Investing in Sustainable Infrastructure
Daniel Runde, with the Project on Prosperity and Development, CSIS, moderated a panel discussion about meeting infrastructure demands around the world. The panelists were:
- John Graham, Principal Investment Officer, Infrastructure and Energy Division, Inter-American Investment Corporation
- John Moran, Vice President, Insurance, Overseas Private Investment Corporation
- Andrew Patterson,Regional President-Africa, Bechtel
- Mini Roy, Managing Director, Head of Public Sector and Development Organizations, Americas, Standard Chartered Bank
Raising “the question you hear all of the time in Washington,” Runde first asked the panelists if there is plenty of money for infrastructure projects, but not enough bankable deals.
Patterson responded that, in regard to infrastructure projects, much depends on the deal structure, the timeline, risk factors associated with projects, and private money positioning. The key is to keep in mind the type of project. Road projects differ from power projects, which differ from port projects. Then, find the right funding sources for that project.
Roy said she agreed with Patterson’s comments, and that her organization is more reactive, looking for projects within the emerging markets for infrastructure. The financing is called in when the projects are ready. Not many bankable projects have been presented in the past couple of years, but her bank is more than willing to consider all that’s offered.
Moran said funding is available. What’s missing, in some cases, is due diligence, meaning the upstream work. The countries that take the time to plan and invest obtain bankable deals. Often times, a tradeoff exists between velocity and quality, but taking time to invest in some of the more basic due diligence results in bankable projects.
Many times the local participants take the first hit, but now international participants are coming in. Multilateral organizations can work to minimize project risk.
Moran said public institutions tend to be more demand-driven or deal driven, while private institutions are more transaction-driven, not necessarily feeding their profits back to the policy makers. Donor or grant funds can be deployed in a structural way that moves projects into the next stage. This might help the local officials, working with threadbare budgets, to be more effective with the next round of projects.
Runde commented that in working with the Development Finance Institution (DFI), managers are promoted based on the amount of deals they do; it is a volume-driven culture. This can be an obstacle on sustainable projects and reinvesting project capital.
From the Washington policy perspective, the success and the emergence of the infrastructure bank has been a salutary wakeup call, along with a rising count among countries that have signed on as members.
Frequently, Runde added, money is not the issue, instead it’s a capacity gap of some kind. He asked the panelists about specific gaps that need to be fixed. Moran responded that the rule of law and enabling issues is another area to be addressed. Working with the local regulatory authorities and the amount of legal and regulatory risk in the countries allows private investors to understand the factors that place capital at risk. Additionally, lenders need to be comfortable with prospective deals given the ways the projects under consideration are perceived and supported. Graham said the response that’s thrown around a lot is project preparation. A big gap exists in public sector project management – “owner’s engineers” type management. This is “less of the battle and more of the war.”
Runde asked Roy about this issue, the kind of public sector gaps that lenders find. Roy responded that when the right parties are involved in any emerging market, the private sector projects are the ones completed. Gaps exist between the money raised and what it’s used for. In the private sector, the government’s priorities are hard to determine. Banks are paying more attention to this because bankable projects can be accomplished if they can prioritized politically.
Patterson said that, looking back through history, some of the most challenging projects to be delivered have been in the U.S. and Europe, not just in developing nations. Companies look at government partnerships and key infrastructure projects that can unlock economic growth.
Moran added that one gap that has disappeared over the past five to ten years is the political gap. Whether the infrastructure funding is private or public, the political risks have diminished. Because these financing methods are the only practical way forward, the level of angst has gone way down. Governments have realized that private infrastructure delivery is probably the only option.
The private sector also needs to take the initiative to invest and be on the ground, he said. The more one works in that collaborative environment, the more one considers the risks of the unknown.
Some risk mitigation is involved when local stakeholders beyond the government invest in the projects. That is considered good risk management, and the participation of many different entities reduces the political risk.