsofSIprojects areoftenhigh,financingthemcreatesafurtherdisincentivesforgovernmentsandprivatecompanies – particularlyindevelopingnationswheredomesticinterestratesarerelativelyhigh,

• Climateriskisnot incorporateinfinancingpricing

• Lackofapipelineofsustainableandbankableprojects:

• Poorprojectpreparationcapabilitiesandinadequatepublicinvestmentframeworkswhichaffectbothpublicandprivateinvestmentdecisions. Thatincludeslackofenablingenvironmentandrobustcapacityfordesigningandimplementingpublic-privatepartnerships(PPPs)arekeypriorities.

• Asymmetricaccesstoefficient-enhancing,cost-reducingtechnologyandtechnologydiffusion - neededtoenhancesustainabilityandexploitthesynergiesbetweengrowthandalow-carbontransition.

• Aggregationproblem-

• Financingimpedimentsovertheprojectcycleandbringing downthecostsoffinancingwillbeessentialforenabling investmentsandtiltingincentivestowardsmoresustainableprojects.


Fuelsubsidiesandotherpricedistortions

• Eliminatingfuelsubsidiesiseasiersaidthandone:inmanyoil-producingeconomiesitisapolitical

• Butthesolutiontotheproblemisnotaneasyone:forinstance,inoilproducingcountries,thistypeofsubsidiesoftenconstituteanalternative(albeitveryimperfect)incometransfermechanisms;

• Ifsuchpracticesaretobeovercome,alternativesmustbeproduced;• (WilluseAmaretal’s andotherpaperstodiscusstheissuebriefly):


2.Creatingapipelineofsustainableandbankableprojects• Theemphasisisoftenputon

• enablingenvironmentand• robustcapacityfordesigningandimplementingpublic-privatepartnerships(PPPs)

• Thoseareimportant,buttheissueofprojectelaborationandimplementingcapacityneedsalsotobeaddress

• NDBscanhelpalotatleastatfourlevels:• Nationalplanningstrategy.• Policycoordination.Coordinatingwithpolicymakingstances,agencies,localproducersandconstructorsinordertoovercomebarriers

• Developingapipelineofpotential SIproject,thatwithsomehelpcanturntobetechnicallyfeasibleandfinanciallysustainable;

• Bothhelpingprojectelaborationanddevelopingcapabilitiestoproduceprojects


WhatNDBscando?

• NDBsshouldhaveakeyroleinsupportingnationaleffortstoboostcapacitiesforsustainableprojectpreparationandpipelinedevelopment,throughstrongerandmoreeffectivePPFsandknowledgesharing(tools,standardizedformats,bestpractice,knowledgeplatforms).

• Addressingsustainability,promotingharmonizedapproaches,andimprovingcoordination,includingthroughjointinitiatives,shouldreceiveparticularattentionastheystepupprojectpreparationsupporttocountriesinscalingupinfrastructureinvestment.

• NDBsalsoneedtoincorporatesustainabilitymoreconsistentlyintheirownanalyticalandinvestmentframeworks.Intheircurrentindividualandcollectiveefforts,MDBsarerespondingtothisagenda(MDBs2015b).ComplementingstrongerandbettercoordinatedMDBsupport,partoftheclimatefundsstemmingfromtheParisAgreementcouldbeusefullydeployedtohelpbuildcapacitiesincountriestointegratesustainabilityininvestmentpoliciesandprojectpreparation.


Technology:investmentanddiffusion

• CostreductioniscriticaltomakeSInotonlytherightinvestment,butthebestalternativeforgovernmentsandtheprivatesector;

• Therehasbeensignificantefficient-enhancing(andcost-reducing)technologicalinnovations,butknowledgeisunevenlydistributed,andoftennotabsorbedbydevelopingnations;

• Inanidealscenario,suchknowledgeshouldbetransferredtoallnationsseekingtopromoteSI;butinanumberofcases,theonlywaytointernalizesuchinnovationsisbypromotingtheconstitutionof“productionchains”domestically;

• NDBsaspolicyinstrumentscanpromotesuchinternalizationbyactingaspartofoverallindustrialpoliciesthatcancreate


