In­fra­struc­ture for a sus­tain­able fu­ture

Financial Mirror (Cyprus) - - FRONT PAGE -

In­fra­struc­ture is a pow­er­ful driver of eco­nomic growth and in­clu­sive de­vel­op­ment, ca­pa­ble of boost­ing ag­gre­gate de­mand to­day and lay­ing the foun­da­tions for fu­ture growth. It is also a key el­e­ment of the cli­mate-change agenda. Done badly, in­fra­struc­ture is a ma­jor part of the prob­lem; done right, it is a ma­jor part of the so­lu­tion.

Over the next 15 years, more than $90 tril­lion in in­fra­struc­ture in­vest­ment will be needed world­wide. That is more than twice the value of the en­tire stock of in­fra­struc­ture to­day, and re­quires to­tal an­nual in­vest­ment to in­crease more than twofold, from $2.5-3 tril­lion to above $6 tril­lion. Around 75% of this in­vest­ment will have to take place in the de­vel­op­ing world, par­tic­u­larly middle-in­come coun­tries, ow­ing to their growth needs, rapid ur­ban­i­sa­tion, and al­ready-large in­fra­struc­ture back­logs.

Clos­ing the in­fra­struc­ture gap will un­doubt­edly be chal­leng­ing. But it also rep­re­sents a pro­found op­por­tu­nity to cre­ate the un­der­pin­nings of a more sus­tain­able fu­ture.

As it stands, more than 80% of the world’s pri­mary en­ergy sup­ply and more than two-thirds of its elec­tric­ity are de­rived from fos­sil fu­els. In­fra­struc­ture alone ac­counts for around 60% of global green­house-gas emis­sions. If the world fol­lows the same old ap­proaches in build­ing new in­fra­struc­ture, it would lock in pol­lut­ing, re­source-in­ten­sive, and un­sus­tain­able path­ways to growth.

But shift­ing to re­new­able en­er­gies and sus­tain­able in­fra­struc­ture can have the op­po­site im­pact, help­ing to mit­i­gate green­house-gas emis­sions while en­hanc­ing coun­tries’ re­silience to cli­mate change. If cli­mate risks are fac­tored into in­vest­ment de­ci­sions, re­new­able en­er­gies, cleaner trans­port, ef­fi­cient wa­ter sys­tems, and smarter, more re­silient cities will emerge as the best bets.

For­tu­nately, the political will to take ac­tion to mit­i­gate cli­mate change has never been stronger. At last De­cem­ber’s United Na­tions cli­mate con­fer­ence in Paris, world lead­ers reached a land­mark agree­ment to work to­ward a more sus­tain­able fu­ture, in­clud­ing by trans­form­ing the way in­fra­struc­ture projects are de­vel­oped, fi­nanced, and im­ple­mented. But agenda set­ting is just the first step. De­liv­er­ing sus­tain­able in­fra­struc­ture at scale will re­quire strong pub­lic pol­icy lead­er­ship and re­spon­sive pri­vate-sec­tor en­trepreneur­ship.

Pol­i­cy­mak­ers must clearly ar­tic­u­late over­all strate­gies for sus­tain­able in­fra­struc­ture in­vest­ment, and em­bed them in com­pre­hen­sive frame­works for sus­tain­able growth and de­vel­op­ment. Here, the G20 coun­tries can lead the way.

What pre­cisely should those strate­gies en­tail? While spe­cific pol­icy ac­tions and pri­or­i­ties must be tailored to in­di­vid­ual coun­tries’ cir­cum­stances, the main el­e­ments of sus­tain­able in­fra­struc­ture agen­das can broadly be cap­tured un­der four “I”s: in­vest­ment, in­cen­tives, in­sti­tu­tions, and in­no­va­tion.

For starters, pol­i­cy­mak­ers will need to en­sure a sig­nif­i­cant in­crease in to­tal in­vest­ment. This re­quires a re­ver­sal of the broadly neg­a­tive pub­lic-in­vest­ment trend in the last cou­ple of decades. Gov­ern­ments must al­lo­cate sig­nif­i­cantly more funds to sus­tain­able in­fra­struc­ture.

But, given se­vere fis­cal con­straints in many coun­tries, pub­lic in­vest­ment alone is not enough; the pri­vate sec­tor will still have to meet more than half of the to­tal need. Ef­forts to re­duce pol­icy risks and costs of do­ing busi­ness can help spur the pri­vate sec­tor to scale up in­vest­ment con­sid­er­ably.

To en­sure that new in­vest­ment is ori­ented to­ward sus­tain­able in­fra­struc­ture, pol­i­cy­mak­ers must also ad­just mar­ket in­cen­tives. The elim­i­na­tion of fos­sil-fuel sub­si­dies and the im­ple­men­ta­tion of car­bon pric­ing are par­tic­u­larly im­por­tant; with oil prices very low, now is the ideal time for coun­tries to im­ple­ment such re­forms. Pric­ing re­form will also be needed in other in­dus­tries, in­clud­ing wa­ter.

But more in­vest­ment alone is not enough. Strong in­sti­tu­tions are needed to en­sure the fea­si­bil­ity, qual­ity, and im­pact of that in­vest­ment. Par­tic­u­larly im­por­tant is the ca­pac­ity to de­velop strong pro­ject pipe­lines and in­sti­tu­tional frame­works for pub­lic-pri­vate part­ner­ships.

Fi­nally, there is the fourth “I”: in­no­va­tion. On one hand, tech­no­log­i­cal in­no­va­tion will be needed to pro­vide in­creas­ingly ef­fi­cient com­po­nents of low-car­bon, cli­matere­silient in­fra­struc­ture. That is why in­vest­ment in re­search and de­vel­op­ment – es­pe­cially in re­new­able-en­ergy tech­nolo­gies – must also in­crease sig­nif­i­cantly.

On the other hand, fis­cal and fi­nan­cial in­no­va­tion will be needed to cap­ture the po­ten­tial of new tech­nolo­gies. Specif­i­cally, the cre­ative use of fis­cal space will en­able the mo­bil­i­sa­tion of more fi­nanc­ing for sus­tain­able in­fra­struc­ture. And there will be more space as car­bon taxes raise sub­stan­tial rev­enue for gov­ern­ments (and im­prove the tax struc­ture).

Mean­while, new fi­nan­cial in­stru­ments and the re­source­ful use of de­vel­op­ment cap­i­tal can lev­er­age more pri­vate fi­nance and lower its cost. Pro­mot­ing in­fra­struc­ture as an as­set class could help at­tract more sav­ings to­ward in­fra­struc­ture. As it stands, as­sets un­der man­age­ment by banks and in­sti­tu­tional in­vestors world­wide amount to more than $120 tril­lion, of which in­fra­struc­ture ac­counts for only about 5%.

To­day, both in­fra­struc­ture in­vest­ment and cli­mate ac­tion are ur­gently needed. With the right ap­proach, we can achieve both goals si­mul­ta­ne­ously, build­ing a more pros­per­ous and sus­tain­able fu­ture.

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