This blog series takes a look at the new landscape of financing for development, the focus of our upcoming Istanbul Development Dialogues, an annual a global development forum where policy-makers, business leaders, and experts discuss issues of our time.
Nearly five years after the adoption of the 2030 Agenda, we know that achieving the Global Goals will not be possible without private sector involvement. According to UN estimates, US$5-7 trillion will need to be mobilized each year.
Looking more closely in Central and Eastern Europe, including Western Balkans and CIS, our PwC findings show the demand as high as $3 trillion over next few years. Public sector direct financing, foreign aid and development assistance are simply not enough to cover these needs.
Infrastructure is crucial for SDG attainment and can be seen as an enabler for social and economic development. I understand infrastructure broadly – as assets serving societies and businesses, ensuring provision of services necessary for economic growth and social welfare.
This includes not only transport, power, sanitation, water and telecommunications but also social infrastructure like schools and hospitals. In terms of attractiveness of projects, investors look at the project’s volume, financial feasibility, risk profile and, if relevant, revenue risk to determine whether to get involved.
Most of the projects currently attracting private investors in our region are power and transport, while the largest potential for growth, based on the current level of involvement and percentages, would be in water and sanitation.
The good news is that the private sector’s appetite for responsible investment is steadily growing. According to an IFC report, more than $160 billion in private investment was mobilized by MDBs and DFIs in 2017 and the global impact investing market is estimated to be $502 billion. In our Private Equity Responsible Investment Survey 2019, 81 percent of investors report having an environmental, social and governance policy in place and 72 percent already use or are developing it.
At the same time, there is distance between considering action, and taking proactive steps. For example, while 83 percent of respondents are concerned by climate risk for their portfolio companies, only 31 percent have acted upon this. There are different, specific challenges that depend on the country, sector and investor’s profile.
Generally though, barriers typical for emerging markets can basically be grouped in three categories:
- Lack of clarity on what sustainable infrastructure really means and how to measure impact and data gaps. Standardization in this aspect is crucial for investors to be able to compare like with like and make informed choices.
- Risk and bankability of individual projects. Working in various territories, I see a gap between mature and emerging markets in the cost of financing due to risk premium. From the perspective of private investors and their lenders, projects must be likely to deliver high enough risk adjusted returns.
- Significant gaps in capabilities and capacities in structuring, assessment and delivery of sustainable development initiatives, on both public and private side. Governments in many countries are struggling with a lack of structured approaches to project preparation, not able to prepare a strong and predictable pipeline of sustainable projects. This is probably the most important challenge.
Various solutions, such as de-risking or co-financing, are currently being applied on a project by project basis. While this is helpful, it cannot ensure the desired level of investment. So how can we scale up private engagement in sustainable investments?
1. Consistent and comprehensive policy and regulations.
Examples of measures that can be applied include introducing ESG concerns into public procurement, regulations on ESG disclosures by private investors, or supporting green market development. If obligatory measures are to be implemented, their overall costs and benefits need to be considered. In parallel, an efficient and predictable system of incentives needs to be in place to balance bankability and the financial attractiveness of investments with affordability and social concerns.
2. Addressing the gap between mature and emerging markets in the cost of financing due to risk premium.
This can be done by long-term cost reduction strategy at the sovereign and local level, including improvement in policies, regulatory environment, investment planning, greater risk transfer to public sector or international institutions, and addressing residual risk.
3. Standardization and third-party assurance.
There has been a lot of progress in this area, with the IFC Impact Principles and UNDP SDG Impact Initiative being introduced. This not only can stimulate development of a sustainable investment market, but also introduces certification to authenticate alignment with ESG principles.
4. Capacity building.
This is crucial to support the public sector with project-preparation facilities and technical assistance to increase pipeline predictability and the bankability of individual projects. On the private side, companies need help to better understand ESG topics, how they generate direct value in cost reduction and innovation-driven growth, and indirect benefits through risk and reputation management.
MDBs and other IFIs have significant roles to play – providing technical assistance to cover sustainability premiums, reduce project risks and ultimately attract more investors to engage in sustainable initiatives. International institutions can provide technical assistance to governments in capacity building and can empower investors with insights on markets and projects.
Ultimately, 2030 is even closer than we think, given that the timeline to develop a good, bankable investment project is often calculated in years. We need to match the needs and interests of private investors with those of society and environment on much broader scale.
Under the overall theme of “Putting money to work for sustainable development”, the Istanbul Development Dialogues, taking place 27-28 May 2019, will seek to tackle some of these issues.