Financingimpediments

• Domesticfinancingcostsindevelopingeconomiesisnormallyprohibitive,asindicatedbyslidebelow(ifwetakeoutChina,thedifferencesareevenmoresignificant;maturitiesarealsoinadequate

• Thesolutionisoftenfoundwithfullpublicfinancing,blendingwithnon-privatesourcesoffinance(e.g.subsidedpublicbanks’creditand/ormultilaterals’lending);

• Onesolutionistofacilitateaccesstointernationalmarketswithbettercredit/issuanceconditions;againtwoproblemsaresignificant:

• Localcurrencyrisk• Politicalrisk

• OnelongertermsolutionmustcomefromthedomesticdevelopmentofSIsecurities– suchasinfrastructurebonds,greenbonds,resiliencebonds–thatcanbeusedtotapdomesticinstitutionalinvestors


Financingcosts:uneven“partners”


RealInterestRatesarehighinmanyEMDEVcountries

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-10

-5

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25

Percent

Source:WorldBankWorldDevelopmentIndicators usingIMFInternationalFinancialStatistics.Note:Realinterest rateisthelendinginterestrateadjustedforinflation asmeasuredbytheGDPdeflator.

3.WhatNDBscando?

• Improvingcreditconditions – byusingtheirbalance-sheetstoreducefinancingcostsandwidenmaturitiesforsustainableinfrastructureprojects;

• Projectelaboration– sunkcostsfortheelaborationandcompliancewithS&EnationalstandardscouldbereducedbytheprovisionofTAandearmarkedfundsforSI;atechnicallyandfinanciall well-designedprojectismorelikelytobeabletoaccessprivatefinance,bothinpreandpost-completion

• Aggregation – asignificantnumberofSIprojectsaretoosmall,whichmakeslendingandsecuritizingcomplicated;

• Leveragingprivatesourcesoffinance– byprovidingguaranteesandcreditenhancements;

• Crowding-inofprivatecapital– byhelpingcreatenewinstrumentsandbyfosteringnewmarkets.


Developmentbanks- complementarities

NDBs RDBs MDBs

Coordination withnationalplanning

- Aspolicy instrumentsNDBscanbettercoordinatewithlocalgovernmentsandagenciesundertheumbrellaofnationalclimateplanning orINDCs

- Regional action - Helpcoordinate internationalefforts

Comparativeadvantageinknowledge

- Policy-making stances- Localbusiness environment- Localdemandandproducers

- Regionalprojects

Financing - Accesstodomesticpublicand privatefinancing

- Potentiallygoodaccesstolocalcurrencyassetsthatcanbeplacedwithdomesticinstitutional investors

- Good ratingandaccesstointernationalcapital markets

- Excellentratingandaccesstointernationalcapitalmarkets


InordertosignificantlyexpandSIinvestments:1. Nationalgovernmentsandprivatesectorsperceiveonlythe

challengesoffosteringSI:theyshouldalsoseeopportunitiesinaclimatechangestrategiesandactions.

2. Planningandinstitutionalbuildingiskey;3. AnewinternationalfinancingarchitectureforSI,where(oldand

new)MDBs,RDBsandNDBscreateacoalitiontofosterprojectelaboration,scaling-up,newinstrumentstocrowd-indomesticandinternationalprivatecapital.


Bilateralaid,MDBsandRDBs

Governments

FinancialIntermediaries(including NDBs)

Companies Projects

Projects

Projects

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$$$

$$$

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SustainabilityCriteria

Knowledge/Technicalassistanceforprojectelaboration

InternationalcreditandsecuritiesMarkets

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Pledges

CapitalfromGlobalPartners

PledgesCapitalfromGlobalPartners

Governments

FinancialIntermediaries(including NDBs)

Companies Projects

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$$$

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Knowledge/Technicalassistanceforprojectelaboration

Guaranteefund

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RDBs

NDBs

ExistingMDBS

NewMDBS(AIIB+NewDev.Bank)

IDFC–sustainabilitydefinition

MultilateralAndRegionalDevelopmentBanks

Internationalcreditand

securitiesMarkets

$$$

national development banks and sustainable infrastructure financing · 2016-08-12 · 2015 – a...

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