The importance of investing in built-to-last infrastructure

The Global Infrastructure Forum being organized by multilateral development banks (MDBs) next month in Washington, D.C. comes at an opportune time. The adoption of the Sustainable Development Goals and the Paris Agreement on climate action have generated valuable political momentum to set the world on a path toward better and more sustainable development outcomes. Infrastructure is at the core of this agenda. It is a major driver of economic growth and inclusive development. It is also key to tackling climate change. Done badly, it is a major part of the problem; infrastructure currently accounts for around 60 percent of the world’s greenhouse gas (GHG) emissions. Done right, it is a major part of the solution; sustainable infrastructure mitigates GHG emissions and builds resilience to climate change.

Globally, investment needed in infrastructure over the next 15 years is estimated at more than $90 trillion. On an annual basis, infrastructure investment will have to more than double from $2.5-3 trillion currently to more than $6 trillion. As much as three-quarters of the new investment will need to take place in the developing world, particularly middle-income economies. The estimated investment needs over the next 15 years are almost twice the value of the entire infrastructure stock today. This presents a big challenge, but also an opportunity to remake our physical environment in a better way.

The world needs to build more infrastructure but build it to last in the new climate economy. There is a great danger of locking in high-carbon, polluting, and unsustainable pathways if the new infrastructure is built in much the same way as before. But if the new investments are designed to factor in climate risks, they can not only bridge the infrastructure gap to support growth and development but also protect the climate. This means investing in renewable energy, cleaner transport, efficient and resilient water systems, and smarter cities.

Delivering sustainable infrastructure at scale will require strong public policy leadership and active private-sector engagement, including important transformations in the way infrastructure investments are developed and financed. Specific actions must be tailored to individual country circumstances. However, the main elements of the agenda can broadly be captured under four “I”s: investment, incentives, institutions, and innovation.

Boosting investment in infrastructure to more than twice current levels will require substantial increases in public sector’s own investment and policies to catalyze a major scale-up of private investment. The generally negative trend in public investment rates over the past couple of decades, which exacerbated infrastructure gaps, must be reversed. Given the scale of the needs, and fiscal constraints in many countries, more than half of the new investment will have to come from the private sector. Policy risks and costs of doing business must be reduced to attract more private investment.

Market incentives must be reformed to orient new investment towards sustainable infrastructure. Removal of fossil-fuel subsidies and implementation of carbon pricing are crucial. The current low petroleum prices provide an opportunity to jumpstart reform. Pricing reform is also needed in sectors beyond energy, such as water. Getting prices right and reforming regulation to correct incentive distortions put markets to work in support of public policy goals.

The quality and impact of higher investment will depend greatly on the strength of public institutions. Especially important are capacities to develop strong pipelines of sustainable projects and improve institutional frameworks for public-private partnerships. As much as 70 percent of total investment in sustainable infrastructure will be connected with urban areas. So institutional and fiscal strengthening of cities merits particular attention.

Technological innovation expands possibilities by providing new and more efficient technologies for low-carbon, climate-resilient infrastructure. Fiscal and financial innovation will be important in capturing those possibilities. Investment in research and development, notably in renewable energy technologies, should be boosted. Mobilizing financing for sustainable infrastructure at scale will require enhancing and creatively utilizing fiscal space, and leveraging private finance and lowering its cost through innovations in financial instruments and use of development capital. Carbon taxation can raise substantial revenue as well as improve tax structure. Globally, assets under management by banks and institutional investors amount to more than $120 trillion but only about 5 percent of those are invested in infrastructure. Innovations to promote infrastructure as an asset class and tap these large pools of savings will have a high payoff.

The foregoing public policy agenda is primarily the responsibility of national governments. But there is an important role for international cooperation through collective actions and technical and financial support. For emerging and developing economies, MDBs in particular will be a key partner in building capacities and mobilizing financing. The scale of the sustainable infrastructure challenge will require enhancements in the capabilities of these institutions. The Global Infrastructure Forum provides an important opportunity for the MDBs and their development partners to translate the current favorable political momentum into a more concrete action agenda to step up sustainable infrastructure development. It must not be missed.