Investment in sustainable infrastructure – what needs to happen? - BNP Paribas CIB
 
Friday 29 November 2019

Partnerships between development institutions and the private sector are vital for investment in sustainable infrastructure. Will they succeed?


Reflecting on the urgency of reaching the Paris Agreement's climate targets, Sir Suma Chakrabarti, sixth President of the European Bank for Reconstruction and Development (EBRD), talks about the role of development institutions – and how a global partnership could "be a catalyst for transformational investment in sustainable infrastructure". It is about giving due consideration to economic, social and environmental factors in the building of roads, buildings, water infrastructure and energy capacity.

Hello Sir Suma, you were previously Head of the UK's Department for International Development. Why, in your opinion, is it so important to reform how we currently finance sustainable infrastructure?
Sustainable infrastructure is about growth and development with due consideration to the externality effects hitherto ignored. Sustainable infrastructure is critical and huge investments are required: more than $60 trillion are needed over the next 15 years for the growing Global South (low- and middle-income countries). It will be a challenge to finance it. But it will be an even bigger challenge to finance it in the right way.

According to projections, 70% of the increase in future emissions of greenhouse gases will come from infrastructure still to be constructed. If we want to achieve the Paris climate targets, we must make sure that such future infrastructure is sustainable. And as we heard at the UN Climate Action Summit in September, we have only a decade to turn things around.
 
Do you think the development institutions are addressing this challenge?
At the One Planet Summit in New York, we saw that the world expects development institutions to join forces and take a lead to finance sustainable infrastructure.

In a letter to the presidents of the multilateral development banks (MDB), the finance ministers of France, Jamaica and Qatar - who lead the climate finance track to meet the goals of the Paris Agreement - praised the significant increase in climate finance achieved by the MDBs since COP21 in 2015. They also called on us to do much more – to provide more climate finance and more support to our countries of operations in developing their Nationally Determined Contributions (NDCs). We responded to the ministers' call at the UN Secretary General's Climate Action Summit with our joint MDB statement committing the MDB to five specific actions:

  • More climate finance from the MDBs
  • Greater mobilisation of capital from the private sector
  • More transparent reporting
  • Helping our clients to deliver on the Paris Agreement goals
  • Supporting them in shifting away from fossil fuels

These all require working in partnerships – and the one with the Green Climate Fund (GCF) is vitally important.

The EBRD has already established a very strong relationship with GCF, which we have demonstrated can be a catalyst for transformational investment in sustainable infrastructure.

We have already had great successes together: these include a major solar park in Egypt, which will be the largest in the world when completed, supported by $64 million dollars of GCF concessional finance; a framework for renewables in Kazakhstan; and a climate-resilient hydropower plant in Tajikistan. Now, GCF is actively supporting our trademark Green Cities programmes.

How can multilateral development banks achieve their aim of boosting climate finance?
Let me highlight one condition, one opportunity and one challenge.

First, the condition is policy reform. MDBs are in a favourable position to engage on policy and back it up with investment, so we must help governments create such frameworks on the ground. Several countries from Egypt and Jordan to Kazakhstan and Mongolia now have viable renewables markets, a direct result of policy engagement by the EBRD and other International Financial Institutions (IFIs). We also helped design the PPP (Public-Private Partnership law) in Kazakhstan – which was adopted to create a common legal framework designed to help attract investments in Kazakhstan. These new investment opportunities are opened up through policy engagement.

" According to projections, 70% of the increase in future emissions of greenhouse gases will originate in infrastructure which is still to be constructed. We must make sure that such future infrastructure is sustainable. "
Second, the opportunity is capital. There is a massive amount of capital – up to $100 trillion dollars – which is held by pension funds and insurance companies in mature markets. This capital is seeking high returns, which emerging markets are best placed to deliver. But Public-Private Partnerships (PPPs) in emerging markets can be risky. In order to provide appropriate risk-return profiles, de-risking instruments are very important. We have already created successful de-risking products, including the Standby Liquidity Facility – whose objective is to make term liquidity available to banks to enable them to manage any unexpected liquidity constraints they may encounter – in partnership with Multilateral Insurance Guarantee Agency (MIGA) for the Turkish PPP market. Other partners, including the IFC,SIDA, AfDB,IADB and the EU, have created their own targeted facilities. Building on this, we are now working together under the MDB Infrastructure Cooperation Platform, chaired currently by the EBRD, to create an effective risk mitigation (or credit enhancement) product, which can be scaled up and replicated. And just before the UN Climate Summit, EBRD issued the world's first ever climate resilience bond. With these new products, we can seize the opportunity and attract the capital required.

And third, the challenge is about our actual projects. The shortage of bankable projects and lack of institutional capacity in emerging markets are well-known problems. Our collective MDB response has been to roll out a series of Project Preparation Facilities over the last five years. The largest is the World Bank's Global Infrastructure Facility; the EBRD, EIB, and regional development banks are all working on this too, and together we have allocated $800 million to project preparation. Under our facility, the EBRD has already prepared 12 PPPs and more than 50 sub-sovereign projects.

What can we expect from this synergy?
I have only mentioned one condition, one opportunity and one challenge that require us to work together. There are many more, of course. I can only praise the hundreds of local private banks, our partners, which distribute billions to SMEs (small to medium enterprises) in nearly 30 countries for energy efficiency upgrades.

It's also important to reconfirm that the G20 has been a catalyst in the wider global debate on infrastructure, and has worked collaboratively with the MDBs on an agenda to promote infrastructure as an asset class and the role of quality aspects within that agenda.

But not all partnerships need to be global: we have also found partnership opportunities internally. As of last year, we have a Sustainable Infrastructure Group, which now delivers nearly half of our investment.

It unites all banking teams for energy, transport and municipal policy and investments. We hope to see great innovation as a result of this synergy, such as public utilities powered with renewables.

And I am sure that even greater innovation will come from our existing and new partnerships – including, of course, a strong and well replenished GCF.

About Sir Suma Chakrabarti
Sir Suma Chakrabarti is noted for having played a key role developing the UK's successful Know-How Fund for Central and Eastern Europe and worked with the European Commission in improving its programmes in the Middle East and North Africa.

He was elected twice as President of the European Bank for Reconstruction and Development (EBRD). Before arriving at the EBRD, he held the position of Permanent Secretary at the British Ministry of Justice and was its most senior civil servant. Prior to this, from 2002, he headed the UK's Department for International Development (formerly the Overseas Development Administration (ODA), where he worked closely with economies undergoing substantial reform in eastern Europe, the former Soviet Union and the Middle East and North Africa.



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